Insurers Have Opportunity To Define Terms Of Loss History Database Debate Hard markets create political backlash.

Certain legislators will always seek a “villain” when insurance premiums rise. When it comes to auto and homeowners coverage, insurers who use credit-based insurance scores and electronic loss histories to underwrite their policies make a convenient bad guy.

During the initial stages of the debate over the use of insurance scores, the political rhetoric was heated and insurers response was perceived as defensive. Gradually, however, the tone of the debate became more rational and most states that took action in 2002 to regulate the use of insurance scores enacted compromises. The compromises established reasonable consumer safeguards while allowing companies to continue to utilize this effective underwriting tool.

While it is still a significant political issue in many state legislatures, discussions with public policy makers about the use of insurance scores are considerably less contentious. Instead, the debate has shifted from efforts to ban the practice, to one of how to fairly regulate the use of such scores.

This change in tone is significant, as Congress will consider renewing the federal Fair Credit Reporting Act (FCRA)–the federal law that allows insurers to access credit-based insurance scores–this year. Many of the same arguments that have taken place at the state level are likely to be repeated on Capitol Hill.

Insurers listened to the concerns of consumers and agents about disclosing the use of insurance scores and explaining the correlation between credit history and risk. Many companies made a concerted effort to communicate with policyholders, agents, public policy makers and the media.

NAII is pleased to have played a role in this process by conducting, along with other national trade groups, a series of consumer focus groups on the use of insurance scores, educating member companies on the findings of this research, and producing materials that help companies effectively communicate with policyholders.

The current debate over the use of electronic loss history databases to underwrite coverage–particularly homeowners policies–has many of the same characteristics: angry politicians armed with anecdotal evidence of constituents who cant find insurance; a powerful special interest group (in this case real estate brokers) that claims its business is suffering from unfair use of loss history information; and confused consumers upset about rising insurance prices.

However, NAII believes that there are four significant differences in the debates over insurance scores and electronic loss histories–commonly referred to as C.L.U.E. (Comprehensive Loss Underwriting Exchange) reports–that provide insurers with an opportunity to win the public policy debate.

First, consumers and public policy makers intuitively understand the direct correlation between past losses and future claims. Unlike credit history, which, as we have learned, requires a significant amount of education before earning the acceptance of consumers and policymakers, it is much easier to demonstrate the relationship between loss history and future claims activity.

It is widely accepted by consumers and public policy makers that individuals with a history of moving violations and accidents (even those that dont result in insured losses) and of previous insurance claims are more likely to have more frequent and more severe insured auto losses in the future. Likewise, consumers, legislators and regulators understand and accept that loss history is one of the most important factors that insurance companies use to underwrite and rate homeowners insurance policies.

Second, the exchange of loss histories has been going on for years. In the early 1990s, some insurance companies began to use a loss history database operated by an outside vendor to access important underwriting information. ChoicePoint operates the C.L.U.E. database, while the Insurance Services Office maintains the Automated Property Loss Underwriting System (A-PLUS) database.

By agreeing to post its companys loss data to the database, an insurance company gains the ability to access loss data from other companies. This allows all participating insurers to access accurate information about losses, including specific dates, causes and the extent of damage. These advances in technology have streamlined this process, allowing insurers to make more accurate and more timely underwriting decisions. This benefits home buyers, home sellers, realtors and insurers.

Third, it is difficult to justify realtors claims that the use of automated loss history reports is impeding real estate sales. There is no evidence to suggest that home sales have been affected by a supposed inability to obtain homeowners insurance. In fact, the National Association of Realtors recently reported that existing homes sold at an annualized rate of 6.09 million houses in January 2003, a 3 percent gain from December 2002, and the strongest monthly rate ever.

Finally, insurers are seeing the value of aggressively communicating their views on automated loss histories to consumers, public policy makers and the media. Just as insurers use historical data to predict future losses, the industry has learned much from the debate over credit-based insurance scores that can be used in the discussion over loss history databases.

People are naturally skeptical of what they dont understand. Individuals feel deceived if they believe corporations are “hiding” something from them.

For most consumers, disclosure equals innocence and information leads to acceptance. By reaching out to key audiences before being put on the defensive by opponents, insurers can define their messages, establish the terms of the debate, and generate wider acceptance of the use of loss history databases.

Such efforts will help us avoid the political and public relations pitfalls we encountered early in the insurance scoring debate and allow insurers to engage public policy makers in discussions over the use of loss history databases from a more positive starting point.

Jack Ramirez is president of the National Association of Independent Insurers in Des Plaines, Ill.

Reproduced from National Underwriter Edition, April 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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Insurers Have Opportunity To Define Terms Of Loss History Database Debate

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