Panel Looks to Break Down Credit Scoring

Credit-based insurance scores are accurate, reliable and effective predictors of future loss, and they are gaining some acceptance among insurance agents – but regulators need more convincing.

That was the gist of a panel discussion on “Credit Scoring, What’s the Beef – What’s the Score” at the 2002 Underwriting Conference in Chicago this week. Some 150 insurance underwriters and executives attended the three-day meeting sponsored by the Alliance of American Insurers and the American Association of Insurance Services.

“How good a future loss predictor is it? From my experience the companies have essentially asserted that it’s a superb future loss predictor, perhaps the best they’ve ever seen,” Nathaniel Shapo, Illinois Director of Insurance, said. “Checking with staff, I feel we’ve gotten more assertions on that than we have actual hard proof that this is ‘A’ – a terrific future loss predictor and ‘B’ – an adequate substitute for other factors that have been used in the past. That’s not to say it’s not. I suspect that there probably is a significant correlation. But the more we can get on that, the easier it is for us to be able to accept that this new and somewhat unorthodox approach is okay.

“The second issue is whether this tool could have a disproportionate impact on particular groups, particularly minority groups, which many other sections of the insurance code are designed to protect.”

John Wilson, assistant vice president of ChoicePoint, one of the vendors that provide credit-based insurance scores for companies, said race and income are not factored into the scores and their value as a predictor of loss cannot be understated. “Within any given group, you’re going to have people with good scores, medium scores and poor scores and in each of those groups, the people with the lower scores have worse loss ratios.”

Wilson said companies need to let customers know when they are getting a better rate because of their credit score. “It’s too bad that only those who are adversely affected are knowing about it. Companies say 60-70 percent of all their customers get a better rate because they use credit than they would otherwise, but those people don’t know it. By and large they don’t understand there’s that benefit. Now maybe in a place like Maryland, where something gets taken away, then the consumers realize, too late, what it was that they were benefiting from.”

Lynn Knauf, property/casualty policy manager for the Alliance of American Insurers, said using credit-based insurance scores, instead of actual credit reports, helps preserve customers’ privacy. “It’s also very objective. When you’re getting a score and you’re not seeing someone’s actual credit report, there’s no room for subjectivity there.”

Phil Lackman, vice president of government relations for the Professional Independent Insurance Agents of Illinois, said the way some companies used credit scoring to re-write their book of business caused considerable problems early on with agents and caused many of them to speak out against it.

“I think we’re through the biggest hurdles with the agent community,” said Lackman. “But I think it’s just beginning, frankly, with consumers, because to a large extent people aren’t listening when the industry tries to be proactive and put information out there. The press picks up the most negative aspects of this issue and that’s what they put out there. We then end up responding, but it’s on their agenda.”

Video highlights of the panel and the conference are available at http://www.allianceai.org.