Open the Black Boxes

By | April 7, 2003

One of the most frustrating experiences for any insurance buyer—personal, commercial or institutional—is to see a sudden, steep rate hike even if you haven’t had a claim in years, if ever.

The industry loses credibility with consumers when companies are happy to grant expanded coverage with little or no rate increase one year, only to turn around the next year and seek higher rates and restricted coverage, whatever the loss experience or risk profile of an account.

There is evidence that individuals are more receptive to the economics of insurance ratemaking when they believe the underwriting process examines and reflects their own circumstances, and gives them some measure of control.

Marshall & Swift/Boeckh, the nation’s largest valuation firm, says that insurers’ use of its services does not hurt customer retention in homeowners insurance, even though valuation reviews often result in higher insurance bills.

Why isn’t there more resistance to the valuation process? According to M&S/B, consumers will more readily accept a higher bill if they can see that it is based on careful attention to the unique characteristics of their own home.

It is ironic, then, that the advocates of consumer protection are rallying against two trends that make homeowners underwriting and rating more reflective of individual risk characteristics:

• The rapidly growing use of credit-based insurance scores; and

• The systematic use of the Claims Loss Underwriting Exchange (CLUE) database in underwriting. (CLUE was originally established to control fraud losses.)

It was apparent from comments at a Chicago meeting of insurance compliance professionals that insurance trade organizations are closely watching deliberations in California and Texas regarding scoring and CLUE.

The two largest states for homeowners insurance, which account for nearly 20 percent of total national premium for the line, may have profound influence over how much latitude insurers will have in using such tools.

Proponents of insurance scoring are taking heart from a recent report from the Bureau of Business Research at the University of Texas. The report, commissioned by the Texas legislature, found a significant relationship between credit-based insurance scores and loss experience in 150,000 auto policies from five insurers.

If anything, “credit scoring appears to be a more important predictor for homeowners losses than for auto,” wrote Richard Dorman, a nationally known insurance consultant and trainer, in an article in the Journal of the Society of Insurance Research.

According to Dorman, a responsible person is a better insurance risk because he or she will “remember to lock the door so there is less theft, turn off the stove or put out a cigarette to reduce fire risk and pay attention to the fact that the house needs repairs.”

By rewarding personal responsibility, credit-based insurance scoring offers to free homeowners pricing from exclusive reliance on construction, territory and fire protection—factors over which individuals have little or no effective control, Dorman said.

Why then, does scoring remain so controversial? Consumer and regulatory activism certainly has much to do with it, but insurers would be letting themselves off too easily if they fail to recognize that the opaque, “black box” quality of credit reporting makes many consumers feel manipulated rather than empowered.

I have been involved with financial services and insurance for 13 years, but I still cannot be completely certain what actions or omissions of mine are reported and what their implications are.

The same holds true for CLUE, a valuable database of insurance loss information maintained by ChoicePoint, Alpharetta, Ga. In the CLUE product description, ChoicePoint wrote that, “insurance applicants receive a fairer rate based on their specific loss history, not the generic loss history of broad classes.”

But if comments at the Chicago gathering are any indication, even insurance lobbyists are surprised to learn what can appear in a CLUE report. One trade group representative expressed surprise that a general inquiry whether a loss is covered under a policy might be reported to CLUE, even if no claim is filed.

A spokesman for ChoicePoint later confirmed that was true. He added, however, that it isn’t always true: Some companies report such inquiries, others don’t. To those of us in the industry, that’s a defensible exercise of discretion. To those on the outside, it may look arbitrary.

Joseph S. Harrington is the communications manager for the American Association of Insurance Services (AAIS), Wheaton, Ill. The views expressed here are his own, and not necessarily those of AAIS. He can be reached at

About Joseph S. Harrington, CPCU, ARP

Harrington is a Chicago-area business writer and communications specialist. From 1994 to 2016, he served as director of corporate communications for the American Association of Insurance Services (AAIS). More from Joseph S. Harrington, CPCU, ARP

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Insurance Journal West April 7, 2003
April 7, 2003
Insurance Journal West Magazine

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