One of the liveliest exchanges on my new blog was prompted early on by my Sept. 19 filing of Associate Editor Mark Ruquet's NU column on the credit scoring controversy, “Credit Scoring A Sore Point For Consumers.” We received so much reader feedback that a few days later, on Sept. 22, Mr. Ruquet filed his own “Counterpoint” on this blog to respond to reader critiques, urging credit scoring proponents to “take off their blinders” and consider consumer concerns. With more responses pouring in, he penned a second column in the Nov. 20 edition of National Underwriter that is reprinted below. Feel free to continue the debate on this blog!

Readers Talk Back On Credit Score Debate

BY MARK E. RUQUET

One of the greatest fears of a reporter or any writer is not being read. So it was with some satisfaction to receive many responsespro and conto my column on credit scoring. Ive received one or two comments on past columns, but in comparison, the reaction to my most recent piececalling the practice into questionwas an avalanche.

Readers had two chances to comment: once, when my views appeared in this space on Sept. 18 (Insurers Shoot Messenger, Then Ignore The Message), and then after my editor, Sam Friedman, posted my column on his blog (www.property-casualty.com) later that week.

Some agent readers agreed that the use of credit scores is controversial in the eyes of consumers, and raises suspicions. While unscientific, this might be a real indicator that among those who have to sit in their offices and explain the practice to customers, its not an easy sell.

While reading your columnI was gratified to see that someone in the insurance industry is finally willing to admit and pronounce the fatal flaw in insurance scoringthe unreliability of the source, wrote Len Stayton in an e-mail. As an active agent working with clients on a daily basis, I see the damage that is done to consumers by this system of credit reporting that our industry has come to rely on so heavily.

Another agent e-mailed to say he felt there was something to the opinion that the industry has a tendency to shoot the messenger instead of listening to the message. He also agreed that the industry is vulnerable to being inadvertently caught up in any alleged credit scoring abuses.

He felt that while slow payers increase expenses for insurers, the raw data for credit scoring does have defects. He concluded it would be wise for the industry to demonstrate some flexibility and listen to the criticismto make the process better before the whole system is outlawed, even where it can be actuarially supported.

I agree with you that this will blow up in someone's face, said a third agent in a private e-mail, who requested anonymity. Since Im an agent, I know who the angry consumers will vent on.

Others, however, remained steadfast defenders of credit scoring.

This is just another example of how truth is being pushed out in favor of emotion more and more, wrote Todd R. Bault, a senior analyst on non-life insurance for
Sanford C. Bernstein LLC, in New York, posting to Sams blog.

Credit variables relate to insurance usagei.e., how often one claims, he said. They do not penalize for credit crises, but they do penalize for using lots of credit because that is highly correlated to insurance usage. And compared to other data sources, credit is more accurate because people care more about it. That's part of why it works so wellthe datas good.

It seems to me the question to be answered is: Does the use of credit accurately predict losses? wrote David Voteau on Sams blog. If the answer is no, then why have so many insurers switched to using it? And why have their loss ratios improved? If the answer is yes, and the stats back it up, then let's quit having this debate.

The stats show there is a definite link between poor credit and poor driving habits, he continued. Basically, it is a life-style choice people make, and the way some people treat credit relates to the way they drive.

Another agent wrote in an e-mail that I had missed the proverbial ship on this one. Though he had not read the Consumer Reports article casting doubt on the practice, he said insurers use credit scores in pricing personal lines because there is a clear correlation between poor scores and poor drivers. Databases, he noted, are never 100 percent accurate, but this one is far more accurate than inaccurate.

We were buying a new car for cash recently, but the car dealer pulled out his chart showing loan rates. The chart listed credit score across the top and then rates that became progressively higher based on the scores. Its interesting that there is not a public outcry about this like there is about insurers using the scores, Stan Chraminski, with Learning and Organizational Development, noted on Sams blog. The question is, how do we get like the banks, where the use of scores seems to be so readily accepted?

No matter which side of the issue you are on, questions are still being raised and voters are being asked to answer them.

John Desmarteau, president of the Professional Insurance Agents of Oregon/Idaho, noted on Sams blog that Oregons referendum on whether to ban credit scoring was taking place on Election Day. Measure 42, as it was called, went down to defeat, by 65 to 35 percent.

Current law in Oregon, he noted, allows for the use of credit scores only on initial applications, and prohibits its use to raise or drop rates on existing customers. The association, he added, supports their use.

Eliminating the use of credit information would be unfair to the great majority of insurance customers who carefully manage their business and personal finances, he wrote. Responsible individuals and well-run businesses end up subsidizing the insurance costs of those that arent as careful. Without credit scoring, rates are higher for everyone.

He added that removing tools that have proven to be accurate will only result in unfair cross-subsidies between risk groups.

At least in Oregon, instead of simply assuming the issue is not worth arguing over, members of the industry put up a case to consumers that there is some benefit to credit scoring for them, and won the day. (See Oregon Voters Okay Credit Scoring For Insurance Rating, Nov. 13, page 33.)

Meanwhile, in Michigan, the state Appeals Court is considering whether to reinstate the insurance departments regulations banning the use of credit scores.

Pro or con, this issue is not settled. If insurers really believe it is, they could be in for a rude awakening one day from a consuming public that still views the industrys use of credit scores with a sense of suspicionone I cant help but share because of the unreliable nature of the source data itself.

To comment further on this issue, contact Associate Editor Mark E. Ruquet at mruquet@nuco.com, or right here on Sam's blog.

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