NAIC Faces Calls for Enhanced Transparency on Insurance Risk Scoring

The Consumer Federation of America (CFA) and the Center for Insurance Research (CIR) have formally requested that the National Association of Insurance Commissioners (NAIC) develop recommendations aimed at enhancing consumer transparency and rights regarding the use of unknown and undisclosed risk characteristics in property and casualty insurance. Their concerns highlight the growing impact on consumers who face opaque scoring systems used by insurers that affect coverage eligibility and premium costs. These undisclosed risk factors, often derived from complex models and third-party data without meaningful oversight, contribute to rising premiums and reduced availability, especially in the property insurance sector, which is currently experiencing a market crisis.

CFA and CIR emphasize that while consumers have access to financial credit reports and the ability to dispute inaccuracies therein, similar transparency is lacking for insurance risk scores, particularly in property insurance. For instance, homeowners in wildfire-prone areas receive risk scores based on factors such as proximity to fire stations and local vegetation, yet insurers rarely provide clear explanations or guidance on how consumers might mitigate these risks to lower their premiums.

The organizations argue that this lack of transparency in underwriting and rating processes has led to consumer frustration and increased scrutiny from policymakers and the media. To address this, CFA and CIR advocate for robust disclosure requirements obligating insurers to share detailed risk scoring methodologies and provide consumers access to their specific risk profiles. They also emphasize the necessity for mechanisms allowing consumers to challenge erroneous data points and decisions impacting their coverage.

As a model, CFA and CIR reference California's regulation on wildfire risk models, which mandates insurers to disclose risk scores promptly and provide an appeal process that includes timely insurer responses and involvement from state insurance departments if appeals are denied. They suggest expanding similar regulatory frameworks across all insurance rating factors, ensuring consumers can contest coverage denials and premium increases with clear explanations.

Separately, Illinois has initiated efforts to tackle potentially discriminatory auto insurance practices. Illinois Secretary of State launched the “Driving Change” campaign to prevent insurers from using socioeconomic data such as credit scores, zip codes, and age in auto insurance rate setting. The campaign, supported by AARP Illinois and state legislators, seeks to gather resident experiences of unfair ratemaking practices.

These developments indicate a rising regulatory and consumer advocacy focus on transparency, fairness, and accountability in insurance underwriting and pricing models. Enhanced disclosure and appeal rights could play a pivotal role in mitigating consumer impacts from complex, opaque scoring methods and support a more equitable insurance market environment.