Credit Scoring: No Surprises

The public doesn’t like surprises—especially when those secrets involve the use of personal financial info. Credit scoring has been around for years, but like the use of non-OEM parts, it’s safe to say that the public is not overly aware of its applications in the insurance world.

For many insurance companies, credit scoring is an integral part of the underwriting process. If underwriters were not allowed access to crucial information about prospective insureds, their job would be little more than blind guessing.

Kevin Callahan of the Bob Callahan Agency Inc. in Albany, N.Y., describes credit scoring as a “real hot-button topic.” “Many people feel as though they have been discriminated against, and even those who benefit from it seem to resent having insurance companies accessing this type of information,” Callahan said.

Despite this, Callahan said they have used the tool for about five years, and from an agency standpoint have developed a way to tell the customer about it in the “least threatening way possible.”

“Personally, I have very mixed opinions about it. My belief is that the companies who lead our industry were in search of a way to eliminate the need for an agent to ‘front line underwrite.’ I think that the hope was that with a CLUE, credit score, and MVR information, an automated way to underwrite and issue policies would be developed. The ‘magic bullet’ never materialized.”

The credit scoring issue was recently dragged into the spotlight with the release of a new study by Conning & Company called “Breaking the Silence” that looks at auto insurers’ use of credit scores. The study reveals that out of the 100 largest personal automobile insurers, 92 percent of them use credit information in underwriting new business.

In Georgia, Insurance Commissioner John W. Oxendine has subpoenaed six insurance companies to appear at a Sept. 13 public hearing examining credit scoring practices in the state’s insurance industry. “There is a very good argument that only certain risk factors, such as driving record or type of vehicle insured, should be used when determining eligibility or rates,” Oxendine stated. “I am concerned about the potential adverse impact that credit scoring may have on our most financially vulnerable citizens.”

Hopefully, the Georgia hearing will serve to shed more light on the practice and be more educational than critical. But regardless, the public won’t like the fact that their credit history can affect their premiums.

The bottom line is that insurance scoring is a valuable tool, but there should be no surprises. Agents need to have agreements in place with every carrier represented that clearly spell out the roles and responsibilities of all parties if credit scoring is used.