State to Challenge Insurers’ Formulas
Insurance Commissioner John Garamendi said late Wednesday that he would issue emergency regulations as early as today to stop California insurers from using credit scores to set rates on homeowner’s policies.
“Insurance companies have engaged in a series of activities over the past year that are a serious problem for homeowners -- one of which is the use of credit scores in underwriting insurance,” Garamendi said in a telephone interview. “We think it is discriminatory and bears no relationship to the risk and causes of a loss.”
Credit scores are assigned to consumers by credit-rating firms and used to evaluate a person’s willingness and ability to repay his or her debts.
Garamendi also said he would require insurance companies to show proof that their use of information from the Comprehensive Loss Underwriting Exchange database is indicative of future, rather than past, insurance risks.
The so-called CLUE database, which tracks loss data on properties, is now used by about 90% of the nation’s homeowner’s insurers. In many cases, homeowners complain that it has been used to deny coverage -- or vastly boost rates -- because they have filed past claims.
Garamendi said CLUE should be used to set rates or deny insurance only when the insurer has reason to believe the past claim experience portends future problems, as it would if a house had bad pipes and consistent water damage. He believes loss data are frequently used improperly to impugn homeowners who may have moved and no longer have claims problems.
Using credit scores as part of the formula for setting insurance rates discriminates against the poor, Garamendi said. He said that is illegal under California and federal laws.
Although he cannot bar insurers from using credit scores if they can prove their use is not discriminatory, he said he plans to make them show this proof before using these scores to set rates. California law requires insurance department approval of rate formulas.
Garamendi said regulations to change both industry practices “are already in progress,” and may be ready to publish as early as today. Emergency rules can be put into effect within 15 days of first providing insurers with proper notice, he added.
Insurers potentially affected by the moves could not be reached for comment late Wednesday, but Garamendi’s action is certain to be controversial. The emergency regulations were precipitated by insurance industry lawsuits, which barred Garamendi from putting the same changes into effect through interpretation of the law, rather than formal regulation.
“The insurance companies got a restraining order that said what I was doing was underground regulation,” Garamendi said. “The judge’s decision made it impossible for me to do this any other way.”
