Prescreening Offers Option for Insurance-Credit Rating Hassle

For insurers that want the underwriting benefits of credit reports but don't want to deal with the regulatory hassle that sometimes accompanies their use, prescreening may be the answer, a spokesman for the National Association of Independent Insurers (NAII) told attendees of Fair Isaac's Interact '98 Conference in San Francisco last week.

"Recent changes in federal law open the door to an exciting marketing opportunity for insurance companies," says Sam Sorich, NAII assistant vice president and Western regional manager. "Insurers can now prescreen credit reports to identify consumers for their products, thanks to 1996 amendments to the Federal Fair Credit Reporting Act (FCRA)."

Prescreening is a process where a credit bureau compiles or edits a list of consumers that meet specific criteria and gives the list to an insurer to target new customers.

"While federal law has allowed insurance companies to use credit reports as an underwriting tool for more than 25 years, prescreening is a recent variation for insurers' use of credit," says Sorich. "This could become the most secure and simplest way to use credit reports."

Sorich notes the difficulties insurance companies have when using credit reports. "The states have broad authority to develop a variety of mandates, requirements and prohibitions on how insurance companies can use credit reports," says Sorich. "However, this broad authority does not apply to prescreening. The FCRA amendments preempt states from imposing any restriction or prohibition on insurers' prescreening activities until January of 2004."

But insurers that prescreen must be aware of FCRA requirements, warns Sorich. "First and foremost, a credit bureau can provide a credit report for insurance prescreening only when prescreening is part of a transaction that will be a firm offer of insurance to the consumer," according to Sorich. "Also, the bureau must establish a system to notify consumers how to 'opt out' of prescreening lists."

When an insurer solicits a consumer from a prescreened list, the company must give the consumer a clear and conspicuous disclosure statement with the following five elements:

• The consumer must be informed that his or her credit was reviewed.
• The consumer must be told that the offer of insurance was made because his or her credit report met certain criteria.
• The consumer must be advised that he or she may not receive the insurance being offered if he or she does not meet any of the company's other underwriting criteria.
• The consumer must be told of his or her right to opt out of future prescreening lists.
• Directions on how to exercise the right to opt out must be given to the consumer.

In addition to these disclosure requirements, the FCRA imposes record- keeping mandates on insurers that prescreen, according to Sorich.

"The most controversial feature of the federal law's prescreening authorization is the requirement that the insurer make a firm offer," says Sorich. "According to the definition, the insurance company's firm offer may be subject to some conditions."

"In a sense, the federal law allows an insurance company to 'postscreen,'" says Sorich. "What this means in practical terms is that an insurer making an offer to a consumer whose name is on a prescreened list may withdraw the offer if the insurer finds that the consumer does not meet the insurer's other established underwriting guidelines."

Sorich explains that even though a consumer meets the credit criteria used for prescreening, the insurer may withdraw its offer based on driving record, type of vehicle, claims experience, a home's construction type, age of residence or any other established underwriting criteria.

And 'established' is important. According to the FCRA, criteria used to withdraw the offer must be established in advance of the prescreening and must be kept on file for three years after the offer is made, says Sorich.

"So for the next five years, prescreening is a safe harbor for insurance companies that want to use credit reports, but also want to avoid the conflicting and unreasonable limitations of some state laws," Sorich concludes.