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1 This pamphlet has been designed to help those involved with the insurance industry better understand the issue of insurance scoring. However, because of the important role agents play in dealing with policyholders on a day to day basis, this brochure is focused on answering the questions most asked by insurance agents. The very mention of the term insurance scoring brings to mind questions of privacy, agent liability and consumer protection. Some media reports have likely prompted concern from policyholders who could benefit from the use of insurance scoring. This brochure is intended to help in answering questions and communicating the numerous benefits of insurance scoring to insurance customers. Insurance Scores WHICH IS IT? CREDIT SCORES OR INSURANCE SCORES? The popular use of the term credit scores is misleading. It is important to understand that insurance scores are not credit scores or credit reports they are distinctly different. Insurance scores are designed to predict a different outcome than credit scores. An insurance score is a number, generally ranging from , which predicts the likelihood of a policyholder or applicant to submit a claim. A credit score, on the other hand, is also a number, generally ranging from , but it predicts the likelihood of future delinquency on credit accounts. Although both scores solely utilize credit bureau data, insurance score models were developed to predict future insurance losses by examining actual policyholder performance data from insurance companies in conjunction with the corresponding credit bureau data of that policyholder. WHY ARE INSURANCE COMPANIES USING INSURANCE SCORES? As with any industry, insurance companies are always looking to provide better service to their customers. Insurance companies learned that insurance scores are an accurate predictor of a consumers likelihood to file a future claim. Independent tests were run by insurance 2

2 companies comparing insurance scores against the claims history of policyholders. They found that the scores do predict the likelihood of claims. In fact, of all underwriting tools, insurance companies have found insurance scores are the most accurate predictor of future losses. The Process WHERE DO INSURANCE SCORES COME FROM? Scores are based on information from consumer credit reports that insurers or modelers get from the three major credit bureaus: Equifax, Experian (formerly known as TRW) and TransUnion. Another company, Fair, Isaac provides statistical models to a wide array of clients, mainly in the financial services arena, including the majority of the models used to calculate insurance scores. ChoicePoint is an information provider it provides insurance companies with underwriting and claims information services to assist those companies in assessing insurability. It also provides statistical modeling. HOW ARE INSURANCE SCORES COMPUTED? Generally, an insurer sends an inquiry to one of the major credit bureaus. The credit bureau then conducts a process in which specific credit report attributes are input into the model (for that individual carrier) that then produces a score. The score is returned to the inquiring insurer, and the insurer can then use the score in its decision-making processes. C ONSUMER C REDIT R EPORT I NFORMATION U SED I N S CORING I NCLUDES: LATE PAYMENTS, COLLECTIONS OUTSTANDING DEBT LENGTH OF CREDIT HISTORY NEW APPLICATIONS FOR CREDIT TYPES OF CREDIT IN USE 3

3 Implementation WHY DOES THE SAME CUSTOMER GET DIFFERENT SCORES FROM DIFFERENT COMPANIES? As the use of insurance scores becomes more prevalent, the major credit bureaus and other credit consulting companies are introducing new products into the marketplace. At the same time, many companies are developing their own models for insurance scores. Think of the insurance scoring process as a menu, from which each insurance company can choose items. Although each company will have access to the same information, the combinations they choose will likely be different. Because of the competitive marketplace, each company wants to develop their own combination. This competition is the reason why a customer may get different scores from different insurers. EVEN IF A CUSTOMER GETS THE SAME SCORE FROM DIFFERENT COMPANIES, THE COMPANIES SEEM TO USE THE SCORES IN DIFFERENT WAYS. WHY IS THAT? Just as every company s underwriting guidelines and rating tools are different, insurers use insurance scores in a variety of ways. Many companies use insurance scores as a tool to better evaluate risk. Because competition in the Indiana insurance industry is so intense, companies will naturally try to develop different ways to utilize insurance scores to give their policyholders and themselves a competitive advantage. While some companies may go as far as to use the scores to price their product, many others simply use them to determine eligibility. Bad Insurance Scores DO A LARGE NUMBER OF INQUIRIES OR HITS AFFECT AN INSURANCE SCORE? Inquiries or hits are tallied whenever a consumer s credit report is accessed for the purpose of determining the consumer s credit performance. For example, whenever an individual applies for a credit card or maybe a home equity loan, the credit check run on the report 4

4 is considered an inquiry. As with virtually all credit checks, inquiries have an impact on insurance scores. However, it is important for insurance customers to know that insurance scores consider patterns of credit management practices, while single incidents generally have minimal impact. T HE F OLLOWING O UTLINES T HE T YPES OF I NQUIRIES: CONSUMER- INITIATED CREDIT INQUIRIES NON-CONSUMER- INITIATED CREDIT INQUIRIES INSURANCE INQUIRIES Too many inquiries adversely affect an insurance score if the customer initiates them. While a single consumer-initiated inquiry has little negative effect on an insurance score, multiple inquiries in a short period will have a greater impact. An exception could be multiple car dealership or mortgage inquiries in a short period of time. These are often treated as a single inquiry, as it is a sign of financial responsibility to shop around for the best deal. This type of inquiry includes promotional inquiries, account review inquiries, and consumer inquiries where the consumer has requested a copy of their own report. These type of inquiries do not affect insurance scores. Insurance inquiries are when an insurance company accesses a consumer's credit report to run an insurance score. Insurance companies do not usually factor the number of hits by other insurance companies into their insurance scoring model. Therefore, Insurance inquiries generally do not affect a customer s ability to get a policy. The majority of major credit providers do not use models that evaluate insurance inquiries when calculating scores. Likewise, most insurers use models that do not include insurance inquiries. 5

5 WHAT ABOUT SOMEONE WITH A LARGE AVAILABLE CREDIT LIMIT OR NO INSURANCE SCORE? Again, companies will view a no score differently, just as they look at different criteria in credit history. Some companies have loss experiences which show no scores as a negative, while others show it as a non-factor or even a positive. Ultimately the marketplace will determine the best analysis of these factors. A large available credit limit can be a red flag when calculating credit and insurance scores. Simply put, the whole concept of insurance scoring is about managing assets. Those who manage their financial assets well are less likely to require the use of asset protection. Insurance is asset protection. If an individual establishes an available amount of credit which is extraordinarily high, they are statistically more apt to incur difficulties in managing their assets. Explaining Rejection to a Consumer WHEN A CONSUMER IS ADVERSELY AFFECTED BY AN INSURANCE COMPANY DECISION, WHAT INFORMATION IS GIVEN TO LET THEM KNOW HOW THEIR INSURANCE SCORE FACTORED INTO THE DECISION? When a consumer receives an adverse action on an application for insurance, be it a denial, non-renewal, or a rate change, the consumer can inquire as to the reason. The Insurance Institute of Indiana believes it is important for companies to respond to inquiries with an understandable explanation. Explaining all factors involved in establishing an insurance score would be overwhelming and generally useless to the consumer, as well as cumbersome to the company. However, a detailed explanation should be developed which would serve value to the consumer for future applications. Improving Insurance Scores WHAT CAN CUSTOMERS DO TO IMPROVE THEIR INSURANCE SCORES? Customers who periodically obtain a copy of their credit report, from the three major credit bureaus, are the most likely to improve their 6

6 scores. Not only can they see where their credit standing might be deficient, they can also check for inaccuracies. An insurance score is a snapshot of a person s insurance risk based on the information in their credit report that reflects their credit payment patterns over time, with more emphasis on recent information. Although agents are not credit counselors, there are a few things they can tell customers to improve an insurance score: 1) Pay bills on time. Delinquent payments and collections can have a major negative impact on an insurance score. 2) Keep balances low on unsecured revolving debt like credit cards. High outstanding debt can affect an insurance score. 3) Apply for and open new credit accounts only as needed. Individuals should maintain the necessary minimum number of credit cards, as well as other credit accounts. Over time, responsible use of credit can increase a customer s insurance score. Correcting Mistakes on Credit Reports WHAT, IF ANYTHING, CAN CUSTOMERS DO TO CHANGE MISTAKES ON THEIR CREDIT REPORTS? Federal law requires that the insurer notify the individual if an adverse decision is made based on credit information. The consumer can contact the credit bureau; and, if the information is incorrect, the bureau is required to promptly correct any errors in the report. If an adverse underwriting decision is made based on previous, erroneous information, an application can be resubmitted and the insurer can review the corrected information. In addition, consumers can request a free copy of their credit report if they are denied a policy for any reason. Discrimination Issues ARE INSURANCE SCORES UNFAIR TO MINORITIES, WOMEN, OR PEOPLE WHO LIVE IN CERTAIN NEIGHBORHOODS? Quite possibly the best aspect of utilizing insurance scores is that they 7

7 are objective. Consumers have the ability to control or improve their own rating based on their individual efforts. Even so, the following information is typically restricted or prohibited and therefore is not used in any insurance bureau scored models: ETHNICITY INCOME RELIGIOUS BELIEFS GENDER MARITAL STATUS NATIONALITY AGE ADDRESS BANKRUPTCY (INDIANA LAW) Sole Basis CAN A CUSTOMER BE DENIED OR NON-RENEWED SOLELY ON THE BASIS OF THEIR INSURANCE SCORE? A number of states have passed or are in the process of passing legislation which bars insurers from using insurance scores as the sole basis for denying or non-renewing a policy. The Insurance Institute of Indiana and the Professional Insurance Agents of Indiana support the need to have this provision in our lawbooks and have been working with legislators to get it done. Federal Fair Credit Reporting Act (FCRA) HOW DO THE LIABILITY ISSUES UNDER FCRA AFFECT AGENTS? The FCRA requires that users of consumer credit reports must have a permissible purpose, such as underwriting of insurance. It is important that producers become familiar with the notification requirements of adverse actions. Customers must be told by the insurer that the adverse action was taken using information from a 8

8 consumer credit report. Failure to comply with FCRA can result in federal enforcement actions as well as private lawsuits. It is also important to note that the notification requirements are the same for adverse information found on a motor vehicle report (MVR), which is also covered under FCRA. IS PLACING A CUSTOMER IN A LESSER TIER AN ADVERSE ACTION, WHICH ALLOWS THEM TO OBTAIN A FREE CREDIT REPORT? Some companies feel that until a quote is given there is no adverse action. Once a quote is given, and then the rate changes due to a consumer report, then an adverse action has been made. It is best to check with each company s legal department for their opinion and position. Department of Insurance Involvement SHOULD THE INDIANA DEPARTMENT OF INSURANCE HAVE ACCESS TO THE UNDERLYING OR SUPPORTING INFORMATION COMPANIES USE TO CREATE INSURANCE SCORES? Proprietary information must be kept private for competitive purposes. However the Insurance Institute of Indiana and the Professional Insurance Agents of Indiana support the need for the Department of Insurance to serve in a regulatory capacity on the insurance scoring issue. In order to protect consumers, it is important the agency responsible for oversight of the insurance industry in the state be able to review the information companies are using in establishing insurance scores. Agent Liability THERE ARE SO MANY LEGAL REQUIREMENTS; DO AGENTS NEED A HOLD HARMLESS AGREEMENT IN THEIR CONTRACT? Agents should check the indemnification language of their agency s contract. As long as agents follow procedures established by the insurer, many insurers have added language that hold agents harmless for the company s failure to comply with certain laws, including the FCRA. 9

9 Agent Access to Insurance Scores WHY ARE AGENTS NOT GIVEN COPIES OF CUSTOMER INSURANCE SCORES? Privacy provisions in the Gramm-Leach-Bliley Act of 1999 have erected barriers to the sharing of an individual s credit information. Additionally, the two issues previously mentioned, the FCRA and agent liability, are the main reasons insurance scores are not made available to agents. Because the FCRA requires users of consumer credit reports to have a permissible purpose, it is difficult to draw the line in regard to the agent s responsibility. While the underwriter certainly needs access to the records to take care of their end, the agent is probably better off not risking violation of the FCRA and being held liable for the actions of the insurance company. Key Points The use of insurance scores allows for objective, consistent and accurate underwriting. With the use of insurance scores, subjectivity is minimized. A strict formula is applied that evaluates empirically derived data, allowing for an impartial underwriting and pricing decision. The use of insurance scores helps to protect customers who are less likely to have losses. Insurance scoring helps to reduce the number of risks in the company pool. In turn, this reduces the subsidization by those less likely to have losses, thereby giving them better rates. The majority of customers have good insurance scores therefore insurance scores help them qualify for better rates. Customer privacy is protected by certain statutes of the FCRA. In addition, individual insurance companies often establish their own policies and procedures to protect their customers privacy. Agents should be familiar with the statutes of the FCRA governing customers privacy rights. The use of credit-based insurance scoring has led to an expansion of eligibility for standard and preferred companies. That is, there are fewer rejections/less non-standard placement for underwriting reasons. 10

10 Additional Resources Equifax TransUnion Experian Fair, Isaac ChoicePoint Federal Trade Commission Indiana Department of Insurance Education efforts courtesy of: Alliance of American Insurers American Insurance Association Insurance Institute of Indiana Professional Insurance Agents Association of Indiana, Inc. 11

11 PROFESSIONAL INSURANCE AGENTS OF INDIANA, INC. 867 S. James Road Columbus, OH Insurance Institute of Indiana 2450 One American Square Indianapolis, IN

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