HCS HB 1502 & 1821 -- INSURANCE

SPONSOR:  Luetkenhaus

COMMITTEE ACTION:  Voted "do pass" by the Committee on Insurance
by a vote of 15 to 0.

This substitute restricts how insurers may use an applicant's
credit information in their underwriting practices.

The substitute prohibits insurers from:

(1)  Using credit information as the sole underwriting factor;

(2)  Using credit information contained in a credit report that
the insurer knows to be in dispute;

(3)  Providing credit information to third parties, unless
specifically authorized by the federal Fair Credit Reporting Act;
and

(4)  Using the number of insurance inquiries as a negative factor
in their insurance scoring formulas.

The substitute requires the insurer to inform the applicant, at
the time of application, if credit information may be used as an
underwriting factor.  Also, the substitute requires that when a
credit report adversely affects an applicant, the insurer must
inform the applicant about his or her rights regarding the credit
information.  Upon written request, the insurer must provide to
the applicant or insured a list of the primary factors in the
credit report that negatively affected them.  Applicants and
insureds may request reevaluation if new circumstances might
result in a change in credit score.

FISCAL NOTE:  Estimated Net Income to Insurance Dedicated Fund of
$0 to $33,900 in FY 2003, $0 in FY 2004, and $0 in FY 2005.

PROPONENTS:  Supporters of HB 1502 say that credit scoring is a
valid underwriting tool.  However, 38 states have now enacted
laws governing the issue.  An obvious issue for the state to
address is the situation where a person chooses not to go into
debt and therefore has little or no credit history.  This can
negatively affect their insurance costs.  Some insurers use
credit information a lot; some little or not at all.  So people
can always get insurance coverage from somewhere; but many people
simply don't like the notion that their credit affects their
insurance.  HB 1502 addresses that concern without forcing undue
burdens on insurers.

Supporters of HB 1821 say that Missouri currently has no
safeguards protecting consumers from potential abuse of credit
information.  HB 1821 will require insurers to submit their
credit scoring methodology in writing to the department, so the
state can ensure that the process is done fairly.  Forty percent
of credit reports contain inaccurate information.  Using
inaccurate information won't help an insurer lower the cost of
claims.  Instead, it merely redistributes premiums, often in a
discriminatory fashion, hurting single parents, seniors, people
living in rural areas, and minorities.  Beyond the question of
how well the practice works is whether or not, as a matter of
public policy, the state should have some oversight of the use of
credit information.

Testifying for HB 1502 were Representative Luetkenhaus;
Independent Insurance Agents of Missouri; Missouri Insurance
Association; and Department of Insurance.

Testifying for HB 1821 were Representative Smith; Office of the
Governor; Scott Lakin, Director, Department of Insurance.

OPPONENTS:  Those who oppose HB 1502 say that 90% of insurers use
some form of credit information in their ratemaking simply
because it is a very good predictor of losses.  The lowest 20% in
credit scoring turn out to have double the risk of loss of
everyone else.  Insurers will typically use 30 to 60 different
characteristics taken from a credit report and incorporate them
into a formula for insurance underwriting.  Insurers already must
comply with the federal Fair Credit Reporting Act, which requires
them to notify applicants when a credit report has negatively
affected the applicant.  Credit is one of several criteria used n
ratemaking as well as a person's age, sex, claims record, and
geography.  The formula will vary with the region.  Overall,
there has been a 92% correlation between credit problems and
insurance losses.  Insurers use credit information in their
underwriting because it works.  The use of credit information has
actually resulted in a decrease in premiums for many people who
improve their insurance score with their good credit history.

Those who oppose HB 1821 say that HB 1502 solves any problems
people may have regarding the use of credit information, and HB
1821 goes too far in its restrictions.  The practice of using
credit information is not new; it has simply expanded throughout
the industry.  Further, the use of credit information is not
something that consumers have voiced concerns about.  For
example, a recent Better Business Bureau report lists the most
common consumer complaints about all kinds of companies, but
complaints about insurance companies using credit information
were non-existent.

Testifying against HB 1502 were Allstate Insurance Company;
Columbia Insurance Group; and National Association of Independent
Insurers.

Testifying against HB 1821 were National Association of
Independent Insurers; Independent Insurance Agents Association;
American Insurance Association; Missouri Insurance Coalition; and
Associated Industries of Missouri.

Richard Smreker, Senior Legislative Analyst

Missouri House of Representatives
Last Updated October 11, 2002 at 9:01 am