Credit-based insurance scores creep into commercial lines: credit-based insurance scores, already a staple in the personal lines business, are creeping into commercial lines insurance, which is not as regulated, says one expert

Risk & Insurance, Oct 1, 2004 by Tom Starner

As the debate continues over the use of insurance credit scores in personal lines, one expert says that the insurance scores are being used in commercial lines.

"We believe it's happening," says Lamont Boyd, insurance market manager for Fair Isaac & Co. in San Rafael, Calif. "But carriers are very concerned about competitive advantage, so they don't want to tell anyone they might be using our scores for commercial underwriting."

Credit-based scores help insurers predict losses, says Boyd. "At the time we originally developed credit-based scores, we wanted to see if there was a correlation between scores and claims," he says. "And we found very distinct relationships between 15-25 variables on a credit report and whether person would make a claim on an insurance policy."

On the personal lines side, credit based insurance scores are widely viewed as an accurate tool to underwrite risk and have been in use for many years. "Credit-based insurance scores are an integral part of the underwriting process, a very important factor," says Tim Hollyer, an agency product development manager for Progressive Insurance, which has been using the scores since 1992 in personal lines underwriting.

"We've found that credit helps us predict future losses better and more accurately, along with the standard factors such as age, driving record, car, location," says Hollyer. "Credit scores help us be even more accurate, so we can offer a premium that reflects expected claims costs."

Regulators, however, want to be sure people are not being unfairly denied coverage. Several states have pending legislation on regulating the use of scores in underwriting personal lines coverage, according to the Insurance Information Institute. In Louisiana, lawmakers are even considering whether to outlaw insurers' use of credit information altogether.

Boyd, who says credit-based risk scores fall into a discipline known as predictive analytics, adds that when an insurer looks at a score, the key variables are whether a person or a group of insureds is more or less likely to have a loss.

"The variables may be similar, but more weight is given to variables that are related to insurance," Boyd says. "It's really a measure of personal responsibility. For example, the same people who drive carefully also get their tires checked or make sure they get a new roof when the time comes."