Sledgehammers at 40 Paces

You would think that after several centuries in business, insurers would have a better handle on public relations. Apparently they still believe the sledgehammer approach is effective.

And then they are surprised when some, most or all members of the public, legislators and regulators don’t trust them.

Exhibit A: credit scoring—or, more accurately, insurance scoring. Not so long ago, the message to regulators and the public was, ‘We have this new underwriting/rating tool; it’s based on a clear correlation between credit history and the likelihood of future auto claims; and, oh by the way, we won’t give you our methodology because it’s proprietary.’

Yeah, that ought a work.

Amazingly, it did for a few years, until almost every carrier foisted its proprietary insurance scoring system on the market, fearing the possibility of a competitive disadvantage. Some of the newbies hadn’t a clue what they were doing. (One insurer’s “credit score” consisted of an applicant’s or insured’s mortgage provider.)

It wasn’t consumer complaints so much as ones from agents that caught the ear of regulators and legislators. Insurers responded with studies showing a correlation between credit records and the risk of loss.

While some critics were skeptical of the correlation, there was far more concern about how carriers structured their underwriting and rating around credit factors.

It could be a recipe for redlining because of adverse impacts on residents of low-income areas. How, for example, would an insurer score an individual who doesn’t take part in the credit system, which is fairly common among low-income people and immigrants.

Years ago, I moderated a panel discussion on credit scoring at the American Agents Alliance convention. Prior to the discussion, which got heated and then superheated, I approached one of the panelists, Lamont Boyd of Fair Isaac Corp., a foremost provider of credit-scoring services and methodologies. I asked Boyd what would happen if someone didn’t take part in the credit system.

He told me that person would have a “neutral” score. Neutral, I later figured out, would likely place a person in a different, less-preferred tier than would a good or great score.

With auto insurance companies having more tiers than most multi-level sports stadiums, it’s easy to see how someone with a neutral score and a clean driving record could wind up paying a lot more for auto insurance than someone with a clean driving record and a good score.

Last year, bills to restrict the use of credit scoring were introduced in 28 states, although only five enacted laws. This year, legislatures in more than 40 states dealt with credit-scoring measures.

It wasn’t that long ago you could count the bills throughout the country on one hand.

This year, the National Council of Insurance Legislators (NCOIL) came out with its credit-scoring model act, which carrier groups praised and which served as a guideline for legislation in more than a dozen states. The model act gives insurers three options for how to treat persons with little or no credit history.

Insurers may not realize it, but the NCOIL model contains a trap. According to the act, if a carrier can demonstrate that a lack of credit history correlates to risk of loss, the insurer is allowed to use that information.

Which brings us back to redlining and possible illegal discrimination.

For more than a year, the credit scoring working group of the National Association of Insurance Commissioners has wanted to study possible disparate racial impacts of insurance scores. The agenda of the NAIC’s September quarterly meeting was to include the launch of a study, but it was again postponed while the working group determines its structure and what constitutes disparate impact.

“We’re not saying the study should not happen,” said Joel Ario, insurance commissioner of Oregon and co-chairman of the working group. “We’re saying it should not happen right now.”

The industry obviously wasn’t willing to take it on faith that the study wouldn’t be built on preconceived notions. Ironically, the idea for the study came from regulators tired of taking it on faith that credit scoring wasn’t unduly discriminatory.

“This is nothing more than an effort by a few regulators who are opposed to the use of credit-based insurance scores,” said Lynn Knauf, policy manager for the Alliance of American Insurers, “to create a study that will reach only one conclusion, the one they’ve already reached.”

It could be called a sledgehammer approach to analysis, which might be appropriate given the history of credit scoring.

Richard Rambeck, the editor of InsuranceWeek from 1989 to 2000, has been an insurance journalist for 15 years. He is currently a freelance journalist who covers the insurance industry for several publications.

Topics Carriers