Credit Scoring Questions & Answers

ORS 746.661 – ORS 746.663 and OAR 836-080-0435 – OAR 836-080-0438 provide the requirements on the use of insurance scoring or credit history for personal insurance underwriting and rating.

Key provisions of these statutes and rules are summarized in Bulletin INS 2003-8.

The following rating examples illustrate how these statutes and rules apply to specific situations in Oregon.

Rating Examples

Scenario 1: An insured was placed in Tier 2, the standard tier, in initial underwriting. The insurer developed and used an insurance score, based on credit history, that assigned an insured to a rating tier during initial underwriting. This policy is coming up for renewal.

Renewal guideline: The insured will remain in Tier 2 based on the initial insurance score. Other rating factors may be reevaluated to determine the insured's final rate.

NOTE: An insured may be re-rated or non-renewed only on the basis of factors that do not include insurance score or credit history.

Scenario 2: An insured was not placed in a tier, but the insured's credit information was used to determine the final rate. This policy is coming up for renewal.

Renewal guideline: Any change in the renewal rate must be based exclusively on rating variables other than insurance score or credit history. The original credit based rate adjustment will remain in place for subsequent renewals.

Scenario 3: An insured was placed in a preferred company based in part on credit information. This policy is coming up for renewal.

Renewal guideline: The insured will remain in the preferred company as long as underwriting variables other than insurance score or credit history do not weaken and cause the insured's underwriting profile to fall outside the renewal parameters for the preferred company. Any change at renewal must only be based on factors other than credit history or insurance score.

Scenario 4: The insured was placed in an insurer's non-standard company solely because of adverse credit information when coverage was obtained two years ago. The adverse information is out of date and no longer reported on the insured's credit history. This policy is coming up for renewal.

Renewal guideline: If the insured requests that the policy be re-rated, the insurer must re-rate the policy with current credit information. This will result in the insured being placed in the insurer's standard company, if all other factors are unchanged.

If the insured does not request that the policy be re-rated, the insured will remain in the non-standard company.

NOTE: An insured may request, no more than annually, to re-rate their policy to reflect updated credit information.

Insurers are encouraged to provide information to policyholders describing their rights with respect to re-rating and other consumer protections contained in ORS 746.661 and ORS 746.663.

Scenario 5: The insured was charged a higher rate due to two disputed late payment notices on the insured's credit report. The disputed notices were resolved in the insured's favor.

Guideline: If the dispute is resolved under the Fair Credit Reporting Act (FCRA) process and the insured notifies the insurer in writing that the dispute has been resolved, then the insurer is required to re-rate the policy using the updated credit information. The lower rate will be applied retroactively to the effective date of the current policy.

Insurers are encouraged to provide information to policyholders describing their rights with respect to re-rating and other consumer protections contained in ORS 746.661 and ORS 746.663.

Scenario 6: The applicant is applying for automobile insurance for the first time with the insurer. The applicant's insurance score is unfavorable, but the applicant has no prior accidents and no moving violations.

Guidelines: The insurer may not use an insurance score alone as a reason to deny an application for insurance coverage. Other substantive factors must be used in combination with an insurance score to determine eligibility. The applicant may be offered coverage at a rate higher than the preferred rates due to the lower insurance score in accordance with the insurer's filed rating plan or rating model. If the insurer offers coverage at a higher rate based on the insurance score, the insurer must send a notice of adverse action to the insured. See scenario 12 for related discussion.

NOTE: If the insurer is required to give the applicant a notice of adverse decision, the specific reason or reasons for offering coverage at a higher rate, not to exceed four, must be stated in the notice, as required by ORS 746.650(5)(a).

Scenario 7: The insurer filed a new rating plan that uses a credit-based insurance score to place an insured in a rating tier. The insurer's previous rating plan also used credit information to determine rating tiers.

Guideline: The current book of business will be renewed under the previous rating plan. Any change in the insured's renewal premium will be based on rating variables that do not include the insurance score under the old tier rating plan. The original tier placement based on insurance score will remain in place for subsequent renewals.

The revised rating tiers will apply only to new business and the subsequent renewals from this new business, written on or after the effective date of the revised tier rating plan.

NOTES:

1. If the insured believes that the new rating tiers will be more favorable, the insured may request that the insurer re-rate the insured under the revised tier rating plan.
2. The 12-month requirement applies to insureds that request re-rating due to an adverse decision.
3. The statute allows an insurer to inform an insured about the possible benefit from being re-rated. It would be prudent, however, for the insurer to also explain any possible disadvantages of re-rating to the insured.

Scenario 8: An insurer places business in three affiliate companies; one for non-standard business, one for standard business, and another for preferred business. An insured currently has coverage in the standard company. The insured applies for coverage in the preferred company, but the insured's insurance score is much less favorable than the score on file.

Renewal guideline: The insurer may use the new credit information in connection with other variables to consider the application for coverage with the preferred company.

NOTES: The insurer may not use the new credit information to non-renew the policy. Unless the insured separately requests a re-rating in the standard company, the insurer may not increase the insured's rates in the standard company based on the new credit information.

Scenario 9: An insurer uses rating tiers based on an insurance score developed from an insured's credit history. The insured currently has coverage in the third tier. Two years later, the insured requests re-rating. The resulting insurance score is unfavorable, indicating placement in the least favorable tier.

Renewal guideline: The insurer may not refuse to continue coverage based solely on credit history. The insurer may place the insured in the least favorable tier based on new credit information since the insured asked to be re-rated. If an insured requests to have his or her credit-based insurance score recalculated midterm, an insurer would not be expected to apply the revised credit-based insurance score to the policy already in force. The insurance score would be applied upon policy renewal. This is consistent with the manner in which other rating variables are used to calculate an insured's premium.

Scenario 10: The applicant for insurance does not have sufficient credit history to determine an insurance score.

Guideline: The insurer may not decline coverage based on the inability to calculate an insurance score.

Premiums may be based on the inability to calculate an insurance score only if the insurer has demonstrated to the Insurance Division that the inability to calculate an insurance score increases the risk to the insurer. Otherwise, the consumer's credit history must be excluded or treated as neutral in calculating premium.

For classification purposes, the Insurance Division considers applicants without credit history to be a different group than applicants who have insufficient credit history to calculate an insurance score.

Scenario 11: The insurer is unable to find any credit history for an applicant after verifying the applicant's information.

Guideline: The insurer may not decline coverage based on the lack of credit history but can decline coverage based upon other underwriting criteria.

Premiums may be based on the lack of credit history only if the insurer has demonstrated to the Insurance Division that the lack of credit history increases the risk to the insurer. Otherwise, the consumer's credit history must be excluded or treated as neutral in calculating premium.

For classification purposes, the Insurance Division considers applicants without credit history to be a different group than applicants who have insufficient credit history to calculate an insurance score.

Scenario 12: An insurer is introducing a credit-based insurance scoring model in its rating and underwriting rules and has existing in-force policies.

Guideline: The existing in-force policies will be rated under the older rating plan that does not incorporate an insurance score. If an insured requests that a policy be re-rated, the insurer must use the new model, which incorporates the insured's insurance score. If the insured’s rate is higher than the lowest credit rating tier, the insurer must send a notice of adverse action to the insured even if the new premium is less than or equal to what the premium would have been if credit had not been used to rate the policy.

The new business will use the insurance score for rating, but the insurance score may not be used alone as an eligibility criterion. Other substantive factors must be used in combination with an insurance score to determine eligibility. If the insurer offers coverage at a rate higher than the lowest credit rating tier, the insurer must send a notice of adverse action to the insured.

NOTE: A notice of adverse decision is not required if the insured is placed in a less favorable rating tier based on other rating variables.

Scenario 13: An insurer files a new credit model to replace the existing credit model. The new model changes the insurer's underwriting guidelines only.

Guideline: The new business will be underwritten with the new model. The renewal business will be rated according to the old model. The renewal rate for the policy can only be updated for other rating variables. The original credit-based rate adjustment will remain in place for subsequent renewals unless the insurer files historical experience to support a different rate relativity for the entire group. The filing must be made in accordance with ORS 737, the Insurance Division’s property-casualty rating law.

Scenario 14: The insurer files a new credit scoring model, which is incorporated in its rating plan.

Guideline: The new business must be rated with the new model. The renewal business will be rated according to the old model. Any change in the renewal rate must be based on rating variables that do not include insurance score or credit history. The original credit-based rate adjustment will remain in place for subsequent renewals unless the insurer files historical experience to support a different rate relativity for the entire group. The filing must be made in accordance with ORS 737, the Insurance Division’s property-casualty rating law.

If the insured requests to be re-rated, the insurance score developed from the new model should be used to rate the insured.