Six Degrees of Separation

I missed my posts the last two weeks. The past week was such a blur it's been hard to catch up. I was hoping that one of the presidents had worked as an insurance agent or company man before taking on the mantle of leadership for our country so I could post on that; unfortunately, I found no evidence to that effect. Instead, I offer you a recent request and how it ended up interrelated (in my mind) with other recent topics we've discussed.

I was asked if insurance companies were allowed to use credit scores when giving homeowners insurance rates in Massachusetts. The following answer is posted on the Massachusetts Division of Insurance website under FAQ for homeowners insurance in response to a question that is NOT the same, but I think the answer still applies: "Unlike Massachusetts' auto insurance market, the homeowner insurance market is not take-all-comers. Insurers may decide to non-renew your policy or decline offering a policy as long as they do not base their decision on specific criteria outlined in our insurance laws (M.G.L. Ch. 175, section 4C)."

As far as credit reporting, Chapter 93 Section 51 seems to imply it can be used for insurance generally (see subsection 3 (iii)) and Chapter 93 Section 62 outlines other ways that the information can be used in insurance. Just to be sure that credit scoring wasn't considered unfair, I also checked the Massachusetts “UNFAIR METHODS OF COMPETITION AND UNFAIR AND DECEPTIVE ACTS AND PRACTICES IN THE BUSINESS OF INSURANCE”regulation which does not mention the use of credit scores at all. You, dear readers, may remember this law from our mention of it back in our insurance rebating post. While all of those laws indicate that credit scores can be used for homeowners insurance, currently credit scoring is not allowable in Massachusetts auto insurance rating, according to regulation 211 CMR 79.

The use of credit scores for insurance rating is not a topic without controversy. I almost mentioned what a hot topic credit scoring for insurance rates was in our post on redlining. People have suggested that using credit scores is the newest form of discrimination. You can read a recent Rough Notes article, "Remain Calm All is Well" on it. That is not the first article on the topic though, Independent Agent, for example, had an article back in May of 2002.

The National Conference of Insurance Legislators (NCOIL) created a model act in 2002 "regarding use of Credit Information in Personal Insurance." It was last updated in 2009. As of 2007, 26 states had adopted the law. The model appears to allow the use of credit scores but:

prohibits an insurer from refusing to insure an applicant, insured, or other individual seeking insurance coverage because the person’s insurance score fails to meet or exceed a minimum numeric threshold, unless one or more other applicable underwriting factors independent of credit information are considered.

Massachusetts was not one of the adopters of the model, despite (or perhaps because of) the fact that this topic has cropped up almost every year in the last decade (we have The Standard and MassAgent articles to prove it). Massachusetts appears to still allow the use of credit scores in homeowners insurance, though, as we mentioned above it's prohibited it in the use of auto insurance rating.

The Massachusetts Attorney General's office as recently as the fall of 2010 was attempting to strengthen the anti-credit scoring regulations. They issued this report on it in December of 2009. Finally, I am not sure about the documentation of the claim, but according to autoinsurance.org, there are currently 46 states in which an auto insurer can look at your credit score and use it as a factor in rating, Massachusetts is one of the four states in which this is not legal.

As I learned researching a different request this week, Massachusetts has had unique auto insurance regulations almost since the dawn of auto regulation. According to Donald Hillman in his 1980 publication: Strategic Study in Support of Competitive Automobile Insurance Rating in Massachusetts, "In 1925, Massachusetts, after four years of legislative study, adopted the first compulsory auto insurance law in the nation. It was to be the only compulsory auto insurance law in the United States for the next 32 years." He goes on to discuss how Massachusetts introduced no-fault auto liability insurance in 1970:

This first-in-the-nation law radically changed the manner in which bodily injury claims were adjusted and paid. The no-fault law is the one example of undeniably successful lawmaking in the area of auto insurance in Massachusetts -- claims were reduced and premiums for bodily injury coverages fell accordingly.

Massachusetts's current stance on the use of credit scoring in auto insurance appears in keeping with its pattern of being in the minority (dare I say forefront) of auto insurance regulation.