PROPOSED RULES
INSURANCE COMMISSIONER
Original Notice.
Preproposal statement of inquiry was filed as WSR 01-22-009.
Title of Rule: Unfair practices regarding use of credit information in insurance.
Purpose: The proposed rules implement chapter 360, Laws of 2002, and restrict the use of credit history in insurance.
Other Identifying Information: Insurance Commissioner No. R 2001-11.
Statutory Authority for Adoption: RCW 48.02.060, 48.18.100, 48.18.120, 48.19.080, 48.19.370, 48.30.010, 49.60.178, and sections 1 and 2, chapter 360, Laws of 2002.
Statute Being Implemented: RCW 48.18.100, 48.18.120, 48.18.290, 48.18.2901, 48.18.291, 48.18.292, 48.18.480, 48.18.540, 48.19.020, 48.19.030, 48.19.040, 48.19.080, 48.19.370, 48.30.010, 48.30.300, 48.30.320, 49.60.010, 49.60.030, 49.60.178, 49.60.220, and sections 1 and 2, chapter 360, Laws of 2002.
Summary: The proposed rules provide filing information regarding credit scoring models and their use. They provide a mechanism for protecting confidential and proprietary information.
Reasons Supporting Proposal: The proposed rules implement chapter 360, Laws of 2002. They protect consumers and instruct industry on how to file the information needed to determine if rates comply with the new law and chapter 48.09 RCW.
Name of Agency Personnel Responsible for Drafting: Lisa Smego, Tumwater, Washington, (360) 586-3110; Implementation: Beth Berendt, Tumwater, Washington, (360) 664-4627; and Enforcement: Carol Sureau, Tumwater, Washington, (360) 586-1189.
Name of Proponent: Mike Kriedler, Insurance Commissioner, governmental.
Rule is not necessitated by federal law, federal or state court decision.
Explanation of Rule, its Purpose, and Anticipated Effects: The proposed rules implement chapter 360, Laws of 2002. The new law restricts the use of credit history in underwriting and in rating. The purpose of the proposed rules is to establish a clear and efficient mechanism to implement the new law. Below is a brief overview of each proposed WAC section.
Proposed WAC 284-24A-001 is the purpose of the proposed rules.
Proposed WAC 284-24A-005 provides definitions for the new chapter.
Proposed WAC 284-24A-010 requires the insurer to inform the consumer of the four most significant factors that led the insurer to take an adverse action. The insurer's explanation must be in clear and simple language.
Proposed WAC 284-24A-015 establishes the timeframe for filing insurance scoring models. The use of credit history in underwriting has a different effective date than the use of credit history in rate making. The proposed rule reflects the different effective dates in the timeframes for filing.
Proposed WAC 284-24A-020 establishes how to file the insurance scoring model.
Proposed WAC 284-24A-025 allows the filing of models by vendors. Insurers may use a model filed by a vendor and accepted by the commissioner by submitting without filing the entire model. The insurer can reference the model.
Proposed WAC 284-24A-030 allows for the protection of confidential and proprietary information.
Proposed WAC 284-24A-035 informs the insurers of what the scope of review will be when the commissioner reviews the filed models.
Proposed WAC 284-24A-040 states what action the commissioner will take if a model does not comply with Washington law.
Proposed WAC 284-24A-045 advises insurers how they can show illustrate that their rates are not excessive, inadequate or unfairly discriminatory.
Proposed WAC 284-24A-050 instructs insurers what information must be included in a multivariate rate analysis.
Proposed WAC 284-24A-055 informs insurers of what actuarial information should be submitted with their model or rate filing.
Proposed WAC 284-24A-065 provides some questions and answers that the commissioner believes may be useful to insurers in complying with the rules and law.
Proposed WAC 284-24A-070 provides an effective date.
Proposal does not change existing rules. The proposed rules would be a new chapter in Title 284 WAC.
A small business economic impact statement has been prepared under chapter 19.85 RCW.
Consumer groups generally oppose the use of credit history in insurance rating or underwriting. They believe that data in credit reports are often inaccurate and consumers find it very difficult to correct the information. Many consumer groups allege that use of credit history in insurance underwriting may be a proxy for "redlining" - which is an illegal method of underwriting insurance. "Redlining" is a term for outlining a geographic area on a map and not selling insurance in that area. Historically it was used to avoid selling insurance in high crime areas - which typically had a higher proportion of low-income and minority residents.
The subject was first mentioned in Washington's regulation of insurance with the issuance of Bulletin 96-2 in August of 1996. The bulletin addressed the subject of consumer complaints regarding a lack of information about why they were cancelled, nonrenewed or denied insurance. The bulletin restated WAC 284-30-570 and noted that insurers had to provide the "true and actual reason" for their action, including actions based on credit information. Because the information might be incorrect, the insurer must be specific about the information and its use. The bulletin stated that it "is not sufficient for an insurer to merely state that the reason for nonrenewal is a poor credit report. The insurer must refer clearly to the content of the credit report on which it is relying, and state the reasoning to support the adverse decision, or the specific underwriting criteria that are not being met."
Use of credit information increased since 1996, as have the concerns about the use. As insurers increase the use of using credit scoring, more insurance regulators have begun to respond. States across the nation have developed new rules and proposed legislation on this subject. The National Association of Insurance Commissioners (NAIC) is interested in the subject. A white paper was developed in the mid to late 1990s and development of a standard law and/or rule remains the subject of discussion. In December of 2001, a workgroup was formed to study the issues and develop regulatory options.
On October 11, 2001, a CR-101 was filed announcing the agency's intent to begin rule making in this area. The CR-101 was mailed to affected parties and posted on the agency website. On November 6, 2001, Commissioner Kreidler issued T 01-02, a technical assistance advisory (TAA) which described the types of information needed to evaluate personal lines rates. The TAA required a multivariate statistical analysis of all rating factors in light of the insurer's plan for tier rating or rating by credit history. The purpose of the TAA was to ensure the commissioner received timely and complete information about use of credit-related rates, rate tiers, or rate factors and their relation to other rate factors that the insurer may already have in place. With this information, the commissioner could thoroughly and expeditiously review the proposed rates and determine whether or not the proposal complied with chapter 48.19 RCW.
The legislature considered the subject of insurance scoring in the 2002 session and adopted ESHB 2544 (chapter 360, Laws of 2002). The legislation restricted the use of credit history in underwriting and rate making. During the session, the commissioner and his staff had many discussions with industry and interested parties about potential rules and legislation. Since the adoption of the legislation, those conversations have continued and focused on implementation of the newly adopted law.
Is the rule required by federal law or federal regulation? This rule is not required by federal law or regulation.
Industry affected by the proposed rule. The rules would impact Fire, Marine & Casualty Insurers, #6331.
Parts of the proposed rule that may impose a cost to business. The new law restricts the use of credit history to deny, cancel, or nonrenew an insurance policy (section 1, chapter 360, Laws of 2002). The law prevents the use of certain credit factors. The law also prevents insurers from using credit history to determine personal rates, premiums, or eligibility for coverage unless the insurance scoring model is filed with the commissioner (section 1, chapter 360, Laws of 2002). The law also prohibits certain types of information from being used to calculate insurance scores.
The purpose of the proposed rules is to establish a clear and efficient mechanism to implement the new law. The requirements and restrictions are imposed by the law; ensuring compliance and implementing the law is the purpose of the rule making. Below is an overview of each proposed WAC section.
Proposed WAC 284-24A-001 is the purpose of the proposed rules.
Proposed WAC 284-24A-005 provides definitions for the new chapter.
Proposed WAC 284-24A-010 requires the insurer to inform the consumer of the four most significant factors that led the insurer to take an adverse action. The insurer's explanation must be in clear and simple language. The requirement to inform the consumer about the significant factors when an adverse action is taken is in section 1, chapter 360, Laws of 2002.
Proposed WAC 284-24A-015 establishes the timeframe for filing insurance scoring models. The filing of the model (if a model is to be used) is required in section 2, chapter 360, Laws of 2002. The use of credit history in underwriting has a different effective date than the use of credit history in rate making. The proposed rule reflects the different effective dates in the timeframes for filing.
Proposed WAC 284-24A-020 establishes how to file the insurance scoring model.
Proposed WAC 284-24A-025 allows the filing of models by vendors. Insurers may use a model filed by a vendor and accepted by the commissioner by submitting without filing the entire model. The insurer can reference the model.
Proposed WAC 284-24A-030 allows for the protection of confidential and proprietary information.
Proposed WAC 284-24A-035 informs the insurers of what the scope of review will be when the commissioner reviews the filed models.
Proposed WAC 284-24A-040 states what action the commissioner will take if a model does not comply with Washington law.
Proposed WAC 284-24A-045 advises insurers how they can show illustrate that their rates are not excessive, inadequate or unfairly discriminatory.
Proposed WAC 284-24A-050 instructs insurers what information must be included in a multivariate rate analysis.
Proposed WAC 284-24A-055 informs insurers of what actuarial information should be submitted with their model or rate filing.
Proposed WAC 284-24A-065 provides some questions and answers that the commissioner believes may be useful to insurers in complying with the rules and law.
Proposed WAC 284-24A-070 provides an effective date. As noted earlier, the law has two different effective dates. This section parallels the dates in the law.
Compliance costs for the industries affected by the proposed rules: The drafters do not anticipate any costs directly attributable to the rule beyond the time spent in reading and comprehending the rule.
Percentage of the industries in the four-digit standard industrial classification affected by the rule: The adopted law and proposed rule will affect 100% of the personal lines insurers who choose to use credit history in underwriting or rating. As noted, most if not all insurers are using credit history in some fashion.
Mitigation measures that could be used to reduce the economic impact of the rule on small businesses and still meet the objectives: No mitigation appears to be possible or necessary (due to the lack of anticipated costs). As noted earlier, the commissioner and staff have been discussing these issues with industry and interested parties for many months. Proposed concepts and language has been exposed for comments and suggestions in an attempt to mitigate costs, improve the ease of filing, and reduce the time for approval. The commissioner will continue to be receptive to suggestions that will allow the rule to be administered more efficiently while meeting the objectives of the regulation.
Steps the commissioner will take to reduce the costs of the rule on small businesses: The commissioner does not believe that there are any property and casualty insurers that operate in Washington that employ fewer than fifty employees. However, the commissioner is interested in reducing the costs for all business, especially smaller businesses. The commissioner welcomes any new suggestions that could lessen any economic impacts that are attributable to the rules.
Mitigation techniques that have been considered and incorporated into the proposed rule: The commissioner and his staff have had numerous discussions with industry and interested parties as the proposal was developed. The proposal has been through several drafts as changes to clarify and mitigate potential costs have been made. The commissioner would like to thank the industry and interested parties for providing timely and useful comments and suggestions throughout this process. Clearer, more efficient regulation benefits the consumer, industry, and the regulator.
Examples of mitigatory changes that have been made include:
Proposed WAC 284-24A-005 has been refined to eliminate some unnecessary or inconsistent definitions.
Proposed WAC 284-24A-010(1) was clarified and limited. The proposed rule requires insurers to inform the consumer of the four most significant credit factors that led the insurer to take the adverse action. The previous language was "any" - insurers felt this went beyond the scope for their knowledge and ability to comply. Insurers also wondered if the language implied that they should counsel the insured on how to improve. The language was refined and should enable the insurer to pass along the "true and actual" reason for the adverse action without having to develop new information or provide any sort of counseling. The information will allow consumers to understand why the action was taken. This will give the insured the ability to determine if information was correct or what they can do to avoid adverse actions in the future.
Proposed WAC 284-24A-025 allows for the filing of models by vendors. The insurer may never need to file a model. It may be able to refer to the accepted model filed by the vendor. This will save administrative time and money.
Proposed WAC 284-24A-035(2) "discrimination" was qualified to become "unfair discrimination." This is an insurance phrase and helps clarify the rule and its scope.
Proposed WAC 284-24A-050 limits the number of factors for which an insurer must perform a multivariate analysis. This will reduce the costs of compliance as compared to the requirements of T 01-02. T 01-02 requires an unlimited number of factors for the multivariate analysis.
Mitigation techniques that were considered for incorporation into the proposed rule but were rejected: The use of a multivariate analysis has been the subject of some discussion. Some members of industry have suggested that the analysis may be difficult to complete. The commissioner believes that a multivariate analysis is necessary to ensure that credit and other rating factors are not being accounted for in the rating tiers, classifications, factors, or plans. As mentioned in the background, the commissioner issued T 01-02, a technical assistance advisory on this subject in November of 2001. The new law allows for the use of some credit history factors in rating and underwriting. The use of the credit history must be supportable by a sound statistical analysis. Without such an analysis, it is not possible for [the] commissioner to determine if the rates are in compliance with chapter 48.19 RCW and chapter 360, Laws of 2002.
The concept that the proposed rates must be justified and supported statistically is not new. It is a necessary part of rate regulation. Without the ability to look at the impact of the rating factors and ensure that proposed tiering or factoring is not duplicative, or result in rates or premium that is unfairly discriminatory, excessive, or inadequate, the requirements of the underlying law and chapter 48.19 RCW cannot be met.
Reporting, record-keeping, and other compliance requirements of the proposed rule: There are no new reporting or record-keeping requirements as a result of this rule. The law requires the filing of the scoring model if an insurer wants to use a model.
Professional services that may be needed to comply with the requirements of the proposed rule: There may be some professional services [that] will be needed by businesses to develop the multivariate rate analysis. As noted earlier, this was the subject of a technical assistance advisory (T 01-02) issued in November of 2001 and an expected component in filings using credit history since March of 2002. The proposed rule codifies the concept set forth in that TAA. RCW 48.19.020 requires that the filing "must be accompanied by sufficient information to permit the commissioner to determine whether it meets the requirements of this chapter." As noted, the commissioner believes that the multivariate rate analysis is necessary to make that determination. The commissioner has attempted [to] allow compliance with that requirement in the most efficient manner.
Cost of equipment: There is no anticipated additional cost of equipment.
Cost of supplies: There is no anticipated additional cost of supplies.
Cost of labor and increased administration: There may be some additional costs of increased labor and administration. The commissioner has attempted to mitigate or eliminate as many of those costs as possible (see the section addressing mitigation techniques that were incorporated into the rule). Much, if not all of the remaining costs are due to the new law, not the proposed rules. The law requires the filing, restricts the use of certain information.
The proportionality of the cost of compliance: The cost of compliance should be proportional for smaller businesses. The use of credit history is not required or prohibited. The complexity of a model and the weighting of the allowable factors is up to the insurer to decide. There is no connection between the type of model and the size of an insurer. Smaller insurers may choose to use more standardized models and let the vendors file them to achieve some possible savings. The more complex and unique a proposed insurance scoring rating plan is, the more documentation may be needed by [the] commissioner to review the proposal. The insurer must be able to support the filing with documentation to allow the commissioner to determine if the filing complies with chapter 48.19 RCW. The rule does not require or impose any disproportionate differences in costs of equipment, supplies, labor, or administration.
Informing and involving affected businesses: The CR-101 was filed on October 11, 2001. The proposal was published in the Washington State Register and was posted on the insurance commissioner's website with contact names and numbers. Affected parties, including smaller insurers, were mailed the CR-101. The CR-101 requested comments and gave agency contact numbers for parties interested in participating in the rule-making process. The commissioner also held a series of public meetings throughout the state to raise awareness and to discuss the subject with consumers, insurers, and interested parties.
The use of credit history was a prominent topic in the 2002 legislative session and the commissioner discussed the proposed legislation and their possible impacts with industry and interested parties throughout the session. Since the adoption of session, staff and the commissioner have had numerous meetings and discussions with insurers and interested parties, including credit rating organizations. As potential issues and language has crystallized, the commissioner has shared the drafts and asked for comments and suggestions. After numerous drafts and discussions, the commissioner is proposing the draft rules. The commissioner continues to encourage comments from insurers and any interested parties on the proposal.
Informing and involving small business in the development of the proposed rule: See above.
A copy of the statement may be obtained by writing to Kacy Scott, P.O. Box 40255, Olympia, WA 98504-0255, e-mail Kacys@oic.wa.gov, phone (360) 664-3784, fax (360) 586-3109.
RCW 34.05.328 applies to this rule adoption. This is a "significant legislative rule" for the purpose of RCW 34.05.328.
Hearing Location: John A. Cherberg Building, Senate Hearing Room 2, Olympia, Washington, on Wednesday, August 7, 2002, at 2:00 p.m.
Assistance for Persons with Disabilities: Contact Lori Villaflores by August 1, 2002, TDD (360) 664-3154, or phone (360) 407-0198.
Submit Written Comments to: Kacy Scott, P.O. Box 40255, Olympia, WA 98504-0255, e-mail Kacys@oic.wa.gov, fax (360) 586-3109, by 5 p.m. on August 6, 2002.
Date of Intended Adoption: August 21, 2002.
July 3, 2002
Mike Kreidler
Insurance Commissioner
OTS-5829.2
RULES THAT APPLY TO INSURERS THAT USE CREDIT HISTORY FOR PERSONAL INSURANCE UNDERWRITING OR RATING
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• Age of the insured;
• Sex of the insured;
• The county in which the insured lives; and
• The zip code assigned to the insured's primary home address.
"Premium" means the same as RCW 49.18.170.
"Rate" means the cost of insurance per exposure unit.
"Rating factor" means a number used to calculate premium.
"Risk classification plan" means a plan to formulate different premiums for the same coverage based on group characteristics.
"Significant factor" means an important element of a consumer's credit report. Examples of significant factors include:
• Bankruptcies, judgments, and liens;
• Delinquent accounts;
• Accounts in collection;
• Payment history;
• Outstanding debt;
• Length of credit history; and
• Number of credit accounts.
"Substantive underwriting factor" means a factor that is very important to an underwriting decision. Examples of substantive underwriting factors include:
• History of filing claims;
• History of moving violations or accidents;
• History of driving uninsured;
• Type of performance for which a vehicle is designed; and
• Maintenance of a structure to be insured.
"Vehicle" means any motorized vehicle that can be insured under a private passenger auto insurance policy.
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(2) Insurers must explain what significant factors led to an adverse action in clear and simple language.
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(2) Every insurer that uses an insurance scoring model to determine personal insurance rates or premiums must file the model with the commissioner before June 30, 2003. Related rates, risk classification plans, rating factors and rating plans must be filed and approved by June 30, 2003.
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(2) The insurance scoring model must be filed with the current transmittal form accepted by the commissioner. A copy is available at http://www.insurance.wa.gov/ or by contacting the rates and forms division.
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(2) Insurers may use models filed by vendors after the commissioner determines the model complies with Washington state laws.
(3) An insurer may use a model that has been filed by a vendor and accepted by the commissioner if the insurer:
(a) Submits a transmittal form; and
(b) A cover letter that:
(i) References the vendor that filed the model;
(ii) References the filing number used by the vendor; and
(iii) Proposes an effective date for the insurer's use of the model.
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(1) If you check "yes," the model will be withheld from public inspection.
(2) If you check "no," the model will be available for public inspection.
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(1) Any prohibited factors; and
(2) Attributes that may result in unfair discrimination.
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(1) Notify the insurer or vendor that the model does not comply with Washington law;
(2) State the reasons why the model does not comply with Washington law;
(3) Offer the insurer or vendor sixty days to revise the model to resolve the issue(s) outlined in subsection (2) of this section; and
(4) Provide a specific date when the model may no longer be used in Washington if the model has not been revised to resolve the issue(s).
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(1) Submit a multivariate analysis with its initial filing to comply with this law.
(2) Submit a multivariate analysis any time it uses credit history to revise a risk classification plan, rating factor, rating plan, rating tier, or base rates.
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(a) For homeowners, dwelling property, earthquake, and personal inland marine insurance:
(i) Credit history;
(ii) Territory and/or location;
(iii) Protection class;
(iv) Amount of insurance;
(v) Surcharges or discounts based on loss history;
(vi) Number of family units; and
(vii) Policy form relativity.
(b) For private passenger automobile, personal liability and theft, and mechanical breakdown insurance:
(i) Credit history;
(ii) Driver class;
(iii) Multicar discount;
(iv) Territory;
(v) Vehicle use;
(vi) Rating factors related to driving record; and
(vii) Surcharges or discounts based on loss history.
(2) Provide a general description of the model used to perform the multivariate analysis, including the:
(a) Formulas the model uses;
(b) Rating factors that are included in the modeling process; and
(c) Output from the model, such as indicated rates or rating factors.
(3) Show how the proposed rates or rating factors are related to the multivariate analysis.
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(2) Insurers must submit actuarial data based on demographic factors to support any difference in rates or premiums based on:
(a) "No hit," which means the absence of credit history; or
(b) "No score," which means the inability to determine the consumer's credit history.
(3) The actuarial data must include:
(a) Loss history for an experience period acceptable to the commissioner. The length of the experience period will be determined by the amount of data available to the insurer.
(b) Earned exposures.
(c) Earned premiums.
(d) An analysis of the credibility of the data.
(4) The actuarial data must be segmented by:
(a) Demographic factors;
(b) "No hit"; and
(c) "No score."
(5) The actuarial data must show that the proposed rates, rating factors, rating rules, or risk classification plans relating to "no hit" and "no score" comply with RCW 48.19.020.
(6) These filings are subject to prior approval by the commissioner under the provisions of RCW 48.19.040.
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What types of data can I use to support a credit-based rating plan? A credit-based rating plan must be based on the experience of the insurer or an affiliated insurer under the same management. The commissioner will accept data from other states where comparable credit-based rating plans are in effect.
The law says an insurer cannot use the number of credit inquiries to set rates or to deny insurance. Can I consider the amount of time since the most recent inquiry? Yes. The law prohibits an insurer from considering the number of credit-seeking or promotional inquiries. It does not prohibit you from considering the length of time since the most recent inquiry about a consumer's credit rating.
The law says an insurer cannot use collections identified with a medical industry code to set rates or to deny insurance. Not all credit vendors provide industry codes for collection accounts. Would a search of medical references in a text field be in compliance with the statute? Yes. You are expected to review the credit records and eliminate collections identified with a medical industry code. If medical history is not coded or identified, you are not required to perform additional research.
The law says an insurer cannot use the initial purchase or finance of a vehicle or house that adds a new loan to the consumer's existing credit history to set rates or to deny insurance. Can I use the number of such loans and/or the outstanding balance of such loans?
• You may not use the initial purchase of a home or vehicle to affect eligibility for insurance or insurance premiums. The initial purchase is the first loan taken out to buy a home or vehicle.
• You may evaluate any subsequent borrowing by a consumer.
The law says an insurer cannot use the total available line of credit to set rates or to deny insurance. Can I use number of credit lines with limits over a set amount?
• The law prohibits use of data related to the consumer's total available line of credit. Any attribute that evaluates the total amount of credit available to a consumer is prohibited.
• You may use the debt/credit ratio or other ratios that consider the actual debt load. The law does not restrict use of ratios that determine whether an insured is over-extended due to actual debt.
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(1) WAC 284-24A-010, 284-24A-015(2), and related definitions, questions and answers apply to all policies issued or renewed after January 1, 2003.
(2) The remainder of this regulation applies to all policies issued or renewed on or after June 30, 2003.
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