Credit Scoring Battles Persist

The move to restrict the use of credit scores in underwriting has profound implications for insurers.

Speakers at the Casualty Actuarial Society (CAS) Ratemaking and Product Management (RPM) Seminar with law seeking to limit or ban the use of credit scores under consideration in 26 states, the issue is not going away.

“In the last couple of years, the credit crisis and related economic troubles have served to reenergize the debate,” Roosevelt Mosley, a principal with Bloomington, Ill.-based Pinnacle Actuarial Resources, Inc., said.

As an example of what can happen when credit scoring is banned, Mosley cited Maryland, which prohibited the use of credit scores in homeowners insurance in 2002. “The ban resulted in some rate inequities from a cost perspective and a little bit of a shake up in market share and industry loss ratios,” he said. “However, the end result was that the market did not collapse. We did the best we could with the market that was there.”

In the absence of credit scores, insurers need to consider additional variables that demonstrate the characteristics of responsibility or risk-taking behavior which may have been deemed insignificant when the credit score was included, Mosley.

Likewise, Eliade Micu, actuarial consultant at Columbia, S.C.-based EagleEye Analytics, observed that insurers have a range of possible alternatives to credit scores. “Insurers can do nothing and take a wait and see approach, which effectively means wait until the legislature bans credit completely,” he said. “Other companies have taken a more practical approach. They have a class plan that is generalized linear model (GLM) based, so they try to tweak their class plan to make up for the signal lost when you take credit away,” he said.