Credit Scoring – Agents, Carriers Look to Bridge Divisions

Give them credit—both agents and carriers have made credit scoring an issue that the industry can’t turn its back on.

From studies to hearings, the issue has soared to become one of the top three or four issues in the industry and it doesn’t appear to be going anywhere anytime soon.

States on the move
According to Lynn Knauf, policy manager for the Alliance of American Insurers (AAI), “There continues to be a whole lot of activity out there. I haven’t seen as many NCOIL introductions as predicted. We thought it would show up in 40 states, but we’ve only seen it in about 20, but they’re still coming up though. As feared, the actual NCOIL model rarely shows up, instead you get versions of it. I think the creation of the NCOIL model itself increased activity. So many legislators had something to take back to their states.”

As Knauf pointed out, many people have been releasing studies on credit scoring, putting more attention on the subject for both agents and companies.

“There are more studies putting light on credit scoring,” Knauf commented. “I think we’ve come a long way as an industry answering some of the concerns of agents. One of the most significant things is the hold-harmless agreement in the NCOIL model, which also signals that whether or not a state looks at NCOIL, the industry has pretty much agreed on that hold-harmless arrangement, which basically says that if an agent uses credit scoring as prescribed by the company, that the company would reimburse the agent for any liability incurred as a result of that use. It basically says it would cover the agent if he is sued for some reason. It provides that extra layer of protection. Originally companies were not adverse to doing that but I think a lot of them argued they thought that would already be covered in their agency contracts. In several states agents were not comfortable with that may or may not be covered in their contracts.”

Knauf also noted that agent opposition to credit scoring appears to be dwindling. “I’ve heard agents testify that their companies have been using it long enough that they see many policyholders getting discounts,” Knauf said. “I’m sure there are agents adamantly opposed to credit scoring, but I hear less and less of that. I think there still may be a strong area of disagreement on how renewal business is handled. I think we’ll see a lot of enactments over the coming months, yet hopefully more uniformity.

“Some consumer advocates remain opposed to credit scoring. With the recent public hearings in Texas, there were also consumers who were very vocal in opposing credit scoring. The issue of correlation is not a huge area of contention anymore. There’s so much evidence out there that there is a link between credit score and propensity of loss. That’s not something that we have to spend all of our energy defending anymore.

“Instead, in Texas, those opposed to credit scoring testified that insurer use of credit information is not a consumer-friendly type thing for everybody. But, quite frankly, despite some of the heart-wrenching consumer testimony, the majority of consumers stand to benefit from credit scoring. The health of the marketplace itself benefits from credit scoring. You had this truly independent study from the Business of Bureau Research from the University of Texas that clearly supports insurer use of credit. I can’t imagine Texas would take any steps to totally ban credit scoring. There are a few states that do not allow credit scoring to be used, but it’s not a recent thing. Last year Maryland enacted a law to severely restrict an insurers’ right to use credit. They came back this year trying to chip away even more at it, and it was soundly defeated.”

David VanDelinder, executive director of the Independent Insurance Agents of Texas (IIAT), whose association has not taken an active role on the issue, noted that, “There are some side issues that relate to credit scoring that are of most concern to us. Our membership is certainly split on credit scoring. The major concern our agents have is disclosure of information to the consumer.

“We’ve been in a position in the past where we can’t really tell a consumer why their rates are higher. The versions of the bills being advanced here in Texas would require disclosure specific enough for a customer to say here are the elements of my credit information that adversely affected my insurance costs. We are very much in favor of being able to pass that information along to the customer.”

According to VanDelinder, there are around a dozen credit scoring-related bills working their way through the state’s legislature.

“The two major proposals are included in the rate and form regulation bills, those are the ones being debated right now. I think as a result of the UT study, we’ll probably see the carriers able to retain the use of credit scoring with some limitations and certainly with disclosure requirements. That seems to be the consensus from the legislators we talk to.

“Our two issues in this are, we want agents to be protected by insurance companies if they are sued as a result of use of this information and we also don’t want a credit agency able to sell policy information we provide as part of this process. The whole issue of credit scoring has just been clouded by lack of information. Once it is fully disclosed, I think agents will be in much better position to carry the companies’ water on this.

“One of the questions raised in each state is is there really a statistical connection between credit information and losses? The UT study confirmed that there is. Now that was done just in automobile. I think the underlying statistical connection is there, the problem is there is no causal connection between the two that we can point to. It’s not intuitive, it is just something you have to accept as statistically accurate.”

While Texas faces its issues, California is keeping its share of bills on the table. Sam Sorich, vice president of the western region for the National Association of Independent Insurers (NAII), noted, “There are three bills, each of which is a prohibition, AB 227, SB 64, and SB 691, which is a very broad prohibition that would even extend to use of credit information for payment plans which is a little different twist,” Sorich said. “Last session a bill that would have prohibited the use of credit information got out of the Assembly, but it died in the Senate. There has been quite a bit of rhetoric on the regulatory side. Commissioner Garamendi has said on a number of occasions that he’s opposed to insurers use of credit information. We haven’t seen a bulletin or regulation from the Department, but I think it is clear that the operating practice of the Department is to scrutinize insurers’ use of credit information.”

According to Sorich, many independent agents seem to favor credit scoring, with restrictions.

“I sense the agents, and I wouldn’t want to speak for all of them, but at least the independent agents have said here in Sacramento that their position is that they are not in favor of an outright prohibition, but I think the agents feel some restrictions and requirements on the use of credit information are appropriate. Frankly, we’re somewhat in a similar position. We, as an association, recognize that there are restrictions that are reasonable and probably warranted. We’re not opposed to every bill that would impose requirements on insurers’ use of credit information.”

Bills have been getting attention in a variety of states, according to Candace Frick, director of Legislative Affairs and Education for the National Conference of Insurance Legislators (NCOIL).

“Slightly over a dozen states have taken action on the NCOIL model which is a compromise bill between representatives of the insurance industry and the agents,” Frick stated. “Several NCOIL-based bills have passed their Houses of origin. In addition, some states are investigating credit scoring further before adopting legislation to either restrict it or ban it. From what we hear, agents generally support the NCOIL model.

Education, seamless transactions essential
Whether agents endorse it or not, getting as much information on credit scoring is something all sides appear to agree on.

“The industry has said publicly that education is very important,” Frick said. “This is definitely a state-by-state issue, which means it is better left in state lawmakers’ hands. From what legislators have heard, the industry as a whole has not done a good job educating agents or consumers. That’s something the industry has said it needs to work on. Early on, at least, it appears the education component didn’t happen as it should have.”

Rick Dinger, president of California-based Crescenta Valley Insurance (www.cvins.com), said he feels credit scoring has some merit, noting, “The companies have showed the factual data that credit scoring can produce results for them. However, I wish the companies could make it more of a seamless transaction for us.

“When we’re on the front lines selling and you get halfway through the application and it gets bounced out, it puts you in a tough situation. Especially with the Internet, it would be great if it could be done at the point of sale without going through nine different phases somewhere else. The companies should have a link on their page you click on it, put their information in, and get it back instantaneously and proceed with the quote. We need real-time service with this. I think the industry is still crawling, they need to go a lot further before it can be a real successful tool. As an agent, we’re trying to make a sale and get rid of as many roadblocks as possible. As far as the agent (individual insurance companies) sales go, I’m sure they’re getting their results, but they’re losing business because agents just don’t want to take the time, they’re going to go somewhere else where they don’t have to worry about it.”

Guarding against errors is another challenge according to Dinger, who noted, “I think credit scoring needs to be tightened down on some because if you get erroneous information, it is really embarrassing for both the client and the agent. Sometimes someone might see their score drop a little bit because they just bought a new house. They went to a broker and had their name out there to a 100 different banks to try and get the best deal and it looks like they had a million hits on their credit score and it brings it down a little bit. Some agents have found it difficult asking prospective clients for their social security number, for the most part, we quote a lot of referrals and people usually don’t question why we’re asking for their social security number, but there have been a couple of people irate about it.”

As for holding companies to the task of seamless transactions, Dinger added, “I would advise agents to keep the pressure up on companies to improve their technology. We are their bread and butter and if we keep asking for certain things, they’re going to have to come to the party.”

When asked if agents have gotten more information from the industry on credit scoring, Sorich said, “I think the situation is a lot better than it was two years ago and even last year. Agents have been provided with good information by insurers, so at least some of the high level opposition we saw has been quelled. I think the experience in Arizona is instructive. Three years ago the independent agents there were opposed to the practice, and in their defense, I think part of the reason was a lack of communication by insurers. The situation has improved. Independent agents in Arizona now seem to recognize that credit is a useful tool, but also have supported some legislation that imposes notice requirements and limits some of the factors insurers’ can consider, and we’re okay with that. I think here in California, it is pretty clear this is going to be a hotly-debated issue.”

Is agent shopping hindered?
Steve Brooks, president of Calif.-based Brooks Insurance Services (www.brook-sins.com), pointed out that, “For independent agents, it [credit scoring] is a bad thing because we take the time to do frontline underwriting and we help our companies decide where is the best place to put a client.

“Credit scoring just makes it easier for companies that don’t have agents that have what I call ‘800 number’ insurance companies that do no underwriting, by giving them an advantage by using the credit scoring that they can get around having agents.”

When asked if credit scoring has presented challenges for his agency, Brooks remarked, “We haven’t run into a lot of problems with it. My major company is Mercury who doesn’t use credit scoring and it hasn’t hurt their underwriting results because their agents take care of them and make sure they place the risk where it needs to be placed. I think if you leveled the playing field and got rid of credit scoring for everybody, I think in the long term, it would help the companies that have agents and hurt those that don’t.”

Brooks noted that states like Arizona that can use credit scoring for auto have 15 different levels of rates based on the credit scoring.

“It really eliminates the chance for agents [to shop around],” Brooks continued. “You really can’t have a comparative rater when every company has these different software programs. If independent agent companies trust their agents and know they’re going to do the right thing for them, it will only help our companies long-term. What some of these direct-writer companies do that get around it is when they do a direct mailing, they buy pre-credit scored mailing lists.”

Brooks added that California’s policies towards credit scoring appear a bit confusing.

“I’m a little confused because it seems the Department (CDI) goes company to company instead of just saying you can’t use credit scoring,” Brooks noted. “Garamendi [Calif. Commissioner John Garamendi] has made comments that credit scoring for auto is not allowed, but there are still companies using it. Until he catches them, they seem to get away with it. If he says its against Prop 103 regulations to use credit scoring in any form, why doesn’t he just send out a letter to every company saying you have to cease and desist using credit scoring for auto?” According to Brooks, the current situation seems very unfair to consumers because some companies are still using credit and some have been told to stop.

Nanci Kramer, deputy press secretary at the CDI, noted that, “The Commissioner is sponsoring legislation authored by Assembly Insurance Committee Chair Juan Vargas (D-79th District of San Diego)—AB 227—which would ban the use of credit scoring in underwriting. The Commissioner has stated that it is incumbent upon insurers to prove that credit scoring is a valid predictor of potential loss. While insurers state there is a ‘correlation’ between one’s credit score and their propensity to file claims, what they have not proven is a ‘causal’ relationship between the two.

“For instance, I can note that ice cream sales increase when air conditioner use rises, but that doesn’t mean increased air conditioner use causes ice cream sales to increase; rather the increase in temperature is the actual cause of increase in ice cream sales. An insurer stated today that ‘causal’ was not the issue, [regarding credit scoring] because insurers don’t know what ’causes’ claims, they just know that one’s credit score is a predictor of one’s propensity for filing claims, i.e., because allegedly those who take risks with their finances tend to take more risks of other types of behaviors that lead to claims.” Kramer said. “By causal we are stating that there is no proven ‘direct’ correlation between a low credit score and claims habits. Unless a regression analysis is done to eliminate all other variables, the results of the studies cited by insurers cannot be considered reliable or valid. Back to the example of ice cream sales and air conditioner use, unless I remove other variables, e.g., air conditioners, I cannot determine with accuracy when ice cream sales will likely rise and identify the related variable, i.e., temperature increase.

“Additionally,” Kramer continued, “the Commissioner believes the use of credit scoring has the potential to be unfair and discriminatory practice. He has stated that in his opinion, the ‘insurance financial score’ as some insurers call their scoring method, is in fact credit scoring and should also be banned.”

As for agents getting the word of credit scoring out to their policyholders, Sorich added that, “I’d start with the idea that credit information is going to help most consumers instead of hurt them. A lot of people who are having trouble finding homeowners insurance would be having less difficulty if insurers were able to consider their credit reports. Folks that have older homes or shake roofs or water damage are experiencing difficulties in the homeowners market. If they have good credit, companies will be more willing to write those policies. I think that is a positive for consumers, so that’s the message I’d urge agents to convey to their policyholders. Despite what people may read in the headlines about credit, this is a source of information that will keep the market competitive.”

To comment on this story, e-mail: dthomas@insurancejournal.com.

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