PCI Expresses Concerns on States’ Credit Scoring Study

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I do think this should be looked at by regulators. Many companies use different criteria which does not seem right. Also, some low income people, who still pay on-time, get only good or satisfactory because they do not have larger incomes. This does not mean they will be careless or put in any more claims.

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Sorry Nancy, but I do not agree with your points.

Insurers are not using scoring in such a finite way that rates vary drastically between scores that are relatively close. Income will not drastically move a credit score up or down.

Regulators have no basis to look deeper into the use of credit derived info than they have to look at age or gender. Every company should be entitled to use the info and rate it differently. Every company is looking for their own advantage, so I may see value in seeking out risks with one profile while another insurer may have the competitive advantage against a different risk profile. Let every company find their competitive advantage and exploit it, as long as they are not breaking the law. And an insurers use of credit information is not illegal- even more so when it is one of many factors used. An insurance company would have to be crazy to base their rates solely on insurance scores, and I suspect they would not last long.

There are a number of benefits to insurance score use.
Insurance scoring can help make insurance more affordable by allowing insurers to more accurately price. Also brings in fairness in pricing as pricing is not based on factors that correlate weakly with loss experience. In fact, some factors may be more discriminatory in nature than scoring. Scoring is much more strongly correlated with loss experience.

Most people have good credit and can benefit from insurance scoring. Scoring allows insurers to charge lower rates since they can more accurately price. More often than not, consumers qualify for lower insurance rates and in some cases, even offset a less than perfect driving record.

PCI touts that “policyholders with positive credit information are less likely to incur losses. Combined with familiar factors such as years of driving experience, previous crashes, and the age of your vehicle or home, insurance scores are another way for insurers to differentiate between lower and higher insurance risks.”

It is important to note that insurers consider credit information differently than banks and other lenders. In financial institutions like banks credit scores are used to determine an applicant’s ability to repay a loan. Meanwhile, insurers use insurance scores to predict the likelihood of future losses. While credit scores and insurance scores take into consideration many of the same items in credit reports, they tend to analyze the credit characteristics differently, using different weighting factors. Each industry has different intents in how they use the info derived from credit reports.

As PCI has indicated on their website, “there’s a strong connection between credit history and claim filing. Independent studies have proven a 99 percent probability that there is a connection between insurance scores and the likelihood of someone filing a claim. Studies released by the University of Texas and EPIC Actuaries in 2003 reaffirmed this finding. The EPIC study also demonstrated that insurance scores are among the three most important rating variables used by insurers. These studies highlight the accuracy of the tool and its usefulness in helping to ensure that the price of insurance more closely corresponds to the consumer’s risk of loss.”

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I have been in the business for 42 years. Why, just in the past 5 years, has credit scoring become such a great crystal ball? Insurance has undergone a great philosophical change. No longer do companies exist to pay claims, but they exist to make money for the shareholders. Because of such change, the industry invites government into their business, then wonders why. Even the small, rural agencies, the backbone of the profit columns, are no longer wanted.

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- I agree with Linda, Peggy & Buddy … I have been a claimsman for 35 years and this is a cost cutting shortcut to avoid real underwriting decisions.

- Additionally, there will be no cost savings as advertised, just look att he population distribution on credit scores … this will be a non-rebuttable way to raise rates as apart of an unjust enrichment scheme.

- This is another fraud perpetrated on the gulible public and it will unfairly punish minorities and the economic disadvantaged.

- I have handled claims for all economic classes and those with a high credit score are just as difficult as any other with alower credit score.

- The lenders have seen this and are abandoning ther NINA loans with high credit score applicants that have little other underwriting criteria, finding they are 12 times more likely to default than a lower rated credit scores. A funny coincidence … I think not … I suspect that liars can figure and figures can lie.

End…

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Steve’s 100% wrong.

First of all, all insurance companies raised based rates, in most cases 40% or more, so they could offer bogus ‘discounts.

The vast majority of people getting a ‘discount’ actually saw a rate increase. Also, insurance companies refuse to divulge what criteria they use to obtain a credit score…What are they hiding???

Credit scoring works because it’s high-tech red-lining and VERY profitable.

Last but not least, I’ve never met an agent or insurance company representative who could explain what criteria goes into their credit scoring guidelines.

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Credit scoring is a deceptive, inaccurate tool used by the Insurance Industry to manipulate several systems. These systems include, but are not limited to, redlining or exclusion of certain classes of consumers from products and services either through complete denial or through discriminatory product pricing; rate manipulation by means of adjusting internal, non regulated, underwriting tiers; and through questionable proprietary secrecy which usurps the consumer’s ability to know or become aware of how they are scored and the accuracy of these scores.

Whom do they prey upon most often?

* Minorities who live in areas designated as low income, high crime, inner city, and poverty prone.

* Poorly educated who do not know how to protect themselves and feel forced to accept the abuse.

* The poor, the ones can least afford to pay higher rates are being driven into the substandard market.

* The Elderly, who have no debt are now penalized for retiring debt free

* Families with large medical debt

* Single mothers

These groups share commonalities. As individuals, they do not have the means by which to defend themselves from this predatory practice. The Insurance Industry knows this and exploits this knowledge to maintain the separation of classes. By continuing the separation, those on the bottom are forced to pay more and subsidize those at the top. Consumers who have no history of claims are forced to pay higher rates simply because they do not possess wealth.

Credit scoring allows insurance companies to increase premiums arbitrarily by manipulating the underwriting scoring and tiering. Underwriting, which is not regulated, creates a gray area. By changing the underwriting requirements, consumers can have their rates increased or their policies rejected. This allows the companies to act without regard to regulatory compliance. No oversight, no rate filing with the Rating Commission, simply change the tiering cutoffs and take a rate increase. The insurance industry claim their formulas as trade secrets and proprietary intellectual property. When evidence has been presented, which brings to light the discriminatory aspects and the potential illegal act of redlining, companies again refuse to show the methodology claiming the law and regulation allow them to discriminate.

Insurance in most states is compulsory for auto, and required by lending institutions on home mortgages. The legislators and regulators have put all citizens at risk. By allowing the secret models and unregulated changes in underwriting, insurance companies can effectively add a hidden tax and surcharges to every policy issued. Unfair hidden taxation, no representation, stealing from the poor, and failure by the legislative/regulatory bodies to protect the people. History is repeating itself. Over 200 years ago the Revolutionary War was fought to free this country from similar oppressive activities. Over 100 years ago the Civil War was fought to unite the country and help free people from slavery. The insurance companies, with aid from Regulators, are sending us back, again making it legal to own people and hold them hostage. To drive a car it must be insured. To have a mortgage on a home it must be insured. The laws and rules are in place to protect the citizens of this state and the institutions who lend people the money needed to purchase homes. Now these same people are told not only must they be insured, but at whatever price the insurance company demands. Even though the pricing may be excessively high and discriminatory. Those who are less fortunate, minorities and those who have had major upheaval in their lives shall now fall prey to the new â€ŔRobber Barons,” the insurance companies.

The Insurance Industry is guilty of blurring the truth, twisting the facts, and occasionally, outright lying. An investigative report by Channel 7 News from Detroit, Michigan, (http://www.detnow.com/investigations/0310301701.html) revealed some interesting information. The insurance industry was telling lawmakers that 61 percent of the people polled had no problem with the use of credit in rating insurance. Actually, what the industry did, was to take the 44 percent who had no problem and the 17 percent who did not respond or answered no opinion and added them to create the 61 percent number. Truly misrepresenting the facts. Industry lobbyists continue to profess that up to 80 percent of the people are getting discounts. According to a survey done by the Michigan Department of Insurance, while companies do offer discounts, overall, fewer than half and as few as 5 percent (depending on the company) get the maximum discount. This coupled with rate increases of up to 74 percent still yields an increase in premiums. Consumers are not realizing rate decreases.

Rep. Dave Woodward, from D-Royal Oak, told the investigative team, “Their argument is that almost 80% of MI drivers are getting a discount. So they’re shifting all this discount money onto 20% of the population? Now what I think they have effectively done, they’ve raised the base rate across the board and so everyone’s been seeing their rates go up. I mean, no one thinks they’re saving money and the insurance companies want to think that they’re doing consumers a favor by doing this and no one believes them and no one believes them because it doesn’t make sense.”

During a National Association of Insurance Commissioners ( NAIC ) meeting, Birney Birnbaum, (Center for Economic Justice) and Robert Hunter, (Center for Justice and Democracy) reported on the inaccuracies of the credit reporting agencies, and the difference of available information between agencies. Discrepancies near 30 percent had been found and reported. Difficulty in correcting erred credit reports. Errors finding their way back to corrected reports making them incorrect again. Lack of information regarding what information is used by the Insurance Industry. The moving target of credit, as it can and often does change from day to day.

The credit reporting agencies respond poorly. They admit some minor consistency problems may exist, and they are working to create a friendlier and more efficient environment for consumer problems. They have even designed a program which they will sell to consumers to help fix their credit reports. Life must be good when a business can generate errors which are adverse to the consumer, and instead of fixing the errors, they will sell the consumer a program to assist in fixing the errors created by the credit agency.

The Insurance Industry in their defense likes to introduce studies showing a â€Ŕcorrelationâ€Ŕ between credit scoring and the likelihood of filing a claim, (remember, correlation shows a potential relationship, not cause, control and effect). The first studies triumphed were from Virginia and Arizona. Regulators from both states commented on how the industry made significant overstatements as to the nature and conclusions of the studies. Another study favored by the industry was conducted by the University of Texas (UT). This study was to be a true independent and multi-variate study. The UT does many studies for business, and they are normally done to prove the outcome desired by business. Mr. Birnbaum reviewed the study after its release only to report that it was not a true multi-variate study and the methodology for the study had been previously rejected as â€Ŕ counterproductive and misleading”. Besides Mr. Birnbaum’s findings, it appears that the insurance companies were allowed to choose the customer information used in the study. The UT gave the broad parameters, but the companies had the freedom to choose which consumer files they would exclude, or include. These types of irresponsible behaviors lend more credence to the belief that credit scoring is strictly for the detriment of the consumer and benefits the greed of the company.

What the Insurance Industry will not publicize is how it held the NAIC hostage in 1995-1996. The NAIC was formulating their white paper on credit scoring and working towards a position along with policy for regulating the use of credit in personal lines insurance. The report was critical of the use of credit and suggested that the use be restricted. The study also showed a need for a true independent study on the use of credit scoring. The industry not pleased with the initial report withheld the Financial Database Filing Fees ( then 40 percent of NAIC revenue ) until the NAIC changed it’s position and rewrote their paper more in tune with industry demands. This action furthers the belief that money and power corrupt, and absolute power corrupts absolutely. No concern for the impact to consumers. No true independent study by the NAIC.

Tillinghast-Towers Perrin, a large actuarial firm was an advocate for the use of credit scoring. However, in an article released July 26, 2003, Tillinghast now seems to be advocating a return to the old tried and true way of underwriting and determining risk. In a study conducted by Tillinghast it was shown that standard underwriting practices yielded almost identical results as the credit scoring models. Additionally, with legislators restricting or banning the use of credit around the country, the costs associated with maintaining two or more separate systems would be expensive. Tillinghast suggest that companies would be better off if they returned to standard underwriting, and then refined those processes through better data mining of their own databases.

In late 2001 or early 2002 the Maryland Department of Insurance conducted a study of credit scores and zip codes. Credit scores in predominately white zip codes were significantly higher than those in predominately minority zip codes. These findings contribute to the belief that credit scoring may be used to create a disparate impact upon minorities. Through credit scores, insurance companies can determine race and economic composure for neighborhoods, zip codes and even blocks of an area. Companies armed with this weapon can again return to the deplorable practice of redlining, only this time through supposedly legal and approved methods. Minority areas in the past highlighted with red markers to designate high crime, poor, inner city and no-write zones, will now be marked by credit scores. Credit scoring will allow for either the complete rejection, or such high rates, that companies will effectively write themselves out of the â€Ŕless than desirable areas.” The economic gap and the reduced access to affordable insurance in minority and economically depressed areas will continue to grow.

In a report from March 8, 2004 by CBS Market Watch, Charles Chung of Experian, stated that â€Ŕminority populations tend to have lower scores.” This statement along with other data support the position that it would be very easy for companies to connect a credit score model that identifies minority demographics and use this score to either raise rates or refuse to insure all persons within the scoring model or demographic. By raising rates, companies would effectively write themselves out of the market they do not desire to be in.

Credit scoring is discriminatory. Proof of how and why it works cannot be shown. The practice preys upon those who can least afford to pay the higher rates. This is a system by which the insurance company can declare â€ŔGUILTY UNTIL PROVEN INNOCENT,” something our forefathers could not endorse. The system of rating risk through credit is a system, by design, which can be used to determine what customers have enough money to pay claims themselves instead of using their insurance. Those who have the least of means who must purchase insurance to protect themselves in case of loss are penalized. The ability to obtain affordable insurance in the preferred markets is rapidly being taken from the poor and minorities.

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All of the credit scoring models that I have worked with in the industry have not used wealth or income information to determine eligibility. Therefore, no “economic groups” are being unfairly discrimited against. And to infer that those with lower incomes will automatically have a lower credit score is elitist and rather biased. Those with lower incomes are equally as capable of managing their money in a reasonable manner–and they do. I am very concerned that the various companies within a given state use credit scoring in the same way, and that it is regulated to ensure that factors such as income level are not used in a discriminatory manner.

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Steve makes some very good points, mostly echoing the “reasons” spouted by the Companies who advocate use of credit as a super method of underwriting selection. IF credit scoring works, and that’s a BIG IF, it’s more for the cost savings of automating the selection process, not underwriting applicants as in the “old days” with expensive people. Unfortunately, the basic premise of credit scoring fails because the data on which it is based is only about 70% accurate. Errors in the basic data can not be corrected by manipulations in the formulas used by the companies, and that means the result is false. Using false credit scores resulting from inaccurate basic data is no more accurate a method of underwriting than using the color of the car, or color of the roof. Neither system can offer a selection tool as effective as paying experienced professionals to use good underwriting judgement. We’ve started down the slippery slope of “magic box” selection of risks, using a system no more reliable than a toss of a coin. Beware the public backlash when that gets out.

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I agree with Nancy. I don’t think regulators should even consider “credit scoring”. Some companies already use some kind of credit scoring and low income people, people who are divorce or factory workers, etc, don’t fair even if they always pay on time, because of income or something that their spouses were involved with (and I don’t mean a credit that both had but a credit that the spouse had and because they can’t get that spouse they go after the other because they are available and it takes sometimes 2 to 3 years and money to pay a lawyer to get it removed from your credit).
Is not fair to do creding scoring at all.