Give Us Some Credit: The Use of Credit Information in Insurance Underwriting and Rating

Abstract

Moderator: Diana Lee Speakers: Sam Sorich, Michael J. Miller, and Rob Schneider Since the mid-1990s, many insurance companies writing automobile and homeowners insurance in the United States have been using consumer credit history as one of the factors they consider when making underwriting or rate-making decisions. This practice has generated vigorous debate among insurance companies, agents, legislators, regulators, and consumer activists. The views of all of these disparate groups are discussed below. A distinguished panel of insurance professionals takes up the issue of credit scoring. Sam Sorich is the President of the Association of California Insurance Companies. Sam is the chief insurance lobbyist in the state of California. Since 1980, Sam has also been with the National Association of Independent Insurers (NAII) staff, where he coordinates the state government affairs activities for Arizona, Nevada, Hawaii, as well as California. Prior to coming to NAII, Sam was the assistant attorney general in Illinois. He is a graduate of the University of Illinois Law School. Next is Michael Miller, who is a principal with the actuarial consulting firm of Epic Actuaries, with offices located in Wisconsin and Illinois. He is a Fellow of the Casualty Actuarial Society (CAS) and a chartered life underwriter. He is a member of the American Academy of Actuaries as well. Mike has had more than 30 years of experience in the industry and has held different offices within the CAS. His name is very well known in the insurance industry, as he has testified on numerous topics including investment income, excess profits, rate regulation, risk classification, and of course, credit scoring. Mike holds a BS degree in mathematics from Illinois State University, and by the way, Epic is one of ARIA's most recent sponsors. Rob Schneider is the senior staff attorney with the southwest regional office of Consumers Union. Located in Austin, the office is one of three public interest advocacy offices maintained by Consumers Union, the publisher of Consumer Reports Magazine and Consumer Reports Online. Rob coordinates the offices of legislative and regulatory efforts on financial services and insurance and funeral services as well as access to government information. Before his current position, Mr. Schneider was the associate commissioner for consumer protection at the Texas Department of Insurance. He holds BA and JD degrees from the University of Texas at Austin. Society increasingly equates the ability to manage credit responsibly with responsible behavior, even if individuals have a bad credit record through no fault of their own. The use of credit information is widespread these days. For example, banks and other lenders look at credit records of loan applicants to find out whether they are likely to have loans repaid. Landlords look at applicants' credit records to see whether people can manage their finances properly and can pay their rent on time. Employers even look at credit records sometimes as a measurement of maturity and stability. Diana Lee: Mr. Sorich, please give us a brief overview of why and how insurers use credit scoring. Sam Sorich: In a sense, this isn't anything new. The Federal Fair Credit Reporting Act (FCRA), enacted in 1970, specifies a number of permissible uses for credit reports. Businesses are able to use credit reports for determining whether or not to make a loan, and landlords are able to use credit reports to determine whether or not they want to enter into a lease agreement. Employers have access to credit reports. And in 1970, when Congress enacted the law, it became permissible to use credit reports in insurance underwriting. But really, from 1970 to the early 1990s, this wasn't much of an issue. The reason for this was that insurance underwriters did not have the expertise to relate credit reports to the likelihood of an insurance loss. So even though credit information could be used in underwriting, it was not practical for most companies. …