For A Credit Scoring Ban, Have A Fallback Plan, Actuaries Told

In an interview today, he said that since he gave his talk last month not a lot has changed concerning credit scoring with the next likely "big milestone" a decision by the Michigan State Supreme Court in a related case.

That panel is currently considering whether to permit a 2005 ban on credit scoring by former insurance commissioner Linda A. Watters, which insurers contend was not legal.

Mr. Mosley noted that the decision will not end the debate since it will only deal with whether the commissioner "overstepped" and had the authority to enact such a ban and not the legalities of credit scoring.

At the CAS conference, Mr. Mosley with Eliade Micu, actuarial consultant, EagleEye Analytics, reviewed analytical models that hinge on other factors, some of which attempt to focus on the underlying risk characteristics that presumably make credit scoring work.

Mr. Mosley noted that insurers were able to adjust their models when a ban on credit scoring for homeowners insurance went into effect in Maryland in 2002.

"The ban resulted in some rate inequities from a cost perspective and a little bit of a shake up in market share and industry loss ratios. However, the end result was that the market did not collapse," he said, according to a portion of his remarks supplied by CAS.

A copy of Mr. Mosley's presentation slides on the CAS Web site http://www.casact.org showing homeowners data for Maryland from 1998-2007, reveals that the top three writers continued to account for half the market before and after the ban.

In addition, the average loss ratios for the five years following the ban were actually markedly lower than the five years prior–at least 20 points lower for each of the top-three writers, according to the presentation slide.

For the most recent two years, the favorable post-ban loss ratio comparison continued through 2009, according to information from Highline Data, a subsidiary of Summit Business Media, National Underwriter's parent company.

Mr. Mosley said a credit score "is a powerful indicator," which overlaps other traditional and new ratemaking variables. When credit is implemented as a rating factor, it takes away some of the predictive power of existing variables, he said.

When credit is removed, insurers need to recalibrate current factors and consider additional variables that may have been deemed insignificant when the credit score was included. "We should focus on the reasons that credit works," he said.

Payment history, accident and violation history, and number of years an individual has been insured and employed are some of the other variables to consider, Mr. Mosley said during the session titled, "Alternatives To Credit Score."

More generally, he advised insurers to look at variables that demonstrate the characteristics of responsibility, risk-taking behavior, and stability that go into the insurance scoring model.

Mr. Micu said an alternative approach to credit scoring could involve tweaking a current class rating plan that relies on multiple predictive variables or going outside the current plan to ferret out additional behavioral variables. "This has a better chance of working. You may find some useful variables that you should have had in the class plan," Mr. Micu said.

Both men said that the current economy and the political climate have brought this issue to the forefront again.

In addition to the Maryland homeowners insurance ban, Mr. Mosley said that credit scoring is banned in California and Hawaii. In addition, Idaho issued a credit crisis warning about a year ago related to insurers' use of credit related information in a time of economic downturn, he said.