Greater consumer rights and transparency needed around insurance risk scores, CFA tells NAIC
The Consumer Federation of America (CFA) and the Center for Insurance Research (CIR) are requesting recommendations from the National Association of Insurance Commissioners (NAIC) that would enhance consumer rights and transparency on unknown and undisclosed risk characteristics in property and casualty insurance.
CFA and CIR sent their written comments to NAIC’s Casualty Actuarial and Statistical Task Force on Monday.
“The Task Force should issue recommendations on appropriate disclosures and processes to remedy this rapidly developing crisis,” a CFA release on the comments says. “Such recommendations are a critical first step in addressing the problems that occur when consumers are scored without any ability to understand the insurance risk scores, address any problems with them, or correct errors that have affected these scores. The use of unknown and undisclosed risk characteristics further undermines a critical component of the insurance system – voluntary risk mitigation.”
The comments state that the issue is “increasingly” impacting the consumers that the organizations advocate for. It affects the accuracy of the data components that insurers use to determine eligibility for coverage and premiums charged, the comments say.
“While relevant to all insurance coverages, the use of unknown risk characteristics is particularly important in property insurance — a product currently in crisis,” the comments say. “Currently, property insurance availability is plummeting across the country, while the cost of coverage is soaring. Driving these rising costs is the increased use of broader risk scoring systems, complex models, aerial images, and other data (often obtained from third parties not subject to any meaningful oversight) flooding and overwhelming traditional underwriting standards.
“Yet consumers have been left in the dark and lack access to the data and determinations needed to permit the correction of misinformation, and often face losing their insurance coverage or affordable protection for their property.”
CFA and CIR state that consumers have the right to a copy of their financial credit reports and credit scores, and to view the actions that have impacted their scores. Financial credit scores provide a mechanism for correcting false or outdated information.
Consumers typically cannot access the risk score associated with their property, the comments say.
For example, in the homeowners marketplace, wildfire risk models assign risk scores to homes based on a set of considerations that typically include the distance from a fire station, the degree of slope on the property, and wildfire fuel loads such as forest or brush, the comments say.
“There has been very little effort by insurers to explain these scoring mechanisms or how consumers can improve these factors to lower their risk,” the comments say. “This lack of a clear explanation of this and other critical determinants in the property insurance underwriting and rating process is leading to increased frustration and anger by consumers, media, and public policymakers outside the typical insurance regulatory community. Consumers are organizing and making their voices heard in public meetings, the media, and online, often accusing insurers of being greedy and arbitrary and regulators of being negligent in their responsibilities to the detriment of the insurance marketplace as a whole.”
CFA and CIR ask that the task force provide “strong and reasonable disclosure requirements” for insurers to provide increased transparency. The organizations also say that this will provide an avenue for consumers to challenge inaccurate conclusions about their risk profile.
The organizations point to a California regulation on the Consideration of Mitigation Factors/Wildfire Risk Models, 10 CA Code of Regs 2644.9.
The code requires insurers utilizing a wildfire risk model or rating factor to provide policyholders with the written procedure that is used. The score or classification should be provided to the policyholder no later than 15 days after a completed application and no more than 45 days before each renewal and 75 days before any nonrenewal.
If the policyholder has completed a mitigation measure on the property, insurers must provide a revised wildfire risk score or wildfire risk classification.
Policyholders are also provided the right to appeal orally or in writing the assignment of the wildfire risk score or other wildfire risk classification. The insurer must acknowledge the receipt of the appeal within 10 days and respond to the appeal with the reconsideration decision within 30 days. If it is denied, the insurer is required to forward a copy of the appeal to the state’s department of insurance.
“A similar approach should be required for insurance policies and for each rating factor used by the insurer to determine premiums, as well as underwriting classifications that determine if a consumer will be rejected for coverage or nonrenewed,” the comments say. “ Policyholders must be given the opportunity to object or correct any erroneous datapoints and at the very least understand the reasoning behind the coverage denials or premium increases.”
llinois Secretary of State Alexi Giannoulias recently launched a statewide campaign focused on preventing insurance companies from using socioeconomic data to charge residents higher auto insurance rates.
This data could include credit scores, zip codes, and age, according to a press release.
The “Driving Change” campaign is asking state residents to share their stories about unfair and discriminatory ratemaking practices used by auto insurance companies. The campaign was launched in Chicago’s Bronzeville neighborhood, and then AARP Illinois and multiple state legislators joined.
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