Insurers unlikely to alter credit scoring as agencies pursue uniformity

The decision by the three major consumer credit reporting agencies to create a more uniform credit scoring system is not expected to have a major impact on insurers’ use of credit in rating personal lines insurance policies, although some think insurers would be better off to simplify theirs as well.

Equifax, Experian and Trans-Union said their new “Vantage-Score” is the result of market demand for a more consistent approach to credit scoring. In the past, each agency used its own proprietary formulas to create a score, meaning that a lender dealing with a consumer’s application for a credit card or a mortgage might have to reconcile three widely-different scores. The new system uses a single formula to create the scores.

The new system may make it easier for lenders and may eliminate some of the criticism leveled at the credit scoring companies by lenders and consumers.

But insurance trade groups question whether the simplified approach of the three companies will cause any splash in the controversial world of insurers’ use of credit scores.

“Insurers use different systems and scoring models such as

Fair Isaac Corp. (FICO), Choicepoint and proprietary scores. These models are different from the consumer lending focused credit scores by Equifax, Experian and TransUnion,” said Jeff Junckas, director of public affairs, American Insurance Association. “A likely guess is that this new scoring system from the three companies is designed to rival FICO’s generic credit score, which is designed to predict the likelihood of a bill going 30 days late in a 24 month timeframe. This is not what insurers are looking for when they use credit-based insurance scores. Insurers are trying to predict future claims.”

Different approach

Insurers explain that what they do differs from what lenders or credit card companies do.

“Credit-based insurance scores can only be developed using insurance claims data. They are completely distinct from scores based on credit histories that are designed and developed for other purposes such as making decisions about the granting of credit,” Diana Lee, Property Casualty Insurers of America, assistant vice president, research told the Federal Trade Commission last year. Lee said that elements that “for any reason should not be used for insurance underwriting purposes” are not included in credit-based insurance scoring models.

A 2003 survey by the National Association of Independent Insurers found that about 20 percent of insurance companies using credit scores created their own models or had customized ones developed with outside help.

A survey by Conning & Co. found that more than 90 percent of insurers use credit data but they vary in the data they use.

Oregon Insurance Administrator Joel Ario, former chairman of the Credit Scoring Working Group of the National Association of Insurance Commissioners, thinks the standardization of the three major agencies is good move. “I personally believe insurers would be better off if they had more standardization, much like the banking industry,” Ario said.

The National Association of Mutual Insurance Companies also thinks that the decision by the three major credit scoring companies is a positive one. “Strictly from a consumer standpoint, this move will definitely ease some consumer frustration and generally is a positive development,” said Neil Alldredge, NAMIC senior director of state advocacy.