Insurance Journal Forums

This is a controversial subject, and I'm just curious about other people's opinions.

::opens the floodgates::

EDIT: I do mean personal lines use

As in using an insured's credit score for underwriting purposes?

From a commercial insurance standpoint, underwriters will take a look at an insured's financials or D&B report. If there's any major adversity (bankruptcy, history of late pay's, outstanding judgements, etc), then an underwriter may consider alternate payment terms or downright decline the risk. Financial underwriting is part of the commercial underwriting process.

As to using credit scores on the personal lines side, it shouldn't have any bearing as to the premium that's charged - but, as with commercial insurance, more on the payment terms that are offered.

Keep in mind, I think the "old" way, before insurance scores, was a better way.

Using a credit score allows the carriers to more easily utilize the computer for rating applicants (less employees in underwriting), saving tons of money for the carriers.

Remember, too, we are dealing with LARGE numbers...

They feel that the lower the score, the higher the risk. The people with low scores have made poorer decisions in life than those with better, more stable scores. This translates to people driving on bad brakes and bald tires because they can't afford to fix these issues. Homeowners let the roof go a few years too long and the plumbing leaks just don't get fixed. The law of large numbers gives enough credence to this idea that our insurance commissioners have all bought into it after having their actuaries study the theory.

Personally, I think it's a cop-out by the carriers but then, nobody asked me until now...

Swymmer

I have stated several times before that the "'Credit scoring" research is junk science. A real study would have followed x number of people for 10 or 15 or 20 years and then published results. The alleged Credit scoring research was done by looking at xy,000 claims and finding a common thread in the past (like eating mashed potatoes v baked potatoes). They maintain that since 70% of the drivers involved in "at fault" collisions ate mashed potatoes, anyone who is documented as eating mashed potatoes now pays through the nose regardless of a clean license, spotless auto insurance premium payment history, and no CLUE activity. Why? Because these hired experts say so and point to their "junk science research" to justify a theory someone invented to be able to legally redline. Oh gosh! The dreaded REDLINE word. Anyone remember carriers caught REDLINING? It wasn't pretty. They finally figured a legal way around it. Wish I had invented and patented Credit Scoring. If the evidence is so "hard" for credit scoring, why hasn't it been brought to light? Why hasn't a renowned and reliable research entity verified the facts? It's just like J D Power and Assoc - you pay to have them tout your opinion/results. If I am not correct in this, someone tell me the source of income for this fine "Customer Satisfaction Rating" organization (JDP&A)? Anyone? It's their clients who give them the "survey results" and pay them to advertise them. If I am mistaken, please provide a source so I and anyone else can verify otherwise. What a load. But not to worry folks, get ready to bend over again because when the gasoline companies get done sucking even more $$$$ out of us, credit scoring and unwarranted high auto insurance premiums will be a dim, quickly fading, insignificant memory.
Regards, Dar Novak

[quote="wlunday"]Keep in mind, I think the "old" way, before insurance scores, was a better way.

Using a credit score allows the carriers to more easily utilize the computer for rating applicants (less employees in underwriting), saving tons of money for the carriers.

Remember, too, we are dealing with LARGE numbers...

They feel that the lower the score, the higher the risk. The people with low scores have made poorer decisions in life than those with better, more stable scores. This translates to people driving on bad brakes and bald tires because they can't afford to fix these issues. Homeowners let the roof go a few years too long and the plumbing leaks just don't get fixed. The law of large numbers gives enough credence to this idea that our insurance commissioners have all bought into it after having their actuaries study the theory.

Personally, I think it's a cop-out by the carriers but then, nobody asked me until now...

Swymmer[/quote]

It makes sense. People that are struggling to keep up with the bills often delay maintenance on homes and autos. In this slow housing market, there is a moral hazard for subprime homeowers that owe more money than the house is worth and they can no longer afford their payment. I don't doubt that some of them will seek the "bic solution".

It doesn't really matter what your opinion of credit scoring is. It is here to stay, period.

I think a consumer revolt will be forth-coming. There are examples of carriers that do not score, still use the traditional method of underwriting, and are quite profitable.

I represent a highly rated, regional carrier that does not score. They only sell commercial and personal lines property in my state, but we have a substantial book with them, about $300,000 of annual premiums. Almost all of the "poor score" risks we get end up there, obviously. The first three years our loss ratio was 0%, and after 6 years, at the end of 2006, it was at only 17%.

These are not all low score risks, but the majority of them are. I have asked the carrier about their overall experience and the combined ratio is very, very good. This company also will write in a PC10 and their premiums are often time s less than Safeco or Traveler's, so they are not over priced to start with.

They do it by underwriting the things that make sense to them... no pools, no trampolines, no vicious dogs... you get the picture... the "old - fashioned way"!

Swymmer

AlstonCPCU wrote:It doesn't really matter what your opinion of credit scoring is. It is here to stay, period.

True, but that's not why I'm asking. I want opinions!

There have been extensive studies done on credit, the biggest being by the Texas Department of Insurance. To say its junk science is sticking your head in the ground and not reading whats out there.

I have personally seen the data compiled by doing a claims vs score study on three large carriers. The difference betwen an 800 and a 600 was a 22% to 74% loss ratio.

You will not see an uprising among consumers for the same reason there is no uprising against non-standard auto companies. There is always good risks who benefit with lower rates by being grouped with similar risks.

Note that credit is only one of many criteria that should be used for rating/underwriting but a very valuable one.

OK, A study! How may years did the study follow how many people?
Five years? Ten years? Fifteen years? Was the research blind? Double blind? What research criteria and controls were used? How/where can one examine this study? The burden of proof is on the users of credit scoring and the alleged researchers. I do not have to prove the invalidity of either the research or the use of credit scoring and my head is definitely not in the sand - I refute all dogma no matter where it comes from. When someone trustworthy provides the data and the conclusions from legitimate research, I will change my view. As for now, the king has no clothes on and I spread the word wherever I go. The vast majority of agents, brokers, and consumers I have come in contact with during the last five years echo my concerns. There are also tons of bad laws on the books and they are here to stay. So easy to create yet so difficult to abolish because the sheep follow blindly - master (the experts) knows best. I will be waiting for directions on how to access the "Texas" research.
regards, Dar Novak

There is this wonderful thing called a search engine...Google, plugging in Texas, credit, and study yielded http://www.tdi.state.tx.us/reports/credit3.html as the first hit.

..the study looked at data for 2,000,000 policyholders...The study methods, findings and conclusion were peer reviewed by two leading universities and the Texas Office of Public Insurance Counsel.

Reprove not a scoffer, lest he hate thee; rebuke a wise man, and he will love thee. Proverbs 9:8

Using credit scores is against the law in Hawaii and somehow carriers that generally use them on the mainland muddle through...Progressive is one example.

We have many peculiar laws here...one I do not agree with is that it's against the law to "discriminate" against age when rating vehicle insurance...that means I get to subsidize all those young male drivers!

Aloha!

Island Girl Agent wrote: We have many peculiar laws here...one I do not agree with is that it's against the law to "discriminate" against age when rating vehicle insurance...that means I get to subsidize all those young male drivers!

Are you kidding? In Hawaii age is not allowed to be used as a rating factor?

If the study followed 2,000,000 insureds/policyholders/people for ten years and then the data was released and conclusively proved that low credit score = a direct factor in having a loss, I would be interested in examining it. I surmise that the study took a photograph of 2,000,000 current policyholders and then dug up their history and concluded "Omigosh! The vast number of folks with low credit scores had the most claims. We can now charge anyone with a low credit score more because we are going to have to pay on their future claims. Says so right here..." JUNK SCIENCE/RESEARCH. You can select any group of people in the present and search back for a link to anything and draw inferences, but not prove cause and effect. One has to start with a random group and follow it into the future while collecting data. Then at some point in the future, you look at the data and present your theories. That's how REAL research is done. I recall in a philosophy class way back in college how a professor showed us that specific historical data (all true) proved that eating mashed potatoes leads one to becoming an axe murderer.
All axe murderers in our prison system were surveyed and assuming their records were accurate, the majority of them preferred mashed to baked. Conclusive evidence! You eat mashed and you are likely to become (or already are) and axe murderer. If you do REAL research, you follow 5000 human beings for 10 years and collect the data. Then you have something. You can gather statistics from history and "prove" any point.
Thanks for the "proverb" but I stopped "believing" in fairy tales and swallowing the bull generated by self-proclaimed "experts" many years ago when I began to think for myself and started to critically and intelligently examine things. Thanks for the response. regards,

Dar Novak

it's just a way to computer underwrite and price, take the human element out of the process..who is fair issac, kidding