One of the liveliest exchanges on my new blog was prompted early onby my Sept. 19 filing of Associate Editor Mark Ruquet's NU columnon the credit scoring controversy, “Credit Scoring A Sore Point ForConsumers.” We received so much reader feedback that a few dayslater, on Sept. 22, Mr. Ruquet filed his own “Counterpoint” on thisblog to respond to reader critiques, urging credit scoringproponents to “take off their blinders” and consider consumerconcerns. With more responses pouring in, he penned a second columnin the Nov. 20 edition of National Underwriter that is reprintedbelow. 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 notbeing read. So it was with some satisfaction to receive manyresponsespro and conto my column on credit scoring. Ive receivedone or two comments on past columns, but in comparison, thereaction to my most recent piececalling the practice intoquestionwas an avalanche.

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

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

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

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

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

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

Others, however, remained steadfast defenders of creditscoring.

This is just another example of how truth is being pushed out infavor of emotion more and more, wrote Todd R. Bault, a senioranalyst 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 oneclaims, he said. They do not penalize for credit crises, but theydo penalize for using lots of credit because that is highlycorrelated to insurance usage. And compared to other data sources,credit is more accurate because people care more about it. That'spart of why it works so wellthe datas good.

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

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

Another agent wrote in an e-mail that I had missed theproverbial ship on this one. Though he had not read the ConsumerReports article casting doubt on the practice, he said insurers usecredit scores in pricing personal lines because there is a clearcorrelation between poor scores and poor drivers. Databases, henoted, are never 100 percent accurate, but this one is far moreaccurate than inaccurate.

We were buying a new car for cash recently, but the car dealerpulled out his chart showing loan rates. The chart listed creditscore across the top and then rates that became progressivelyhigher based on the scores. Its interesting that there is not apublic outcry about this like there is about insurers using thescores, Stan Chraminski, with Learning and OrganizationalDevelopment, noted on Sams blog. The question is, how do we getlike the banks, where the use of scores seems to be so readilyaccepted?

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

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

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

Eliminating the use of credit information would be unfair to thegreat majority of insurance customers who carefully manage theirbusiness and personal finances, he wrote. Responsible individualsand well-run businesses end up subsidizing the insurance costs ofthose that arent as careful. Without credit scoring, rates arehigher for everyone.

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

At least in Oregon, instead of simply assuming the issue is notworth arguing over, members of the industry put up a case toconsumers that there is some benefit to credit scoring for them,and won the day. (See Oregon Voters Okay Credit Scoring ForInsurance Rating, Nov. 13, page 33.)

Meanwhile, in Michigan, the state Appeals Court is consideringwhether to reinstate the insurance departments regulations banningthe use of credit scores.

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

To comment further on this issue, contact Associate Editor MarkE. Ruquet at [email protected], or right here on Sam's blog.