FACT ACT Study of the Effects of
Credit Scores and Credit-Based
Insurance Scores on the
Availability and Affordability of
Financial Products
Midwest Actuarial Forum
September 22, 2005
Rick Smith and Greg Hayward
Fair and Accurate Credit
Transactions
Act of 2003
(FACT ACT)
(62 Pages)
An Act to amend the Fair Credit Reporting Act, to prevent
identity theft, improve resolution of consumer disputes,
improve the accuracy of consumer records, make
improvements in the use of, and consumer access to, credit
information, and for other purposes.
This session will focus on one section of the FACT Act.
Section 215 of the FACT Act
Requires a Study
Who:
Federal Trade Commission and Federal
Reserve Board
What: Credit Cards, Mortgages, Auto Loans, and
P&C Insurance
How:
Statistical Relationship Utilizing MultiVariate Analysis that controls for
prohibited factors
When: Due to Congress by December 4, 2005
FACT Act Study
One Joint Report to Congress
FTC – Will focus on Auto and Homeowners
Insurance
Federal Reserve Board – Will focus on
Banking Products
NAIC Multi-State Data Call was Withdrawn –
Five Member State Panel was established by
NAIC to work with FTC
Three Trade Associations Are
Coordinating Industry Cooperation
With the FTC
American Insurance Association (AIA)
National Association of Mutual Insurance
Companies (NAMIC)
Property Casualty Insurance Association Of
America (PCIAA)
Actions Taken by the Three Trades
Established a Technical Support
Group
Recruited Data Providers for both the
Auto and Homeowners Study
Responded to Numerous Requests from
the FTC
FTC Request for Comments in
the Federal Register:
1. June 18, 2004
2. February 17, 2005
June 18, 2004 FTC Request
Ten questions asking about methodology and research design:
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10.
How should effects of credit be studied? (methodology)
What is hypothetical alternative situation?
What is appropriate multivariate technique? What data?
How to determine whether negative impact exists?
What methodology will determine specific (credit)
factors causing problem?
Same for factors not in credit scores
Are data available?
If not, what are proxies?
If proxies, what analysis would allow inferences to be drawn?
If only proxy is Census-level, what analysis would allow
inferences to be drawn?
June 18, 2004 FTC Request
112 Responses are shown on the FTC website
(www.ftc.gov)
Most were from individuals with personal
complaints about the use of credit.
American Academy of Actuaries
 Use insurance loss data
 Don’t try for “causal relationship”
 Define yardstick needed to establish concern
June 18, 2004 FTC Request
Center for Economic Justice
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How would consumer be treated w/o credit?
(Although they would do so improperly)
AAA/SOP – Econometric, not actuarial
Don’t use Industry Study database – can’t check
for “intentional bias”
Don’t study Loss Ratio
Try to get policyholder-level race, etc.
via SSA, DMV’s, etc. Try surname for some groups
Get application data, not just policies issued
(e.g. broad data call)
Suggest also studying average credit score
as independent variable
Capture proof of payment on expenses such as
rent and utilities
June 18, 2004 FTC Request
Others
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Coalition to Implement the FACT Act
(insurers, other financial institutions)
Credit Bureaus
Specific insurers
Need to control for geographic risk
If race proxy is used, use Census Block
Don’t use average values, and
extrapolate (like MO study)
 Nat’l Assoc. of Realtors
Causal analysis
Longitudinal analysis
June 18, 2004 FTC Request
Others (continued)
Trade associations:
• Model losses – with and without insurance score
• Study residual market population
• Study ‘lift’ among classes
• Recognize geographic differences
• Study non-controversial variable first: e.g. driving
record
FTC Insurance Study Plan
As Presented by FTC at CAS Seminar
Append race and income to subset of sample,
along with FICO score.
Build one model w/o risk scores, 2nd model
with risk scores. Compare the two.
Add race/income to model. Will test to see if
score is predictive within demographic
groups.
Will test individual attributes.
February 28, 2005 FTC Request
Twenty-one questions asking about how models are developed
and used plus evidence regarding the effect on expenses,
accuracy, availability, and affordability.
101 Responses are shown of the FTC website (www.ftc.gov)
Some Key Advice Provided to the FTC:
 Numerous personal complaints about the use of credit.
 Interesting study by NCRC – suggests study of non-prime
(and non-traditional data sources – rent, utility payments
etc.)
 Michigan OFIS concern - length of time credit affects scores
Data Calls
• Trade associations working with member
companies
• Multiple companies providing data
voluntarily
• Separate data calls for Auto and
Homeowners.
Auto Data Call
 Will use subset of data from 2003 Insurance Score study
• Over 2 million earned car years
• Majority of original data providers
 Industry group working with FTC to add:
• Credit attributes
• Census block (via geo-coding address)
• Vehicle MSRP
 File with name/address will be handled separately
• Add SSN
• Send to Soc. Sec. Administration – add self-reported
race and income information
• This data will be sent directly to FTC
 Separate (new) call for ZIP code data
• Multiple years
• All data for three years
• Have “clustered” Property Damage results
Homeowners Data Call
 New database
• Will collect three years of data by peril
• Approx. 3 million policies, 7 million exposures
 Industry group working with FTC and vendors to add:
• Insurance scores
• Credit attributes
• Census block (via geo-coding address)
• CLUE
 File with name/address will be handled separately
• Add SSN
• Send to Soc. Sec. Administration – add self-reported
race and income information
• This data will be sent directly to FTC
 Separate call for ZIP code data
• Multiple years
• All data for three years
• Will analyze and clustered results
FTC Insurance Study Plan
As Presented by FTC at CAS Seminar
FTC is interested in protecting and
preserving US economy.
FTC realizes parties feel strongly on both
sides of this issue, but FTC will build a
balanced report.
FTC believes data base is fair and is generally
pleased with the industry’s cooperation.
Final detailed report will include many
results, charts, and graphs.
Questions ?