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

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

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?

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

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?

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

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

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

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)

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?

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