The House Financial Services Subcommittee on Financial Institutions and Consumer Credit, led by chairman Luis Gutierrez (D-Ill.), held hearings in May that examined the use of credit scores to measure consumers’ risk profiles and inform the underwriting of property-and-casualty insurance policies. However, industry observers don’t expect significant changes to regulations of the practice, at the federal or state levels, in the wake of testimony.
“There are a couple members of Congress who cannot stand insurance scores, and there’s nothing you can say to them that will change their mind,” says Alex Hageli, director of personal lines for the Property Casualty Insurers Association of America (Des Plaines, Ill.) “But, I don’t see any strong support for any kind of legislation that would prohibit insurance scores.”
Regulation around what can be pulled from consumers’ credit report to establish their insurance risks — properly called an “insurance score,” distinct from a full credit score — generally takes place at the state level, Hageli continues. The average insurance score doesn’t contain all the information in a full credit report, he notes.
“Pretty much every state has imposed restrictions on what insurers can use,” Hageli says. “For example, you can’t consider collection accounts related to the medical industry, and can’t consider multiple pulls [of a consumer’s credit history].”
In fact, the model for insurance scores has been fairly straightforward and consistent since they first became available in the early 1990s, says Lamont Boyd, CPCU, AIM, director of the insurance market for FICO Scoring Solutions (Minneapolis), which creates the scores.
“The only adjustments that have had to be made have come if a legislator wanted to make sure that certain things aren’t considered,” Boyd says. “We’ve adjusted about 13 different state models.”
Aiming for Standardization
Importantly, Boyd adds, FICO doesn’t make any recommendations around how an insurer should use the data it provides. Its goal in creating the scores was to standardize what insurance underwriters were already doing anyway, and take the subjectivity out of the process.
“We never provide any sort of guidance — insurers decide on their own how to use the scores,” he says. “I started as an underwriter in the mid-1970s and used credit reports. But it’s hard to understand what a credit report is really telling you. The standardized scores allowed underwriters to use something consistent and objective.”
Property-and-casualty insurers like these scores because they have proven over time to predict claim frequency accurately. Insurance scores are used along with such factors as age, gender, marital status and driving history to underwrite auto insurance, for example. If they were banned, consumers could actually end up paying higher rates, says Dave Snyder, VP and general counsel for the American Insurance Association (Washington, D.C.), who testified at the House hearings.
“With insurance scores, you can now peg a premium to an individual’s risk, and because of that, companies are now able to write anyone who comes to them because they feel they have a good tool,” Snyder points out. “That has led to competition, which has forced prices to the lowest feasible point.”
The likelihood that there will be little, if any, change after the hearings means that insurance technology providers should be able to maintain current underwriting procedures, says Kathy Donovan, senior compliance counsel for insurance at Minneapolis, Minn.-based Wolters Kluwer Financial Services. She believes the driving force behind the hearing was mostly Congress' desire to learn more about the insurance scoring process.
Donovan notes that National Association of Insurance Commissioners chair and Illinois insurance commissioner Michael McRaith announced a data call in his testimony so that Congress could see what information is being used in insurance scores, and how it impacts consumers. This shows the industry's willingness to be transparent on the issue, she says.
“States will collect the data for personal lines auto insurance carriers operating in their states,” she explains. “There’s a series of questions, with the goal to, in a fairly short time frame, get the information. I think that’s an important factor — it shows the continuing openness of information flow.”
Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio