Insurance score
Encyclopedia
An insurance score - also called an insurance credit score - is a numerical point system based on select credit report characteristics. There is no direct relationship to financial credit scores used in lending decisions, as insurance scores are not intended to measure creditworthiness but rather to predict risk
. Insurance companies use insurance scores in underwriting decisions and to partially determine charges for premiums. Insurance scores are applied in personal lines, namely homeowners and private passenger automobile insurance, and not typically elsewhere.
° One actuarial study has been published, The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan, ACAS MAAA.
° Allstate has made public a private passenger automobile credit scoring model, the ISM7 (NI) Scorecard (where "NI" indicates no inquiries are considered).
The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan ACAS MAAA. This actuarial study matched 170,000 policy records with credit report information to show the correlation between historical loss ratios and various credit report characteristics.
The Use of Credit History for Personal Lines of Insurance: Report to the National Association of Insurance Commissioners, American Academy of Actuaries Risk Classification Subcommittee of the Property/Casualty Products, Pricing and Market Committee.
Insurers' Use of Credit Scoring for Homeowners Insurance in Ohio: A Report to the Ohio Civil Rights Commission, from Birny Birnbaum, Center for Economic Justice. Birny Birnbaum, Consulting Economist, argues that insurance credit scoring is inherently unfair to consumers and violates basic risk classification principles.
Insurance Credit Scoring: An Unfair Practice, Center for Economic Justice. This report argues that insurance scoring: is inherently unfair; has a disproportionate impact on consumers in poor and minority communities; penalizes consumers for rational behavior and sound financial management practices; penalizes consumers for lenders’ business decisions unrelated to payment history; is an arbitrary practice; and undermines the basic insurance mechanism and public policy goals for insurance.
The Use of Credit Scoring in Automobile and Homeowners Insurance, A Report to the Governor, the Legislature and the People of Michigan, by Frank M. Fitzgerald, Commissioner, Office of Financial and Insurance Services.
This report reviewed the viewpoint of the industry, agents, consumers, and other interested parties. In conclusion, insurance credit scoring was found to be within the scope of Michigan law.
Use of Credit Information by Insurers in Texas, Report to the 79th Legislature, Texas Department of Insurance. This study found a consistent pattern of differences in credit scores among different racial/ethnic groups. Whites and Asians were found to have better scores than Blacks and Hispanics. Differences in income levels were not as pronounced as for racial/ethnic groups, but average credit scores at upper income levels were better than those at lower and moderate income levels. The study found a strong relationship between credit scores and claims experience on an aggregate basis. In 2002, the Texas Department of Insurance received a peak of 600 complaints related to credit scoring, which declined and leveled to 300 per year.
Insurance Credit Scoring in Alaska, State of Alaska, Department of Community and Economic Development, Division of Insurance. The study suggested unequal effects on consumers of varying income and ethnic backgrounds. Specifically, the higher income neighborhoods and those with a higher proportion of Caucasians were the least impacted by credit scoring. Although data available for the study was limited, the state of Alaska determined that some restrictions on credit scoring would be appropriate to protect the public.
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
. Insurance companies use insurance scores in underwriting decisions and to partially determine charges for premiums. Insurance scores are applied in personal lines, namely homeowners and private passenger automobile insurance, and not typically elsewhere.
Background
Insurance scoring models are built from selections of credit report characteristics, combined with insurance claims and profitability data, to produce numerical formulas or algorithms. A scoring model may be unique to the insurance company and each line of business (e.g. homeowners or automobile), including the characteristics selected for consideration and the magnitude of the point assignments. As insurance credit scores are not intended to measure creditworthiness, they commonly focus on financial habits and choices (i.e. - age of oldest account, number of inquiries in 24 months, ratio of total balance to total limits, number of open retail credit cards, number of revolving accounts with balances greater than 75% of limits, etc.) As such, it is possible for a consumer with a high financial credit score and excellent payment history to receive a poor insurance score. Insurers consider credit report information in their underwriting and pricing decisions as a predictor of profitability and risk of loss. Various studies have found a strong relationship between credit-based insurance scores and profitability or risk of loss. The scores are generally most predictive when little or no other information exists, such as in the case of clear driving records or claims-free policies; in instances where past claims, points, or other similar information exists on record, the personal histories will typically be more predictive than the scores. Insurers consider credit report information, along with other factors, such as driving experience, previous claims and vehicle age, to develop a picture of a consumer's risk profile and to establish premium charges. The correlation between credit-based insurance scores and overall insurance profitability and loss experience has not been disputed.Support and opposition
The use of credit information in insurance pricing and underwriting is heavily disputed. Proponents of insurance credit scoring include insurance companies, the American Academy of Actuaries (AAA), the Insurance Information Institute (III), and credit bureaus such as Fair Isaac and TransUnion. Active opponents include many state insurance departments and regulators, and consumer protection organizations such as the Center for Economic Justice, the Consumer Federation of America, the National Consumer Law Center and Texas Watch. As a result of successful lobbying by the insurance industry, credit scoring is legal in nearly all states. The state of Hawaii has banned all use of credit information in personal automobile underwriting and rating and other states have established restrictions. A number of states have also made unsuccessful attempts to ban or restrict the practice. The National Association of Insurance Commissioners has acknowledged that a correlation does exist between insurance scores and losses, but asserts that the use of credit reports as beneficial to consumers has not yet been established.Public information
Insurance credit scoring models are considered proprietary and trade secret, in most cases. The designers would like to protect their models from view for a number of reasons, for example, they may provide competitive advantage in the insurance marketplace, or they anticipate consumers might alter results if the computations were common knowledge. As such, there is little public information available about the inner workings of insurance credit scoring models.° One actuarial study has been published, The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan, ACAS MAAA.
° Allstate has made public a private passenger automobile credit scoring model, the ISM7 (NI) Scorecard (where "NI" indicates no inquiries are considered).
Key reports and studies
Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, A Report to Congress by the Federal Trade Commission. This study found that insurance credit scores are effective predictors of risk. It also showed that African-Americans and Hispanics are substantially overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to predict risk within each of the ethnic groups, leading the Federal Trade Commission (FTC) to conclude that the scoring models are not solely proxies for redlining. The FTC indicated little data was available to evaluate benefit of insurance scores to consumers. The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry not open to examination.The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan ACAS MAAA. This actuarial study matched 170,000 policy records with credit report information to show the correlation between historical loss ratios and various credit report characteristics.
The Use of Credit History for Personal Lines of Insurance: Report to the National Association of Insurance Commissioners, American Academy of Actuaries Risk Classification Subcommittee of the Property/Casualty Products, Pricing and Market Committee.
Insurers' Use of Credit Scoring for Homeowners Insurance in Ohio: A Report to the Ohio Civil Rights Commission, from Birny Birnbaum, Center for Economic Justice. Birny Birnbaum, Consulting Economist, argues that insurance credit scoring is inherently unfair to consumers and violates basic risk classification principles.
Insurance Credit Scoring: An Unfair Practice, Center for Economic Justice. This report argues that insurance scoring: is inherently unfair; has a disproportionate impact on consumers in poor and minority communities; penalizes consumers for rational behavior and sound financial management practices; penalizes consumers for lenders’ business decisions unrelated to payment history; is an arbitrary practice; and undermines the basic insurance mechanism and public policy goals for insurance.
The Use of Credit Scoring in Automobile and Homeowners Insurance, A Report to the Governor, the Legislature and the People of Michigan, by Frank M. Fitzgerald, Commissioner, Office of Financial and Insurance Services.
This report reviewed the viewpoint of the industry, agents, consumers, and other interested parties. In conclusion, insurance credit scoring was found to be within the scope of Michigan law.
Use of Credit Information by Insurers in Texas, Report to the 79th Legislature, Texas Department of Insurance. This study found a consistent pattern of differences in credit scores among different racial/ethnic groups. Whites and Asians were found to have better scores than Blacks and Hispanics. Differences in income levels were not as pronounced as for racial/ethnic groups, but average credit scores at upper income levels were better than those at lower and moderate income levels. The study found a strong relationship between credit scores and claims experience on an aggregate basis. In 2002, the Texas Department of Insurance received a peak of 600 complaints related to credit scoring, which declined and leveled to 300 per year.
Insurance Credit Scoring in Alaska, State of Alaska, Department of Community and Economic Development, Division of Insurance. The study suggested unequal effects on consumers of varying income and ethnic backgrounds. Specifically, the higher income neighborhoods and those with a higher proportion of Caucasians were the least impacted by credit scoring. Although data available for the study was limited, the state of Alaska determined that some restrictions on credit scoring would be appropriate to protect the public.
Sources
External links
- The Truth Behind Insurance Scoring, www.InsuranceScored.com
- Insurance firms blasted for credit score rules, by Herb Weisbaum, Con$umerMan on MSNBC (January 2010)
- Washington Commissioner Criticizes Insurers' Credit Score Use, Insurance Journal (July 2010)
- Caution! The Secret Score Behind Your Auto Insurance, Consumer Reports (August 2006)