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Some of the recent trends/changes What’s next?
• Increased use of statistics (multivariate models) to more accurately predict loss costs. Vehicle for improved segmentation.
• Companies taking steps to improve retention – don’t drive “good customers” away.
• Customers exposed to a broader range of optional or mandatory coverages and features.
• Customer tools, service and claims handling also varies widely.
• What is the next generation of rating variables?
• Ability to adapt to regulatory changes.
• Tradeoff between complexity and better segmentation.
• Is Auto Insurance a commodity?
• How can Auto insurers specialize to capture consumer loyalty?
• Will companies be focusing more on customer service?
• What new product features can we expect?
• Will we see policy life pricing in the future?
• Use of credit in pricing is now the norm in most states
– clearly predictive of loss cost, but ability to use in the future is in doubt
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• Industry trends:
– Soft market
– Auto frequency has been dropping
– Safety improvements on vehicles
– Gas prices rising
– CAT losses (hurricanes)
• The current and future state of credit in pricing.
• What happens if we can no longer use for rating?
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• Industry trends:
– Will frequency continue to improve?
– How will gas prices impact frequency?
– What is the impact of safety improvements on BI frequency and severity, and on PD severity?
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• Challenge is to find variables that:
– enhance ability to predict lost costs
– have sufficient data available
– will be acceptable for use in rating by DOIs
– will be technologically viable/ cost-effective
• Credit scoring is the most recent to achieve widespread use – from mid 1990s to today.
• Mileage has been around for some time, with inherent challenges e.g., validation, ease of use. Will technological advances (e.g., GPS) bring it back to play a greater role?
• Other areas that have been publicized:
– Driving patterns & telematics (e.g., PGR insurance)
– Enhanced geographic rating (e.g., going beyond ZIP Code level rating)
• Other variables??
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• Value of retention is well known – better loss ratio and reduced expenses (NB acquisition costs are higher than RB maintenance costs)
• Companies have tried different approaches to improve retention and specifically in some cases to retain “good customers”
– Pricing features: renewal discounts (many companies), accident forgiveness (e.g.,
Allstate), pay plan discounts, prior carrier type discounts.
– Billing features: EFT, payment by credit card, paid in full, renew into annual terms.
– Procedures/allowances: Waiving fees, waiving underwriting restrictions, facilitating rewrites.
– Customer service: Better self service options.
• Expect to see more of this in the future:
– Loyalty programs?
– Policy life pricing ?
• Understanding different customers – different definition of “ easy ”:
– Full service (want to have an agent available)
– Self service (want tools to do everything for themselves)
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• Since the enactment of the Fair Credit Reporting Act in 1970, insurers have been allowed to use credit reports in the underwriting process.
• Prior to development of scoring models (Fair Isaac), credit reports were ordered on occasion, and interpreted by underwriters in making an accept/reject decision.
– Arbitrary and biased review, little regulatory oversight
• Insurers begin using credit history for “personal lines” in the mid 1990’s.
• In the mid-1990’s scoring models became available from credit bureaus and third parties (e.g.,
Fair Isaac, Equifax, Trans Union, ChoicePoint).
– Early adopters used as underwriting tier criteria.
– Over time started to use in setting rates
• In the 21 st century use of credit scoring is the norm:
– A 2001 study estimates 90% or more of auto insurance programs use credit scoring
– More companies using Proprietary credit models developed in house or in conjunction with credit bureaus + more “off the shelf” options
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• Many studies have confirmed a strong evidence linking loss costs to credit score e.g.,
– Epic Actuaries Study June 2003: Concluded that credit and insurance losses are
"unquestionably correlated". The study called credit-based insurance scores "one of the most valuable tools" insurers have for the accurate rating and pricing of auto insurance.
– University of Texas's Bureau of Business Research March 2003: Affirms a statistical connection between a person's credit habits and the likelihood they will file an insurance claim. Study shows that policies with the poorest credit scores generated an average incurred loss of $918 per policy, 65 percent higher than those with the best credit scores that generated an average incurred loss of $558
– Fair Isaac analysis indicating borrowers with average or better credit (70% of market) tend to file fewer insurance claims [Source III 2003]
• Credit scoring is not the most predictive commonly used rating variable but it is highly predictive: Variables with more predictive power include; Driving record, Number of years of driving experience, Number of miles driven, where the vehicle is garaged.
• Other points to note:
– Actuarial science requires correlation not causation
– Scoring in Auto Insurance is revenue neutral
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• Fair Credit Reporting Act (1970)
Insurers are required to notify consumers if they experience adverse action, such as denial, premium increase or cancellation of coverage, due to information contained in their credit report.
Consumers have the right to have errors in their credit report corrected and can request that the insurance company recalculate their insurance score and reevaluate their insurance coverage and premium.
• NCOIL Model for state oversight of insurance scoring practices (2002)
Includes a list of prohibited uses of credit history information as well as negative factors that insurers are prohibited from utilizing in any insurance scoring methodology. o Addresses unfair discrimination by prohibiting use of income, gender, address, ZIP Code, ethnic group, religion, marital status, or nationality. o Prohibits use of credit information as the sole basis for denying, canceling, or nonrenewing coverage, or for determining renewal rates. o Prohibits adverse action solely because a consumer does not have a credit card, or if a credit report or an insurance score is calculated over 90 days from the date the policy is written or renewed. o Establishes standards for allowing insurers to consider absence of credit or inability to calculate a credit score in the underwriting and rating process.
o Prohibits insurers from using several discrete factors in insurance scoring methodology.
Disclosure: Insurers or their agents must disclose on the insurance application or at the time the application is taken that credit information may be obtained in connection with the application.
Filing requirements: requires insurers file their scoring methodologies with the state department of insurance, which may include loss experience justifying the use of credit information.
Sources: BestWeek, Sun Sentinel
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Even before insurance scoring emerged as a regulatory issue, several states regulated the ability of consumer reporting agencies to provide credit reports for underwriting purposes
• NAMIC assessment 2001:
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48 states have taken some form of legislative or regulatory action (PA, VT exceptions)
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36 states have dispute resolution measures, 35 states have disclosure requirements, 39 states require notification and explanation of adverse actions.
– at least 42 states have taken steps to adopt one or more core features of the NCOIL model law, with many (over 30) adopting with little or no modification.
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States prohibiting use of credit scoring for PPA in certain circumstances
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CA & HI do not allow use for rating or underwriting
– MD: prohibited from refusing to underwrite, renew, cancel, or base particular payment plans in whole or in part on an individual’s credit history information
– OR: currently disallow the cancellation or nonrenewal of personal insurance coverage in cases where the policy was previously in effect for 60 days or longer, if the adverse action was based in whole or in part on credit history or an insurance score
– GA: prohibited from using underwriting criteria that result in fictitious groupings of risks that contribute to unfair competition
– UT: prohibits auto insurers from using credit information from canceling or nonrenewing coverage in effect for 60 days or more, to determine rates except to establish premium discounts, and to refuse new or additional coverage to named insureds or household members.
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Legislature to overturn or restrict the use of credit scoring
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Reported 18 states with legislative action in 2005; none were successful.
– Florida 2006 current challenge
– Oregon 2006 ballot issue
Sources: BestWeek, Sun Sentinel
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• April 2006: Progressive Insurance settled class action suit covering an estimated 10 million customers.
- Allegation was that customers were not properly notified that their personal information drawn from credit and other reports was used when policies were cancelled, coverage denied or higher rates charged.
- The company did not admit wrongdoing and denies that the claims were valid.
• June 2006: Allstate settled a nationwide class action lawsuit.
- Allegation was that the company charged black and Hispanic customers higher rates based on information drawn from their credit reports.
- Allstate, which is Florida's second-largest auto insurer, denies that it discriminates against minorities in the pricing of its policies.
- Allstate is changing the formula it uses for factoring credit information into its decisions, under the terms of the settlement.
Sources: South Florida Sun Sentinel
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• The Consumer Federation of America has applauded moves to ban the use of credit scores in insurance.
– Believe credit scoring is a sophisticated way for the personal lines insurance industry to avoid selling insurance to low-income ethnic minorities
– Also don’t like ZIPCode based rating for similar reasons.
• Consumer groups argue:
– Skeptical about the connection between credit scores and insurance claims -- causality
– Errors are so common in credit reports that credit scores are often based on bad information
– Scores also tend to be lower for those who simply don't have a long history of borrowing
– Unfair impact on socioeconomic groups, ethnic groups
– No standards across companies over what items are used on the credit report, variety of different models and varying degrees of use.
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• There are no definitive studies as to whether minorities or other protected classes have lower than average credit scores. Studies to date have been inconclusive, showing no direct link between credit and credit-based insurance scores and socioeconomic or ethnic groups.
– The Missouri Department of Insurance claimed in February 2004 that low income households and minorities are adversely affected by insurance scoring. However, the department’s findings have been challenged by the insurance industry for flawed methodologies. For example, it aggregates ZIP Code credit score data for everyone in a ZIP
Code area, whether they own cars or homes and therefore purchase auto or homeowners insurance or not.
– A February 2004 report issued by the Maryland Insurance Administration (MIA) found that there was insufficient data to conclusively determine whether the use of credit scoring has an adverse impact on these communities because insurers do not collect information on an applicant’s race or income. Without such data, it is not possible to match premiums paid to any socioeconomic group.
• Congress has asked the Federal Trade Commission to study the effect of credit scores on insurance availability and prices. Jesse Leary, an assistant director in the FTC’s bureau of economics says. “We’re going to be looking at how well scores predict risk within racial categories. Are scores a proxy for race or ethnicity?”
• Consumers in Oregon will get to vote on the issue in November 2006
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• Issue is whether insurance companies can continue to use credit scores to help set insurance premiums or decide who gets a policy.
• State says it wants to make sure that using credit scores doesn't amount to a smokescreen that covers up discrimination against minorities and other groups.
• Florida's Office of Insurance Regulation has proposed a new rule under an existing law that requires Insurers to prove they don’t discriminate:
–9/1 deadline for any P&C insurance company seeking state approval for a change in auto or homeowner rates or underwriting guidelines to prove that credit scores don't hurt protected groups. 12/1 deadline for other carriers
– Florida Administrative ruled in favor of the industry regarding on enforcement of the rule
• The insurance industry is challenging the rule in an administrative law court
–Industry says credit scores show them how much risk they take on with each new customer.
–Industry says rule would effectively ban its use of credit scores - don't collect information on customers' race and religion and other factors that the state wants to see..
Sources: South Florida Sun Sentinel
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• For the first time voters are deciding the use of credit.
– Oregon Ballot Measure 42 - qualified for the November 2006 ballot.
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OR is referred to as an "initiative state" because the public can vote on these types of issues. More than 84,000 consumers signed petitions in support of Ballot Measure 42
– The measure would prohibit insurance companies and their agents from using the credit score or
“credit worthiness” of an insurance policyholder or applicant to calculate rates or premiums.
– If passed would take effect 30 days later.
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Some of the arguments being put forward:
– Insurance scoring “is a back door way of redlining minorities,” says Bill Sizemore, a chief petitioner of the initiative and executive director of Oregon Taxpayers United
– Joel Ario, Oregon’s insurance administrator, says the state is concerned about the disproportionate impact of scoring on minorities, which is why it allows scoring only for new customers, not existing ones who have a track record with their insurers.
– Insurers say they’ll attack the initiative as harmful to consumer pocketbooks. “Because of scoring, 60 to 70 percent of Oregonians are paying lower rates for insurance. If this initiative passes, those people will be rerated and their insurance premiums will go up,” says Pat McCormick, a representative for the business and insurers’ political action committee known as Oregonians Against
Insurance Rate Increases.
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• Future (assuming status quo regarding use)
– Carrier-specific models (outside vendor creates model)
– Company scoring models
– Further integration with other variables (CP & TU models that integrate with driving record)
– Use of data outside the 3 traditional credit bureaus
• Renter database, etc.
• Substandard information
– Requires sophisticated techniques – and actuaries!
• Alternatives if removed
– Can’t replace – switching models creates differences.
– Can put some of the power elsewhere: modified weighting on other variables e.g., prior insurance, homeownership.
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