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Credit Scoring Update

Credit Scoring Update . John Wilson – ChoicePoint CAS Seminar on Ratemaking March 14, 2006. Just for Fun. A Vendor Perspective. Carrier Usage Continues to Grow It is Increasingly Sophisticated Yet it Remains “Controversial” Regulatory Issues Continue to Arise But Where and “What” Changes.

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Credit Scoring Update

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  1. Credit Scoring Update John Wilson – ChoicePoint CAS Seminar on Ratemaking March 14, 2006

  2. Just for Fun

  3. A Vendor Perspective • Carrier Usage Continues to Grow • It is Increasingly Sophisticated • Yet it Remains “Controversial” • Regulatory Issues Continue to Arise • But Where and “What” Changes

  4. Challenges to Data Providers • Trying to prove value of scoring • Defending the attributes used • Like carriers, being asked “why?”

  5. Challenges to Data Providers • Consumer Protections / Data Security • How to provide needed data to agents while also protecting sensitive info? • User agreements require permissible purpose • Truncate SSN • Limit distribution to carrier sponsored agents

  6. What Has Changed? • How has insurer use of credit changed? • More complexity / More granularity • By coverage / in Tiering / in GLMs • In small commercial lines • Better talking points and communications • How is credit changing? • New bankruptcy laws / higher minimums • More expanded payment terms • More “sub-prime” and youthful targeting

  7. Regulatory Examples • Michigan, Minnesota • Texas-Studies • Georgia-Guidelines • Florida – Reg. Promulgation • AL, NJ, NY, LA • FTC Study

  8. Regulatory Examples • Politicians in Michigan and Minnesota are on record as favoring a ban on credit scoring, despite strong industry support points • Relying on anecdotal cases and citing perceived errors and discrimination

  9. Regulatory Examples • Two separate studies were conducted in Texas, one by the University of Texas and the other by the Insurance Department. • Although partisans can each point to study findings which support their perspective, the outcome is widely considered positive for the industry.

  10. Regulatory Examples • The Georgia Insurance Department hired outside actuarial firms to review scoring models against State requirements. While several models were approved, the exams are not available publicly until “certified.” They are currently considered work papers. • “Draft” guidelines restrict renewal use, make treatment of unscored or disputed reports more complicated, and slow approvals.

  11. Regulatory Examples • Florida’s OIR recently “adopted” an onerous regulation that the industry fought hard. The reg still faces a legal challenge, but the OIR has been asking questions on filings which are drawn from the contested reg. • As written, it may have the effect of a ban due to an impossible required proof

  12. Regulatory Examples • Provide conclusive demonstration that scoring is a valid predictor of insurance risk, that all parameters are significant; not overlapping or duplicative of other rating factors. • Provide all data used in model development to allow the OIR to conduct multiple regression testing of the scoring method. (Test every vendor and carrier model?) • Prove that scoring does not have a disproportionate impact on protected classes

  13. Recent Update in Florida • Use of Credit Reports and Credit Scores by Insurers                     69O-125.005 • NOTICE OF CHANGE • Notice is hereby given that the following changes have been made to the proposed rule, in accordance with subparagraph 120.54(3)(d)1., F.S., published in Volume 31, No. 26, July 1, 2005, of the Florida Administrative Weekly.  These changes are being made in response to concerns received by the Joint Administrative Procedures Committee. • Proposed Rule 69O-125.005(9)(g)2. is changed to read: • 2. Alternatively, insurers may submit statistical studies and analyses that have been performed by educational institutions or independent professional associations that indicate that there is no disproportionate impact on any of the classes set forth in Section 626.9741(8)(c), F.S. attributable to the use of credit reports or scores.  Any such studies or analyses shall have been done concerning the specific credit scoring model proposed by the insurer. • The remainder of the rule reads as previously published.

  14. More Regulatory Examples • AL now asks carriers to treat no-hits more favorably for older applicants • NJ wants all reason codes to be adverse • A bill has been introduced in NJ to ban the use of education and occupation • In NY, a bill introduced would require disclosure to principals of a business when their personal credit will be used

  15. More Regulatory Examples • Louisiana – Directive 196 (March 1) • An insured has the right to be exempt from the use of adverse credit information directly or indirectly caused by Hurricane Katrina and/or Hurricane Rita • Upon demonstration by an insured, ignore adverse entries on or after August 26 that are Hurricane related for U/W or rating • Requests this also apply in comml lines

  16. FTC Study • The FACT Act requires this study, both for personal lines insurance and for personal credit markets as well. • To address the impact of scoring on availability and affordability, and considering certain protected classes. • What will be found? Will the result differ between insurance and banking?

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