CREDIT SCORING DEBATE CONTINUES

Rough Notes, Jun 2008 by Zinkewicz, Phil

PIA National issues white paper to help agents protect themselves

Credit scoring, or insurance scoring as some in the insurance industry prefer to call it, for the purpose of rating auto and homeowners insurance has been a controversial subject for quite some time. Back in the 1970s, a few property and casualty insurers tried to use credit scores, which were designed solely for lending institutions for lending purposes, as an underwriting criterion for auto and homeowners insurance.

Almost immediately, they faced a court challenge, however, and lost. Basically, the court said that the insurers could not just take credit scores intended for another industry and use them without qualifying them in some way. The insurers ceased using the credit scores and the issue was forgotten-for a while.

Pat Borowski, senior vice president of the National Association of Professional Insurance Agents (PIA National), remembers not only the failed attempts of those insurers to use credit scores but also what brought the issue once again to the forefront.

"In the late 1970s and early 1980s, there was a rash of arson-for-profit incidents countrywide," she says. "The insurance industry, along with regulatory and investigative authorities, was attempting to do battle with these arson rings but was having a difficult time. It was then that the insurance industry drew criticism from regulators and law enforcement officials because they said insurers, by providing coverage, offered an incentive for arson rings to crop up. They asked why insurers were not doing credit checks on purchasers of homes before providing coverage to determine where the money to buy the buildings was coming from.

"Insurers said they were not permitted to use credit scores because of that previous court decision," Borowksi continues. "Now the industry's critics reevaluated that court decision and said it meant only that insurers could not rely solely on credit scores when underwriting but could use credit scores as a part of the underwriting process. If an insurer is using credit scores to determine only whether a potential insured would be able to pay premiums, it was allowed."

Borowski said the next major development came in the 1990s. "Credit bureaus wanted to broaden their customer base, so they approached insurers and said that an insurance-specific model for credit scoring could be created to be used carrier by carrier so that an insurer could demonstrate that credit scoring would make a significant difference to its loss ratio. We call that insurance scoring, and many states allow such scoring to be used as long as it is done in a fair, equitable and nondiscriminatory manner."

The question now arises: Where do independent agents stand in all of this? It is the carrier that has the responsibility to decide whether to use insurance scoring in its rating process, and it is the carrier that must satisfy state insurance department regulations regarding insurance scoring. However, the agent represents the company and must inform the insured that insurance scoring is being used by the company and how it affects his or her premiums.

PIA white paper

PIA National has published a white paper that addresses these issues and more. The white paper makes no judgments as to the merits of insurance scoring but rather provides direction on what agents must do to protect themselves. Among its suggestions are:

* Carriers need to provide comprehensive documentation to their agents that they (carriers) have properly vetted their method and process for insurance scoring. In addition, the carrier needs to instruct its agents on the methods agents are to use.

* Carriers will advise their agents of the legal/regulatory sufficiency, modifications or prohibitions that may exist in the several states on the uses and methods of each carrier's insurance scoring process. Agents write business in many states. Therefore, each carrier should have an accessible and accurate chart for agents to reference that shows each state's regulation, if any, of the insurance scoring process.

* All carriers need to accept (as most do) that executing insurance scoring activities at the agent level is NOT an optional choice of the agent. The ramifications of this business practice and the practical consequences of its process "force" agents to take on this responsibility in order to best serve consumers, their carriers and their own business interests.

* Carrier/agency agreements must provide full and appropriate indemnification provisions for the agent's activities in these areas in the event of any consumer complaint or legal/compliance action.

* Carriers must also use due care to ensure that the vendor licensing agreement, which agents are required to sign, with the outside source selected by the carrier to facilitate their insurance scoring, provides appropriate provisions that complement the obligations expressed in the agency/carrier agreement, and acceptable indemnification for the agent.

* Carriers must make available to the agent sufficient information allowing the agent to properly explain insurance scoring and how/where the consumer can obtain further information that clearly explains the insurance scoring result.