Credit Scoring Alternatives Examined By Some Insurers

NU Online News Service, Jan. 28, 10:14 a.m. EST

A predictive data company said U.S. auto insurers are inquiring about alternative ways to rate auto insurance risks without credit record data.

VortexDNA, a New Zealand-based firm said the interest comes as the Washington State legislature is considering a ban on use of credit-based insurance scores.

Insurance association representatives, however, said their member companies are not expressing overwhelming concern to their associations nationally about a possible end to credit scoring.

VortexDNA said U.S. auto insurance clients are "preparing for a big shake up in the way they price insurance policies." The company said several of its U.S. insurance clients have asked VortexDNA to model how effective its data would be if credit data was no longer available.

VortexDNA Chief Executive Officer Branton Kenton-Dau said, "We work with 3 of the top 10 auto insurers in the U.S. Every insurer we have spoken to relies heavily on credit data to make predictions about who will claim. If credit data is banned, this is going to have very large consequences for the industry."

VortexDNA – which indicated that its proprietary predictive data is not based on credit scores, education or income, but rather on human intention factors – said those three top 10 insurers have expressed interest regarding alternate factors to credit scores.

But Kenton Brine, assistant vice president, Northwest region for the Property Casualty Insurers Association of America (PCI) said he is not aware of PCI member companies fretting over a nationwide ban on credit scoring. He said insurers are aware of concerns about the practice, but are not concerned credit scoring "will be plowed under."

He noted that around 16 states considered a ban last year, but no state passed one.

"I'm sure [insurers] are looking into other tools," Mr. Brine said, noting that companies are always looking to improve how they classify risks. "Are they doing it out of fear that [credit scoring] is going away?" he asked, answering that he does not see that.

Neil Alldredge, senior vice president, state and policy affairs at the National Association of Mutual Insurance Companies (NAMIC) said, "We don't have a clamoring…from member companies that believe there's a tide that has turned [with respect to credit scoring]."

He did note that there "certainly are companies that have concerns about individual states that are considering a ban," but there's no mood that a ban is a foregone conclusion.

In the State of Washington, Insurance Commissioner Mike Kreidler is leading efforts to pass an outright ban of credit-based insurance scoring, association representatives said.

Bills have been introduced in both the House and Senate in the Washington legislature, and Steve Suchil, assistant vice president for state affairs, Western region, for the American Insurance Association (AIA), said action will be taken in both houses. The House had the bill up for a committee vote today, while the Senate scheduled a hearing to discuss the merits of the bill.

AIA and other trades are due to testify at the hearing, Mr. Suchil said. He added it is too early to tell whether the bill will pass.

Mr. Alldredge said the makeup of Washington legislature – which is heavily Democratic – will present a challenge for insurers. "It's going to be a difficult battle," he said.

But Mr. Brine – also citing the Democratic-dominated legislature, and calling it a "fairly liberal" one – said he is proud of the legislature for spending a lot of time debating the issue.

"I think the bill is going to have real trouble [passing]," he said, noting that it "may be on life support in House."

The bill in the Senate will be more difficult for insurers to defeat, he said.

VortexDNA said regulators have been fielding complaints about credit scoring, and pointed to a statement by Mr. Kreidler, who said he has received thousands of complaints.

Mr. Alldredge said credit scoring complaints make up just "a handful" of insurance complaints.

Mr. Brine said the State of Washington receives more complaints than most states because of a reporting requirement. In Washington, he said, insurers have to send an adverse notice to insureds if they do not receive the "very best rate" because of credit. He said insureds may get a discount, but not the very best rate, and they will receive an adverse notice.

In other states, he said, consumers receive an adverse notice only if their rates are worse because of credit than if credit had not been used as a factor at all.