RD331 - The Use by Insurers of an Insured’s or Applicant’s Credit Information in Connection with Underwriting Motor Vehicle Insurance Policies - September 29, 2016


Executive Summary:
Pursuant to the provisions of 2015 House Joint Resolution No. 594, the State Corporation Commission Bureau of Insurance (Bureau) was requested to study the use by insurers of an insured’s or applicant’s credit information in connection with underwriting motor vehicle insurance policies. The Bureau was directed to (i) examine §§ 38.2-2212, 38.2-2213, and 38.2-2234 of the Code of Virginia to determine if those provisions unfairly burden motor vehicle insurance policyholders; (ii) determine whether the use of consumer credit information, rather than relying on the insured's or applicant's driving record and other factors proximately related to risks of operating a motor vehicle, in setting insurance premiums and tier ratings is appropriate; and (iii) determine whether the use of consumer credit information in setting insurance premiums and tier ratings discriminates against poorer or younger people who either have had challenges with credit or have no credit history. The Bureau was requested to submit a report of its findings and recommendations to the Chairmen of the House Committee on Commerce and Labor and the Senate Committee on Commerce and Labor by October 1, 2016.

In 1999, at the request of Senate Commerce and Labor, the Bureau prepared a report titled “Use of Credit Reports in Underwriting” on the use of consumer credit information as a tool for risk selection (refusal to issue a policy). The Bureau reviewed consumer complaints pertaining to insurance companies’ use of credit reports to determine how insurers were utilizing credit and the relationship between credit scores and income as well as credit scores and race. In that report, the Bureau concluded that while insurers had sufficient data to statistically correlate credit scores to losses, neither income nor race was a reliable predictor of credit scores. The Bureau recommended that the insurance industry educate consumers on the use of credit scores in the underwriting process. Legislation was enacted in 2003 setting out conditions for the use of consumer credit information and insurance credit scores and the necessary disclosures to consumers regarding their method of usage.

In conducting this 2016 study, the Bureau examined (i) the use of consumer credit information, including the use of insurance credit scores, by insurers writing private passenger automobile insurance in Virginia; (ii) the number of complaints received by the Bureau’s Property and Casualty Consumer Services Section; and (iii) information from other credible studies on the use and impact of consumer credit information and insurance credit scores in insurance underwriting.

The Bureau receives few Virginia consumer complaints and inquiries related to the use of consumer credit information, and there is no evidence that the provisions of §§ 38.2-2212, 38.2-2213, and 38.2-2234 of the Code of Virginia unfairly burden motor vehicle insurance policyholders. A review of rate filings established that consumer credit information is not the sole rating variable or risk characteristic used to determine insurance premiums and assign rating tiers in Virginia. The use of consumer credit information in setting insurance premiums and tier ratings is not inappropriate, especially if combined with other traditional rating variables (age, gender, marital status, driving record, etc.) which have long standing established actuarial credibility.

There are no definitive studies which establish whether the use of consumer credit information in setting insurance premiums and tier ratings discriminates against poorer or younger people who either have had challenges with credit or have no credit history. However, the Code of Virginia provides certain protections that are designed to limit the impact of consumer credit information on any individual who has no credit history or experiences a direct impact on credit from catastrophic events, regardless of age or economic status.

The Bureau will continue to monitor the number and makeup of consumer complaints related to the use of consumer credit, and will continue to monitor insurers’ use of consumer credit information in rating and tiering auto insurance policies in Virginia. If significant changes in the usage of consumer credit information are noted, the Bureau would make appropriate recommendations to the General Assembly as to the need to consider restrictions or elimination of the use of consumer credit information in rating auto insurance in Virginia.