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Issues in Implementing Credit as a Rating Variable

Issues in Implementing Credit as a Rating Variable. John Wilson - ChoicePoint CAS Ratemaking Seminar – Tampa, FL March 7-8, 2002. Issues Outline. Credit Scoring Overview / Status Implementation Questions to Answer Regulatory Trends Challenges to Consider Suggestions for Use.

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Issues in Implementing Credit as a Rating Variable

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  1. Issues in Implementing Credit as a Rating Variable John Wilson - ChoicePoint CAS Ratemaking Seminar – Tampa, FL March 7-8, 2002

  2. Issues Outline • Credit Scoring Overview / Status • Implementation Questions to Answer • Regulatory Trends • Challenges to Consider • Suggestions for Use

  3. Overview and Status • Insurance Scores are Not New • In use for more than eight years, but • Increasing usage brings attention / challenges • How Widespread is their Use? • Conning study suggests > 90% • IL DOI study shows 68% auto / 79% property • Use to RATE - 61% auto / 29% property

  4. Implementation Questions • Will it work on our book? • Should we use industry or custom scores? • How can we test industry scores? • Can we develop custom scores? • What performance period is best?

  5. Implementation Questions • What rating strategy will we choose? • Tier eligibility or rate factor? • Surcharges? Discounts? • How will we determine “cut-offs”? • How do we avoid “double counting”? • Cross-correlation with Age • Lack of Proof of Prior Coverage

  6. Implementation Questions • Where will it fit in the process? • After initial quote? - Effect of later up-rates? • At POS? How to align with rating software? • Will the agent receive the report? The score? • Who will provide required notices? • How will the groups this impacts respond?

  7. Implementation Questions • Which applicant(s) will be scored? • May depend on how the score was developed • One applicant stands for the household? • Allow / Require multiple orders? • How to interpret multiple scores for a risk? • Choice can significantly impact outcomes

  8. Implementation Questions • Score at renewal as well as when new? • How long is an indication “good for”? • Industry scores developed for 12 month window • How quickly and significantly do scores “migrate” over time? • What portion of the book would be re-rated? • How do indications differ on new/renewal? • IL study shows 14-15% periodically re-check

  9. Regulatory Trends • Early responses ranged from calls to ban credit report use to calls for more study • DOI and Legislative concerns are now leading to more specific rules / restrictions • Some emerging trends include: • No non-renewal based on credit alone • “No sole use” or similar provisions • Enhanced consumer communication

  10. Regulatory Trends • Emerging trends (continued): • Special treatment of those not scoreable • may not reflect performance of “no-hits” • Special treatment for credit inquiries • Consideration of medical or other extenuating circumstances for some derogatory data • Written standards for application of scores • Use for discounts only (renewal & new)

  11. Challenges to Consider • Industry critics charge that the use of credit violates some accepted Principles • Is Classification Ambiguity at an acceptable level? • Is Scoring Subject to Minimal Manipulation? • Is it Publicly Acceptable?

  12. Suggestions for Use • Consistency in application of scoring • Full complement of explanatory material for use with regulators, producers, consumers • Open the “black box” - perhaps with limits • Periodically review / audit compliance • Avoid “sole use” - especially on renewal • Support reasonable regulations on use

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