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Insurance Regulators Whack Weakly at Credit Score Abuse

Using credit scoring to decide who gets auto and home insurance -- and at what price -- has been a hot button issue for the industry. It's surprising that insurance regulators would tackle it, even tangentially.

But when the National Association of Insurance Commissioners takes a step, it's usually a baby step, and that's clearly the case here. A NAIC committee "approved a request to develop" a "model law" that would regulate the sellers of credit information given to insurers, the same credit info already distributed to banks, landlords, department stores, even private investigators.

The triumvirate that rules this industry -- Experian, TransUnion and Equifax -- has a lot to say about whether you get the home of your dreams, big-screen TV, or drive. In most states, your credit score is used by many insurers, including Allstate and State Farm to decide if you will be an asset or a hindrance on the road. A low credit score indicates, at least to insurers, that you could be thinking about balancing your checkbook rather than avoiding a fender-bender. And there are statistics to prove it.

But other states such as California ban or limit it because they see it as another form of "red-lining," which banks used to avoid letting inner-city residents borrow.

The NAIC, whose 50-plus superintendents and commissioners each govern their home state's insurance programs, often stands for "No Action Is Contemplated" because it generally moves very slowly. The so-called "model law" would first have to be approved by the NAIC executive committee, and then each state would have to approve a similar law on its own, since the NAIC has no national regulatory power.

According to the National Underwriter, Illinois Insurance Director Michael McRaith says the credit scoring agencies actually "welcome the oversight." Let's hope insurers do too, because the NAIC has recently shown an uncomfortable tendency to back down when faced with industry objections, particularly on issues such as climate change.