The Insurance Score nswers to frequently asked questions about credit-based scoring in personal lines underwriting 2001
Introduction s our society changes over time, the underwriting of personal insurance also evolves to keep pace. However, one constant remains stable and responsible individuals present lower underwriting risks. But how do you identify those particular individuals? One way is through the use of Insurance Scores, giving both The Hartford and its agents a way to identify stable and responsible risks. When scores are used along with a traditional assessment of physical risk, superior underwriting results. This means both agents and the company write a larger share of the better business, in a greater segment of the marketplace. The use of Insurance Scores raises a number of questions. What do the scores measure? How are the scores calculated? How do I explain this system to customers? We ve provided answers to these frequently asked questions and others in this booklet. Defining the Insurance Score What is an Insurance Score? n Insurance Score is the result of an objective, statistical analysis of credit report information (performed by a consumer reporting agency) identifying the relative likelihood of an insurance loss, based on the actual loss experience of individuals with similar financial patterns. The concept of scoring has been used since the 1970s by many industries, most notably by financial institutions. Historically, scoring systems have been designed around application data, credit data and even client behavior data. The Insurance Score used by The Hartford was developed specifically for underwriting personal lines insurance.
How was the Insurance Score developed? The model, or scoring system, used in the Insurance industry was developed by analyzing hundreds of thousands of records from all areas of the United States and measuring them against claim performance twelve months later. Hundreds of predictive characteristics were studied and approximately 30 were chosen as the most predictive mix of characteristics. Weights were then assigned to these characteristics. How is the Insurance Score calculated? n enhancement to purely judgment-based underwriting, scoring uses a table of point values accurately assigned to key predictive attributes of an insurance consumer s credit record. dding the point values associated with each attribute produces a total score, which ranks consumers by their expected loss ratio and claim frequency. s a group, people scoring in lower ranges statistically demonstrate risk of producing a higher loss ratio and claim frequency than people whose scores fall in higher ranges. Underwriters can use this knowledge to take actions based on acceptable levels of risk. The specific mathematical model used to weigh and measure credit report characteristics is proprietary information. The scoring system will be revalidated and may be redeveloped periodically to reflect changing economic conditions and changes to credit reporting standards and procedures. 1
Can The Hartford demonstrate that the scoring model is valid? Yes. The Hartford s actuarial research experts validated the model against our own book of business. The graphs below demonstrate our results: uto Loss Ratios by Custom Credit Score 85% 84% 80% 75% 73% 70% Loss Ratio 65% 62% 65% 60% 59% 57% 55% 54% 50% 47% 50% 52% 45% 858-997 841-857 823-840 807-822 787-806 762-786 733-761 694-732 637-693 1-636 Credit Score Range Is it legal to use Insurance Scores in underwriting? Only a few states have enacted legislation prohibiting the use of credit-based scoring in underwriting. The Hartford is in compliance with whatever state limitations apply. bout Credit Bureaus and Credit Reports Is the data at credit bureaus accurate? It is one of the most accurate sets of data available for underwriting. Federal law, under the Fair Credit Reporting ct (FCR), requires reasonable procedures to be in place at the credit 2
bureaus to assure maximum accuracy. ccordingly, the bureaus are concerned with the reliability of the sources from which they receive information, as well as the accuracy of that information. The positive impact of technology has improved the accuracy of consumer credit over the last few years. Increased automation by credit grantors, data reporting automation, and better data sorting and matching techniques have resulted in far fewer incidents of misinformation. The ssociation of Credit Bureaus reports less than 1% of all credit report challenges actually result in a change to a consumer s file once the inquiry has been fully investigated by the credit bureau. Does consumer credit compare to motor vehicle reports in predicting losses? In some instances, the Insurance Score can be more predictive than motor vehicle reports (MVRs). For example, not everyone with driving record blemishes is going to be a bad risk. Having more information from different perspectives allows for further refinement in decision making. In other words, using Insurance Scores in addition to MVRs and other traditional risk characteristics provides a strong evaluation system. What aspects of the credit report are included in the Insurance Score? The Insurance Score model considers many aspects of the individual s credit management history, including, but not limited to: number of open accounts and payment history. In particular, the model considers the presence of any major financial blemishes such as bankruptcy, liens, foreclosures, etc. 3
Will a missed payment adversely affect a customer s score? Scores depend on many characteristics and the relationship between them to give the best possible snapshot of the individual. It is unlikely that an isolated event will influence a customer s score sufficiently to contribute to an adverse underwriting decision. More important are overall credit patterns. Does a person s income, address, or occupation affect a score? No. Information on income, address, or occupation is not used. In fact, no demographic or socioeconomic data is used in the Insurance Score model. Can young people or those who have little or no credit history still develop a score? In order to secure a consumer s credit history, there must be at least one tradeline, or credit obligation, with some activity during the last six months. Many young people are starting their credit experience early and have significant credit histories to use for scoring. The Insurance Score model takes into account those consumer credit histories that are thin (having little history), as well as those that are thick (many years of history). The statistical weighting of the information provides an objective evaluation regardless of the amount of experience. 4
If a customer has no credit history, will he or she be denied coverage? Based on this fact alone, absolutely not. When we receive a No Score, it tells us a match has been made with the National Credit File but there is insufficient data to develop an Insurance Score. No Score may affect the applicant s eligibility for preferred pricing tiers. Is Insurance Score used for any other purpose? In some states, Insurance Score may be used to determine eligibility for certain payment terms. Why do I need to ask the customer for a Social Security Number and date of birth? The use of the customer s Social Security Number and date of birth greatly increases the likelihood of a match with the National Credit File. Both data elements are important especially if the customer is a Junior or Senior. No Hit messages tell us that a match could not be made. Similar to a No Score result, we will not decline an applicant based solely on a No Hit, but a No Hit may affect the applicant s eligibility for preferred pricing tiers. Does my agency have to obtain a customer s permission before ordering an insurance score? The states of Minnesota, Montana, and Vermont are the only states requiring you to obtain the customer s permission before ordering an insurance score. In Minnesota, this permission must be obtained in writing by law. In Montana and Vermont, permission can be obtained verbally if business is being transacted by telephone, but the permission must be confirmed in writing with 5
the signed application, before issuing the policy. (In Minnesota and Montana the same rule applies to any consumer report, such as a CLUE report). In Colorado, Florida, New York and Utah, a notice that you are ordering an insurance score must be given to the applicant prior to ordering the score. This notice must be in writing or in the same form as the application. For example, if a prospective customer seeks a quote over the phone, you can verbally advise the caller that you will order a score and then follow up with a written notice if a written application is later submitted. (In New York and Utah, this rule applies to any type of consumer report. In New York the notice should include the name and address of the consumer reporting agency, or expressly indicate this information is available upon request; and Utah law requires notice only for homeowners or residential liability coverage). In all other states, The Hartford recommends as good business practice, the notification of applicants prior to ordering any consumer report. We have a form for this purpose, which is part of our Best Practices manual available to all of our agents. In addition, in all Privacy ct states (rizona, California, Connecticut, Georgia, Illinois, Minnesota, Montana, Nevada, New Jersey, North Carolina, Oregon, and Virginia) agents must provide applicants with a copy of The Notices of Insurance Information Practices form when initiating collection of Insurance Score or other consumer report information. Copies of the required notice forms to comply with the above are available from your Hartford Personal Insurance Center. When my agency requests an Insurance Score, will our name appear on the customer s credit file? No. In response to requests from agents, Insurance Score inquiries will be posted on the customer s credit file as coming from a Hartford gency. 6
Can I get a copy of my customer s credit report from The Hartford? Not from The Hartford, because our underwriters are not routinely provided with the credit report. Our Point-Of-Sale System simply returns a recommendation that ranges from a Premier Score to an Unacceptable Score, including the most significant factors influencing the score. Can customers request a copy of their credit reports from the Consumer Reporting gency? bsolutely. Consumers can obtain a copy of their credit report at anytime. The Consumer Reporting gency can charge a reasonable fee for this service. In addition, if any adverse action was taken in the last 60 days, based on information contained in the report, such as a denial of insurance or an increase for charge in insurance, the Federal Fair Credit Reporting ct requires credit bureaus to provide a copy of the credit report free of charge. Customers who wish to receive a copy of their credit reports should contact the consumer reporting agency directly. Can the customer question information on a credit report? bsolutely. To question a credit report, the disputed information should be presented to the consumer reporting agency, with supporting documentation, if available. The credit bureau researches the claim and checks with the credit grantor, collection agency, or public record source to see if an error has been reported. (s a reminder, less than 1% of all credit report challenges are proven errors.) If the bureau identifies a mistake, it will change or delete the information accordingly. If changes or deletions result 7
due to an investigation, the individual may request that an updated credit report be sent to anyone who received the inaccurate report in the past six months. Information that can t be verified will be removed from the file. If an individual and a credit grantor disagree on any information, the individual must resolve the dispute directly with the credit grantor who provided the information in question. Federal law mandates that once an error is challenged, resolution must take place within a specific time frame or the information must be removed from the file. If an item is found to be correct, but the individual feels it deserves further explanation, a brief statement can be written by the individual and placed on the credit file. These statements will be disclosed each time the credit file is accessed. The Hartford is committed to using Insurance Scores in a responsible manner and is happy to reconsider an application if our decision to decline was based on erroneous information. Talking With Customers bout Insurance Scores My customer is a responsible person who has never been late with a payment. In fact, he just got a new mortgage. How can he have a low Insurance Score? Both banks and insurance companies are using credit-based models to evaluate the risk presented by prospective customers. However, the model that produces an Insurance Score is not the one used by lenders to evaluate credit worthiness. Our Score is derived from a unique mathematical formula applied to specific aspects of financial behavior in order to determine the probability of an insurance loss. 8
My customer is a responsible person who has a low Insurance Score but has never had a claim. Why should her low score be an adverse characteristic? Like any underwriting characteristic, the Insurance Score is applicable to customer groups. For example, some teenage drivers will never have an accident. s a group, however, teenage drivers experience many accidents. Similarly, we ve been able to demonstrate that, as a group, customers with low Insurance Scores tend to have more losses than those with high Scores. How can I explain this new concept to customers? It s really not entirely new. The CORD application for property insurance has questioned the applicant about bankruptcy, etc. for many years. What s new is our ability to understand, and consistently and objectively measure, how financial behavior correlates with loss experience. You can explain to the prospective customer that an insurance score measures the likelihood of future insurance losses based on an analysis of past financial behavior. In addition, many companies offer better pricing for persons with above average insurance scores. Insurance Scores and Your gency What are the agency s FCR and Privacy ct responsibilities in using Insurance Scores? First, you must comply with any notice and permission requirements applicable in your state. These requirements are explained earlier in this booklet and are also set forth in The Hartford s Best Practices Guide, which is distributed to all agents. 9
In addition, there are certain notice requirements that apply under the FCR and your state s Privacy ct, if any, when any adverse underwriting action is taken based in whole or in part on an Insurance Score or other consumer report. basic principle of such laws is the dissemination of accurate information (i.e. if negative action is taken as a result of data obtained, consumers have a right to know the source of the information and to obtain a copy of their information from that source to ensure its accuracy). These notice requirements are detailed in The Hartford s Best Practices Guide. If you do not have a copy of this guide, please contact your Hartford Personal Insurance Center. With regard to using Insurance Scores, will my contract with The Hartford indemnify my agency, if necessary? Your agency agreement includes indemnification provisions for your use of our Insurnace Score System. How can an agency obtain a prospective customer s Insurance Score before submitting an application? Use The Hartford s Point-Of-Sale (POS) System. POS reports, including an Insurance Score description, allow an agent to provide a likely match between prospect and company up front at the point of sale. POS helps agencies avoid the need to re-sell the policy when an application is declined days or even weeks after submission. When an application has multiple drivers is there a Best Practice to identify which individual the Insurance Score is ordered on? Hartford s Best Practice is to order an Insurance Score on the individual requesting the policy. Once you ve determined that individual and ordered the Insurance Score, it s critical to our 10
operational process that the individual the score was ordered on is the driver listed first on the application. By following this practice you ensure that there are no mismatches between the Insurance Score provided by POS and the score developed by the Company. How does a Point-Of-Sale contract work exactly? The use of Point-Of-Sale report-ordering software is controlled by a contract between each agency and the consumer-reporting agency. The Hartford acts as a sponsoring carrier, without which the software would not be provided. We have agreed to sponsor the ability to order MVRs, CLUE Reports, and credit-based Insurance Scores. Each agency is given a Hartford account number, as well as an agency account number. The Hartford pays for the reports ordered by the agency on our account. We monitor the billings and will address any major discrepancies between the number of reports ordered and the new policies placed with us. gencies may use their own account numbers to order reports at their own expense, at any time. These reports are billed directly to the agency. 11
Conclusion How will use of Insurance Scores benefit my agency? Insurance Scores help you identify poor insurance risks, and make the appropriate decisions. We have already seen significant loss ratio benefits for both agencies and our company. In fact, we re so confident in Insurance Scores that they are now an optional component of our gency Classification and Compensation Program*. Except in the states noted below, Insurance Scores may be used as an alternative measure of loss performance for agencies that would otherwise qualify for the Platinum, Gold or Silver Classes. This option is possible because Insurance Score is so highly correlated with Loss Ratio, particularly with regard to Unacceptable Scores. So even if your agency s Loss Ratio doesn t meet Classification guidelines, you may still have an opportunity to qualify by using the alternative guidelines below: n agency with a 3-Year IBP (Incentive Bonus Plan) Loss Ratio that exceeds 60% that would otherwise qualify for the Platinum or Gold Class, may still qualify if the Unacceptable Insurance Scores on the agency s total Hartford Personal Lines Book represent 2% or less of the total. n agency with a 3-Year IBP Loss Ratio that exceeds 65% that would otherwise qualify for the Silver Class, may still qualify for Silver if the Unacceptable Insurance Scores on the agency s total Hartford Personal Lines Book represent 4% or less of the book. * This option is not presently available in C, CT, G, ME, MI, NH, NJ, WV. The Hartford may discontinue this feature at any time upon written notice to the agency. 12
not-so-obvious benefit of Insurance Scores is that they can identify good insurance risks that may have been hidden under generic underwriting criteria. For example, Premier and Superior Scores are allowing us to open the underwriting window to youthful operator exposures and to individuals with incidents on their driving records - even to prospects coming from a nonstandard carrier. Further, the best Insurance Scores allow our underwriters to provide customers with a better rate than that indicated by traditional criteria alone. We re confident that our Score-based underwriting approach is helping us both write a larger share of better business, in a greater segment of the marketplace. 13
105050 Printed in U.S.. 2001 The Hartford, Hartford, CT 06115