The Credit Scoring Paradox

By Greg Davies, Senior Financial Services Analyst, Gomez, Inc.

For more than 30 years, the federal government has allowed insurers to use credit scoring for underwriting and rating purposes. But although this information enables companies to provide accurate details about discounts and savings, it also raises concerns about security and privacy(leading a high percentage of Web users to "abandon" the online quote/application process).

Because credit scoring's technology will likely play an important role in underwriting and pricing for the foreseeable future, insurers must learn to balance online insurance users' demand for accurate rate quotes with their reluctance to share sensitive information, such as social security numbers. Here are some suggestions for resolving the paradox:

EDUCATE & INFORM. Insurers that rely on credit scoring as underwriting criteria must proactively educate consumers about how the process works and inform them why and when credit is used in the application process. Given recent media attention paid to the major credit agencies' data integrity problems, the growing prevalence of "ID theft," and the rigorous disclosure requirements mandated by new financial services legislation, insurers would benefit by explaining clearly how they will use credit information. Insurers that use credit scoring during the underwriting process also should provide basic information regarding how to access credit reports and credit reporting agencies.

THINK "BABY STEPS." Gomez's extensive consumer research finds few first-time insurance Web site users are willing to provide detailed personal information in exchange for a quote. By comparison, people who are serious about buying auto insurance want to know exactly how much coverage will cost. Insurers, therefore, must incrementally increase the amount of personal information required according to where a consumer is in the purchase process. One technique involves offering first-time visitors an abbreviated form for requesting rate estimates (e.g., one which does not ask for personal information beyond a garage address). Consumers who are more serious about purchasing insurance can request a full quote, which would require more detailed personal information, including Social Security numbers.

EXPLORE THE USE OF CREDIT SCORE "PROXIES" FOR ONLINE RATE QUOTES. Although Gomez is not currently aware of any insurer offering such a feature, one way insurers can indicate the impact of credit information in an online quote form without subjecting prospective customers to a credit check (at least until later in the purchase cycle) is to ask several questions which could be used to approximate a consumer's credit rating, such as questions relating to bill payment history, outstanding debt and length of credit history, as well as the number and type of credit accounts. The answers could then be used to approximate a credit rating and render a more targeted rate "estimate." Then, if consumers elect to proceed along the path towards a purchase, an insurer could pull credit scores and render more targeted rates.

Credit scoring is an evolving technique that allows insurers to better predict their policyholders' potential for future insurance losses. Given insurers' unique distribution considerations and online customer acquisition strategies, no one-size-fits all solution exists for managing consumers' conflicting demands for privacy and information accuracy.

However, the suggestions above represent opportunities for all online insurers to increase conversion rates. Moreover, incorporating credit approximations in the purchase process may also allow insurers to weed out unqualified prospects early on, improving expense ratios and allowing agents and sales representatives to focus on converting qualified prospects.

Greg Davies is a senior financial services analyst and lead analyst covering the online insurance industry at Gomez, Inc., www.gomez.com, a Waltham, MA Internet quality measurement market research and advisory services firm.