1. Casualty Actuarial Society Seminar on Ratemaking “American Academy of Actuaries Update on Credit Scoring” Moderator:Walter C. Wright, Chairperson, Risk Classification Subcommittee Panelists:Lisa Smego, Senior Policy Analyst, Office of Insurance Commissioner, Washington State Alan Wickman, Administrator, Actuarial Department, Nebraska Department of Insurance March 27 - 28, 2003 San Antonio, TX Mercer Risk, Finance & Insurance ConsultingPage 1 of 8

2. The American Academy of Actuaries is the nonpartisan public policy organization for the U.S. actuarial profession. The Academy provides independent analysis to elected officials and regulators, maintains professional standards for all actuaries, and communicates the value of actuarial work to the media and the public. Mercer Risk, Finance & Insurance Consulting AmericanAcademyof Actuaries American Academy of Actuaries Page 2 of 8

3. The Parties Involved The Credit Scoring Working Group of the Market Regulation & Consumer Affairs (D) Committee of the National Association of Insurance Commissioners requested assistance from The Risk Classification Subcommittee of the Property/Casualty Products, Pricing and Market Committee of the American Academy of Actuaries Mercer Risk, Finance & Insurance ConsultingPage 3 of 8

4. Mercer Risk, Finance & Insurance Consulting The NAIC’s Request The NAIC requested specific assistance: 1. Review and critique four published papers, by: Monaghan (2000) Fair, Issac (1999) Conning & Company (2001) Virginia Insurance Bureau (1999) 2. Provide guidance/parameters on how the NAIC could conduct a study of credit scoring, including: Determination of causality Whether credit scoring has disproportionate impact on protected classes or on low income groups 3. Recommend best regulatory practices that states could use for reviewing rating plans Page 4 of 8

5. Risk Classification Subcommittee Chairman: Walter Wright, Mercer Risk, Finance & Insurance Members: Leo Bakel, State Farm Insurance Companies James Monaghan, MetLife Auto and Home Chet Szczepanski, Pennsylvania Insurance Department Rae Taylor, Oregon Insurance Division Pat Woods, Insurance Services Office, Inc. Affiliate Member: George Dieter, Travelers Insurance Company Alan Wickman, Nebraska Department of Insurance American Academy of Actuaries Staff: Greg Vass, Senior Casualty Policy Analyst Mercer Risk, Finance & Insurance ConsultingPage 5 of 8

6. Role of the Subcommittee Represent the Academy Provide disinterested actuarial advice and guidance Do not advocate or lobby for any particular position Do not represent our employers Mercer Risk, Finance & Insurance ConsultingPage 6 of 8

7. Major Challenge for the Subcommittee Issue of disproportionate impact on protected classes and low income groups What is meant by disproportionate impact? Why is this an appropriate standard? How much is too much? Most rating tools probably have a disparate impact. Disparate impact: defined as disproportional impact with no business necessity. Measuring disparate impact much more complicated than measuring disproportionate impact. Which protected classes (race, religion, ethnicity) and income groups to study? There are hundreds of possibilities. Mercer Risk, Finance & Insurance ConsultingPage 7 of 8

8. Future Work The NAIC has asked that we review papers by: Consumer Federation of America Texas Department of Insurance Alaska Department of Insurance Mercer Risk, Finance & Insurance ConsultingPage 8 of 8