Roughly a decade after insurance carriers began adding customers' credit scores to the stew of statistics used to set premiums for auto and homeowner's coverage, negative reaction and feedback appears to be waning.Opponents still contend that credit scoring tends to raise premiums overall, that it doesn't correlate directly with risk and that it may serve as a proxy for racial and ethnic discrimination, because some minority groups have lower incomes and are more likely to have credit problems.
But the insurance industry maintains that the majority of customers-though an admittedly narrow majority-saves money thanks to credit scoring. They argue that the way consumers manage credit is a reliable indicator of responsibility and, consequently, of habits less likely to result in claims. Moreover, they point out that credit ratings are just one of many factors carriers consider when they set rates and that credit histories are blind to race and ethnicity.
"Increased use of credit information is a fact of life," says Claire Wilkinson, vice president of the Insurance Information Institute (III) in New York. "It's a proven, reliable indicator of performance in many trust-based relationships." Among insurers, she adds, studies show that lower credit scores are associated with higher relative loss ratios.
"Generally speaking, the legislative and regulatory activity regarding the use of credit scoring has decreased over the last couple of years," says Michael Forney, a spokesman for Allstate in Northbrook, Ill. "We believe this is due in large part to the NCOIL [National Conference of Insurance Legislators] model law on the use of credit information."
The NCOIL Model Act, introduced in November 2002, spells out protections against potential abuses of credit scoring. It requires insurers to re-rate customers with corrected credit reports, notify applicants that credit information is being used in setting rates and let customers know if their credit information results in an adverse action-a higher premium, for example, or denial of coverage. It also protects consumers' privacy. So far, about half the states have adopted the NCOIL model.
Another reason for the decline in opposition is that consumers are becoming more familiar with credit ratings, thanks to their wide use in other financial services industries, says Jeffrey Junkas, director of public affairs at the American Insurance Association's Chicago office. "We've seen fewer overall, country-wide attacks on credit-based insurance scoring," he says, "but we still do see some fiery pockets of opposition in certain states, such as Michigan or Delaware, where they continue to attack the tool."
In Delaware, says Junkas, there are conflicting efforts both to adopt the NCOIL model and to ban credit scoring altogether. In Michigan, he notes, the insurance commissioner tried to institute a regulatory ban on the practice. The industry sued to prevent that and won. The commissioner appealed that decision, and the result of that appeal is imminent. In Colorado, Junkas says, action against credit scoring is "bubbling right near the surface."
On the Federal front, two studies-one on credit scoring in the insurance industry by the Federal Trade Commission and another on broader use of credit information by the Federal Reserve-were both undertaken in connection with reauthorizing the Fair Credit Reporting Act and could provide ammunition to both sides of the issue. Junkas says, however, that he doesn't foresee any direct action against credit scoring coming out of either study. And in June, the Supreme Court unanimously sided with the insurance community by overturning a previous rule that required insurers to issue adverse action notices whenever use of credit data prohibited the policyholder from getting the best possible rate.
Because carriers are regulated by the states, those that operate in multiple states are accustomed to the potential headaches created by states' varying approaches to credit scoring. "There are different state requirements regarding other rating and underwriting factors that insurers use," Allstate's Forney says. "These different state requirements regarding the use of insurance scoring are just one such example."
Still, the NCOIL model does create a measure of uniformity among states that use it, Junkas says. "I think that's why the NCOIL model probably has been so readily embraced," he says. "It may not be ideal from either side's perspective on the credit scoring issue, but it certainly creates a nice, standard baseline by which you can conduct your operations in an efficient manner."
Consumer education has a significant role in keeping opposition to credit scoring at bay, according to Needham, Mass.-based TowerGroup's David West, who previously served as global insurance strategist for SAS, a Cary, N.C., software developer that offers analytics systems for risk modeling. "The insurance industry could do a better job of explaining the relationship between credit and insurance," he says. "The general public does not intuitively understand the relationship." That lack of understanding-combined with general mistrust of the insurance industry on the part of many consumers - leads to fear and uncertainty.
InsureMe, a lead aggregator and referral service for insurance agents, puts a high value on educating Web site visitors and informational blogs on strategies consumers can use to lower insurance costs. "There are a lot of things that go into finding the right insurance, and we found that no one really knew much about what those things were," says Megan Mahan, lead copywriter for the Englewood, Colo., company.
InsureMe's "Insurance Survival Guides" suggest ways consumers can keep premiums for car and homeowner's insurance low, and keeping credit histories clean is among them. InsureMe's blog even carries a 2006 article from Consumer Reports that's highly critical of credit scoring.
"Certain types of credit affect the credit-based insurance score more than others," says Maribeth Neelis, creative marketing copywriter for InsureMe. "We try to give consumers some pointers so they know what to look for and what to be aware of, so they have a better chance to get lower premiums."
In fact, says Junkas, from a consumer perspective, credit rating "is probably the one variable you have the most control over. When you're a 22-year-old male living in Chicago and you just got your first job, it's not easy to move out of the city and raise your age to 45" to get a lower price on car insurance. But you can monitor your credit report and pay your bills on time-and pay lower premiums as a result, he notes.
Credit scoring is entrenched among carriers and, notes Forney, experience has confirmed the correlation between credit data and the likelihood of a loss. The majority of home and auto insurers use it, in conjunction with more traditional measures of risk, to set rates, says the III's Wilkinson.
Credit scores are reliable indicators of risk, she adds, and ultimately lead to fairer premiums. "Insurance scoring, together with other rating factors, helps insurers to price more accurately," says Wilkinson. "Individuals who file fewer, less costly claims pay less-that's the bottom line."
CORRECTION
In "Outsourcing to the 'Rescue' For Growing Reinsurer" (May 2007), the outsourcing steps described were taken only by the Commercial Insurance Division of Swiss Re, not by the entire company.
In the same article, the name of the company Swiss Re recently acquired was reported as GE Insurance Corp. The correct name is GE Insurance Solutions. We regret the error.
