Actuaries Learn State of
the Credit Scoring Debate

economic downturn may have a detrimental effect on policyholders who have been adversely affected by the economy, he said.

SAN DIEGO, CALIF. — The use of credit by insurers as a rating and underwriting factor continues to be scrutinized and criticized, as a result of the difficult economy and a belief by many public policymakers that resulting hardships have led to a worsening of credit scores, causing increased insurance rates.

are concerned that the weighting of
the characteristics and the formulas
that make up the scores are unknown
to regulators and policyholders; oth-
ers are concerned the scores may be
correlated with income or other de-
mographic traits that might otherwise
be prohibited as risk classifications;
while still others observe the recent
Nordman said his organization held
extensive public hearings and com-
mittee meetings on the issue during
2009-2010, explaining how in-
surers use credit-based insurance
scores and discussing how current
economic conditions have affected
policyholder premiums related to
the scores.

With continued debate over credit at the federal level and the Michigan Supreme Court ruling that a ban on the use of credit was not within the authority of the state insurance regulators, it may be that the credit scoring controversy has never been more volatile.

However, for insurers, the message remains the same. A panel session at the Casualty Actuarial Society’s recent Spring Meeting discussed developments on the issue with the National Association of Insurance Commissioners (NAIC) and examined current industry viewpoints.

“The increasing use of credit-based insurance scores is one of the most important developments that has happened in automobile and homeowner insurance personal lines underwriting and rating, and over time there has been increased use of credit-based scores as an analytical tool both for underwriting risk and for pricing risk,” said Eric Nordman, the NAIC’s director of regulatory services.

During the past 20 years, many consumer groups and regulators have questioned the reliability and predictability of the scores and the possible disproportionate or disparate impact on minority and low-income populations, he said. These have long been a cry of the consumer groups as a reason they challenge the use of credit-based insurance scores in insurance underwriting and pricing, Nordman said.

The controversy revolves around whether it is predictive and not everyone agrees that it is, he said. Some