New Risk Assessment Techniques a Must If Credit Scoring Bans Enacted

October 25, 2006

Insurers will need to develop new evaluation techniques to help them assess risks, if the use of credit scoring in underwriting goes away, attendees at the CAS Seminar on Predictive Modeling heard here during a session titled "What To Do When You Cannot Use Credit."

Roosevelt C. Mosley, a principal with Pinnacle Actuarial Resources, Inc, noted that the ability of insurers to use scoring is being threatened. "In the past five to 10 years a number of developments have really put credit under attack."

Mosley cited the trend to regulate the use of credit by a number of states, as well as studies out of Washington and Alaska raising concerns regarding the use of credit, as causes for concern. Media attention on credit and public perception are also key factors.

"In terms of public perception of the use of credit for insurance, there is a lack of understanding of the connection between insurance and credit scoring," he added.

Keith Toney, vice president, ChoicePoint Insurance Analytics, agreed that public perception is playing a growing role in the issue of credit. "It is such a complex thing to understand and many organizations are now putting themselves forward with an opinion about credit."

In response, the industry will have to continue to spend a lot of time to better educate the public about the benefits of using credit scoring as a risk-assessment tool, he said.

Both Mosley and Toney went on to give an update on current state legislative efforts to ban the use of credit scoring.

Toney noted that roughly 70 bills were introduced in 21 states to regulate the use of credit in 2006. "About half of those (35 in 17 states) were to ban the practice of insurance scoring," he said.

From the non-legislative perspective, a new development is the ballot issue. For example, in Oregon, credit-scoring is set to become a ballot initiative this November.

"We are watching that issue very closely. Depending on the outcome there, if that were to be successful, I would have to think that model would be copied by other states," Toney said.

Mosley presented example statistics showing that if credit scoring is removed, it would have a significant impact on rates for many policyholders, resulting in rate changes that could exceed plus or minus 25 percent, based on the range of insurance score rates in use by insurers.

He explained that insurers would have a hard time finding an alternative to credit scoring that is as accurate a predictor of loss. However, in the instance that credit scoring does go away, insurers would need to make the best use of what they are able to use.

"If you are limited in terms of factors you can use, recalibrate current factors to make the best use of the situation when you cannot use insurance scoring," he said.

Mosley advised insurers to identify items that demonstrate the characteristics of responsibility, risk-taking behavior and stability that go into the current insurance scoring model.

Additional variables, such as an individual's payment history; an individual's accident and violation history; and number of years an individual has been insured and employed could be indicators of some of these characteristics.

Mosley said: "Use these additional elements to do what you do better. We are not going to get back to what credit gave us when it was here, but it will be a way to get back some of what you lose if credit goes away."

Source: The Casualty Actuarial Society