Credit Scoring Controversy

While credit scoring remains a controversial issue with consumer groups, many insurance companies say it provides more accurate quotes.

Reflecting the current lack of consensus, the National Association of Independent Insurers' (NAII, Des Plaines, IL) 2002 survey of its lobbyists projects that bills restricting or prohibiting the use of credit scoring for underwriting and rating may be proposed in 25 states. Currently the practice is legal in all states and restriction has been controverted since 1994.

"A little over 20 states have adopted laws," says Bob Zeman, vice president, NAII. "They have generally said that credit reports can be used as long as they are not the sole factor determining risk."

The NAII opposes the prohibition or excessive restriction of the use of credit backgrounds for determining risk. "It's nothing short of amazing," says Zeman. "The utility of credit report information and how it relates to risk is now a better predictor of loss, in the view of some companies, than the motor vehicle record."

Although the NAII is opposed to excessive restriction of the practice, which it says allows the charging of appropriate premium for the risk presented, it is willing to consider legislation that enhances consumer education on the issue. "Credit reports sometimes can involve emotional issues about finances and consumers may not immediately understand the connection," says Zeman.

Quoting Gets Personal

The online collection of personal information (such as a Social Security number) to run a prospective policyholder credit check must be done carefully, says Greg Davies, senior analyst, financial services, Gomez (Waltham, MA). Although lengthy quote forms are cited a factor causing consumer abandonment of the e-quoting process, 21.4 percent of the 55.6 percent that abandon actually do so when asked for their Social Security numbers, according to Gomez's report: Online Vehicle Insurance: Reevaluating Purchase Behavior. To avoid quoting drop-off, Davies suggests insurers incrementally increase online requests for information.

"Insurers must recognize that not all consumers are ready to offer up the personal data required for a truly accurate quote the first time they come to a Web site," says Davies. "It depends on where they are in the purchase cycle. Someone who is starting out may be looking for a ballpark figure, as compared to someone who has talked to an agent and has narrowed it down and just wants to see how much the darned thing is going to cost."

Carriers can offer estimate quotes, says Davies, by asking less-invasive questions. "If you hit consumers with a bunch of disclosures right up front, like, 'We are going to run a credit check,' you might scare them away," says Davies. However, consumers should be informed that a formal quote can be gained in exchange for more personal information. "It is important to set expectations up front before someone is in the middle of the process."