It never fails to surprise me how much of a hot-button issue credit scoring continues to be in our industry. It's not like it's some new idea — insurers have been using it since at least the early 1990s. And although Robert Hunter, Birny Birnbaum and the rest of the gang at the Center for Economic Justice regularly testify against it, most of the insurance industry has pretty much come to accept it as a way of writing business today.

Except, it would seem, for insurance agents.

Way back in March, we published a “Sounding Board” op ed from NAMIC about the efficacy of credit scoring. We're still getting letters from readers (watch for the latest in our October issue), and plenty of them are pretty heated.

Over the past 6 months or so, here's what you've had to say about credit scoring:

In response to the article “Credit Scoring: Tough to explain, hard to beat” by Bart Anderson (AA&B 3/10), I don't believe that rates should be based on our clients' spending habits.

People grow up and their driving habits change. We only charge for minor violations for 3 years and major violations for 10 years (here in California). It can take longer than that to repair a client's credit. These are the same people who last year had excellent credit. Their driving habits have not changed, the economy has.  

This is the time to rate on actual figures that have a direct correlation with the risk. Driving records, claims experience, age, geography, mileage, use, vehicle type and marital status are excellent rating factors. Most of these are choices that give the client an opportunity to change in the short term if they cannot afford insurance. Rating on credit in these times is not as accurate an interpretation of the client.

As you said, “Removing credit from the underwriting/price mix” will not make insurance more expensive. Look at New Jersey and Michigan, where auto insurance rates are through the roof and they use insurance scores. States like California and Hawaii have reasonable rates and those states do not use insurance scores. I don't believe for a second that taking away insurance scores will cause mass rate increases.
Jeff Apperson, Carmichael, Calif.

The article by Bart Anderson really interests me. I have heard over and over that “credit scoring is a fair and accurate predictor of loss.” Where is the actual proof? The reasons given are “because of all these studies,” but there is never an explanation of what data was collected, the length of time it was collected, and where the information can be examined by the general public. I haven't seen any documentation of such research relating to credit scoring.

A “study” is nothing but a snapshot of a selected historical sample—10,000 auto claims. Then common factors are looked at. Will you look at this—the vast majority of the claims are submitted by people with low credit scores. Now comes the magic—an assumption is made that people with low credit scores are more likely to file claims (have losses). Based on what principle of cause and effect? Coincidence of a snapshot?

Real research involves a large random sample of people being surveyed for many years. All kinds of data would be collected, including but not limited to insurance claims, credit score, etc. If the data revealed a direct relationship confirming that as their credit scores decreased or remained low and their claim frequency increased, I would be a believer. Until I can access some real research, I say the king has no clothes and credit scoring has no relevance to claims potential or frequency. If the data exists from true research and not a snapshot study, show it to me or give me the source and I'll examine it for myself.

Until such time, it hasn't been proven and no matter how many experts tout “because we say so,” it makes no difference to thinking people like myself. This is my 39th year in the insurance business writing personal lines and I maintain the use of credit profiling to predict loss frequency is pure bunk. I am forced to use it through our comparative rater, but I don't like it or agree with it.
Darald l. Novak, AAI, Altamont, N.Y.

 

Part of the problem could be with the credit rating agencies that insurers rely on to compile their scoring data. Anyone with a credit history knows that these reports can be notoriously erroneous, and that although it's incumbent on the individual to regularly check and clean up these official scores, many don't.

Last year there was talk at the NAIC about adopting some sort of regulation of the credit rating agencies, but aside from a Property and Casualty (C) Committee hearing last September and some informal discussion at the summer meeting, nothing has come of it.

An NAIC spokesman maintained that although the issue comes up repeatedly, there isn't much urgency to address it on a national level because the practice is subject to state market conduct laws. And although nearly every state has laws to ensure that insurers make “fair and accurate” use of consumer credit information, only California and Massachusetts completely prohibit the use of credit-based insurance scores, and two ban its use for specific lines of insurance (Hawaii for auto and Maryland for homeowners), according to the PCI. “Legislators and regulators in 48 states have studied and debated insurers' use of credit information and have repeatedly reaffirmed that insurers should be allowed to use credit information in underwriting and rating decisions,” a PCI spokesman said.

That may be true, but that doesn't mean it's popular with consumers — or agents. Although neither PIA nor IIABA object to credit scoring, both urge insurers to use caution and fairness in its application.

That warning should have even more resonance today. With national unemployment levels still at 9.6 percent, and personal bankruptcy levels up about 9 percent from last year and filings anticipated to hit 1.6 million by year end, now might not be a good idea to play by the numbers. The insurance industry likes to moan about its “bad reputation” with consumers. This practice just might be one of the reasons that reputation persists.

Any other thoughts on this?