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.

Redlining

Last week I promised a post somewhat related to Martin Luther King jr. and the Civil Rights Movement. There is so much information available on the topic I had in mind that it's been hard to provide a concise and insightful post on it. I suppose that's a great argument for why you should be a member of the library -- then you could borrow all of our resources and become an expert on the subject yourself!

When I tried to come up with an insurance topic related to the holiday, the first one that came to mind was Redlining. According to the IRMI Glossary of Insurance and Risk Management Terms it is:

An underwriting practice involving the rejection of a risk based solely on geographical location. This practice is prohibited under the laws of most states as it tends to be discriminatory to minorities.

The practice of redlining began in the 1930s though the term wasn't used until the 1960s (if wikipedia can be believed). It literally refers to the red lines that used to be drawn on maps used for property loans. Below you can see an example of a similar map of Philadelphia:

If you click on the map, you will be transferred to the UPenn website on redlining where you can click on different locations on the map and zoom in to see what it says (this is all courtesy of the Free Library of Philadelphia Map Collection). The insurance industry adopted a similar stance to that of banks and as a result it was difficult to get insurance in certain urban areas. In 1968 the President's National Advisory Panel on Insurance in Riot Affected Areas examined the ill effect that not providing affordable insurance just based on locality was having on communities. A 1979 publication entitled Insurance Redlining: Fact Not Fiction, describes the issue by saying:"The problem of insurance unavailability is not one that randomly affects isolated individuals but rather strikes at residents of older urban communities. Insurance unavailability threatens the viability of entire communities."

The result of the 1968 examination was the establishment of Fair Access to Insurance Requirements or FAIR plans. As Gregory D. Squires says in Insurance Redlining: Disinvestment, Reinvestment, and the Evolving Role of Financial Institutions, "I have often referred to the issue of insurance redlining as the ugly duckling of the fair housing movement." The Fair plans established in the early 70s required inspection of properties to determine their risk level and provided minimal standards of insurance for hard to place risks.

In the years that followed that initial study, many states also adopted anti-redlining legislation. "The State of Missouri enacted one of the earliest antiredlining laws" in 1977, according to Insurance Redlining: Fact not Fiction. The National Association of Insurance Commissioners added an antiredlining section to their recommended Unfair Trade Practices Act in 1978. Their reasoning, explained in the 1978 NAIC proceedings was that

It is the position of the NAIC that the insurance industry has been perceived
to be redlining, and the perception can only be altered by implementing such
practices as stating exact reasons for rejections, cancellations and
nonrenewals. The insurance industry should also abandon underwriting
"short-cuts" such as refusing to accept an application solely because the
applicant was refused coverage by another carrier.

While I would like to report that the threat of redlining has been completely eradicated, there have been well publicized cases regarding redlining filed by the NAACP as recently as the 90s. Still, I hope that Martin Luther King would be proud of the progress that has been made.

If you'd like more information on the history of redlining, we have the items cited in this post, as well as Regulatory Challenge Business Principles Versus Social Pressures (an analysis of property and casualty insurance regulation) by Conning and Company; Problem of Property Insurance In Urban America, a Hearing Before the Subcommittee on Housing and Urban Affairs; Full Insurance Availability: Department of Housing and Urban Development and Fairness and Balance in Residential Property Insurance: A National Survey of Homeowners Attitudes. We've also got journal articles discussing redlining.

Insurance Rebating

I have mentioned before that I like sales. I brave the crowds on the day after Thanksgiving, I Google coupon codes before buying anything online and I cut upc codes off boxes and send away for my manufacturers rebates. There's one kind of rebate I don't take advantage of though, and that's insurance rebating; it's illegal.

Recently, we were asked what the definition of rebating is in Massachusetts. The International Risk Management Institute (IRMI) has a general definition in their Glossary of Insurance and Risk Management Terms. As far as I know there isn't an exact definition in the Massachusetts code. There are guidelines to help determine whether something is rebating. For example, the law doesn't address allowing customers to pay their premium via credit card although they may get airline miles or other incentives from their credit card company by doing so. As the incentive is not being offered by the agent, but by the credit card company, this may well not be considered rebating. The law doesn't specifically say that you can't offer Red Sox tickets to customers who go with a particular insurance company, but you can't. It's considered a special inducement which is prohibited. If a specific issue arises in this context, an opinion can be requested from the Massachusetts Division of Insurance.

Chapter 176D entitled: UNFAIR METHODS OF COMPETITION AND UNFAIR AND DECEPTIVE ACTS AND PRACTICES IN THE BUSINESS OF INSURANCE covers this topic. Specifically section 3 subsection 8:

Rebates: Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any insurance contract, including but not limited to a contract for life insurance, life annuity or accident and health insurance, or agreement as to such contract other than as plainly expressed in the insurance contract issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such insurance or annuity any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such insurance contract, or annuity or in connection therewith, any stocks, bonds, or other securities of any insurance company or other corporation, association, or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the contract.

Massachusetts was the first state to enact an anti-rebating law (it was promulgated in 1887, coincidentally the same year our library started). The current Massachusetts law is based on the National Association of Insurance Commissioners model "Unfair Trade Practices Act." Massachusetts is not the only state to have adopted an anti-rebating stance. At one point, every state had an anti-rebating law (according to the 1946 NAIC Proceedings). Currently, most states still have insurance anti-rebating laws.

Some states have looked at the constitutionality and effect of the laws, especially since a number of consumer groups have questioned their use. Thus far, the only two states that I can find without anti-rebating laws are California (in 1988 a vote for proposition 103 repealed the anti-rebating law they had previously) and Florida repealed theirs in the 1980's when their courts ruled it unconstitutional.

Back in 2006 Massachusetts had an informational Hearing on "marketing practices" but doesn't appear to have followed up with a bulletin or significant change to their law. More recently, New York felt that their anti-rebating law was not descriptive enough and in 2009 they issued a circular letter "to provide guidance and clarification to licensed insurance agents and brokers (collectively, “insurance producers”) as to what kinds of services (often referred to as “value-added” services) may be provided to insureds or potential insureds without running afoul of the rebating and inducement provisions set forth in the New York Insurance Law." Insurance anti-rebating laws continue to be a topic of interest and if anything groundbreaking happens regarding them, we'll try and post an updated blog post on them.