credit scoring update john wilson – choicepoint cas seminar on ratemaking march 14, 2006
TRANSCRIPT
Credit Scoring Update
John Wilson – ChoicePointCAS Seminar on Ratemaking
March 14, 2006
Just for FunFrom Parade Magazine - March 12, 2006
"WHAT PEOPLE EARN"
JOB RELATIVITY
Actuary 1.00
High School Librarian 0.59
Supreme Court Justice 2.49
Marine Corps Sergeant 0.26
Television Actress 14.67
Firefighter 0.50
Champion Snowboarder 11.73
Nuclear Physicist 0.78
Senate Minority Leader 2.15
Angelina Jolie 352.00
A Vendor Perspective
Carrier Usage Continues to Grow It is Increasingly Sophisticated Yet it Remains “Controversial” Regulatory Issues Continue to
Arise But Where and “What” Changes
Challenges to Data Providers
Trying to prove value of scoring Defending the attributes used Like carriers, being asked “why?”
Challenges to Data Providers
Consumer Protections / Data Security How to provide needed data to agents
while also protecting sensitive info? User agreements require permissible
purpose Truncate SSN Limit distribution to carrier sponsored
agents
What Has Changed? How has insurer use of credit changed?
More complexity / More granularity By coverage / in Tiering / in GLMs In small commercial lines Better talking points and communications
How is credit changing? New bankruptcy laws / higher minimums More expanded payment terms More “sub-prime” and youthful targeting
Regulatory Examples
Michigan, Minnesota Texas-Studies Georgia-Guidelines Florida – Reg.
Promulgation AL, NJ, NY, LA FTC Study
Regulatory Examples
Politicians in Michigan and Minnesota are on record as favoring a ban on credit scoring, despite strong industry support points
Relying on anecdotal cases and citing perceived errors and discrimination
Regulatory Examples
Two separate studies were conducted in Texas, one by the University of Texas and the other by the Insurance Department.
Although partisans can each point to study findings which support their perspective, the outcome is widely considered positive for the industry.
Regulatory Examples The Georgia Insurance Department hired
outside actuarial firms to review scoring models against State requirements. While several models were approved, the exams are not available publicly until “certified.” They are currently considered work papers.
“Draft” guidelines restrict renewal use, make treatment of unscored or disputed reports more complicated, and slow approvals.
Regulatory Examples
Florida’s OIR recently “adopted” an onerous regulation that the industry fought hard. The reg still faces a legal challenge, but the OIR has been asking questions on filings which are drawn from the contested reg.
As written, it may have the effect of a ban due to an impossible required proof
Regulatory Examples Provide conclusive demonstration that
scoring is a valid predictor of insurance risk, that all parameters are significant; not overlapping or duplicative of other rating factors.
Provide all data used in model development to allow the OIR to conduct multiple regression testing of the scoring method. (Test every vendor and carrier model?)
Prove that scoring does not have a disproportionate impact on protected classes
Recent Update in Florida Use of Credit Reports and Credit Scores by Insurers 69O-
125.005
NOTICE OF CHANGE Notice is hereby given that the following changes have been made to the
proposed rule, in accordance with subparagraph 120.54(3)(d)1., F.S., published in Volume 31, No. 26, July 1, 2005, of the Florida Administrative Weekly. These changes are being made in response to concerns received by the Joint Administrative Procedures Committee.
Proposed Rule 69O-125.005(9)(g)2. is changed to read: 2. Alternatively, insurers may submit statistical studies and
analyses that have been performed by educational institutions or independent professional associations that indicate that there is no disproportionate impact on any of the classes set forth in Section 626.9741(8)(c), F.S. attributable to the use of credit reports or scores. Any such studies or analyses shall have been done concerning the specific credit scoring model proposed by the insurer.
The remainder of the rule reads as previously published.
More Regulatory Examples AL now asks carriers to treat no-hits
more favorably for older applicants NJ wants all reason codes to be adverse A bill has been introduced in NJ to ban
the use of education and occupation In NY, a bill introduced would require
disclosure to principals of a business when their personal credit will be used
More Regulatory Examples Louisiana – Directive 196 (March 1)
An insured has the right to be exempt from the use of adverse credit information directly or indirectly caused by Hurricane Katrina and/or Hurricane Rita
Upon demonstration by an insured, ignore adverse entries on or after August 26 that are Hurricane related for U/W or rating
Requests this also apply in comml lines
FTC Study The FACT Act requires this study, both
for personal lines insurance and for personal credit markets as well.
To address the impact of scoring on availability and affordability, and considering certain protected classes.
What will be found? Will the result differ between insurance and banking?