Insurance Scoring: “ What in the world does a credit score have to do with my driving?”

1. Insurance Scoring:“What in the world does a credit score have to do with my driving?” All Industry Communications Meeting June 12, 2002 P.J. Crowley., Vice President, Public Affairs Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5540 Fax: (212) 791-1807 pjc@iii.org  www.iii.org

2. Current Situation • Coverage primarily fueled by legislative or regulatory action or concern about fairness and discrimination. • Use as sole factor is not politically correct. • Growing public concern about privacy. • Lack of control over personal information. • They don’t like red light cameras either. • Unsecured debt on the rise.

3. Communications Obstacles • Behind the power curve. • Failed to educate key stakeholders as importance to industry increased. • Public misperceptions about credit. • Credit means “paying bills on time.” • Individual credit is beyond one’s control. • Differentiation between credit worthiness and financial management.

4. Communications Obstacles • Public misperceptions about insurance. • Use of credit perceived as penalty, not as predictor of future loss. • Credit has replaced all other traditional underwriting factors. • No outside voices defending its use. • People don’t know they benefit.

5. There Are Opportunities • Extensive coverage of rising cost of insurance. • Good credit history can help save money. • Maryland homeowner restriction. • Phase in gives us time to show how many consumers will pay more. • The mold mould. • Need good numbers.

6. Typical Story Line • Long-standing policyholder with no claims history sees rates go up dramatically. • Agent who doesn’t want to be the bad guy labels it “economic red-lining.” • Consumer advocate calls it discriminatory, industry attempt to increase rates and profits. • Commissioner promises consumer protection.

7. Public Concerns • Disparate impact • Discriminates against low income, minorities and no hits. • Difficulty refuting the negative. • Accuracy • People don’t realize they are being checked. • They don’t know what’s in the report. • They overstate the impact of mistakes.

8. Public Concerns • Fairness/Unnecessary Roughness • Dealing with anomalies, such as medical emergencies, divorce, unemployment. • Black box syndrome • Lack of clear causality. • Lack of consistency in application. • People don’t know what they can do to improve rates.

9. Industry Messages • There is a strong correlation. • It is an accurate predictor of future losses. • Credit reports are more accurate than motor vehicle reports. • Increases competition. • Better able to align premium and risk. • More people get insurance. • More people get better rates.

10. Industry Messages • It benefits the consumer. • Most people have good credit, so most people save money. • Good credit can help someone overcome a less-than-perfect driving record. • If restricted, responsible homeowners or drivers will pay more, subsidize higher risk policyholders.

11. Industry Messages • We don’t know why, it just does. • People who manage money well are more likely to protect their most important financial asset – their home. • People who take care of their money are more likely to carefully maintain their property. • People who take risks with their money may well take risks when behind the wheel.

12. Industry Messages • It is not discriminatory. • It is objective, consistent and effective. • Income and ethnicity are not underwriting factors. • No correlation between income and credit score. It’s how you manage your money, not how much you make.

13. Industry Messages • Credit is now a fact of life. • Seeking employment. • Renting an apartment. • Getting utilities. • Obtaining a loan or credit card. • Securing insurance.

14. With Friends Like These! • “If you don’t have good credit, don’t go shopping for homeowners or auto insurance, because you will pay through the nose.” • “Garbage in, garbage out. If there is a mistake in your credit report, there will be a mistake in your credit scores.”

15. With Friends Like These! • “The use of credit reports was the magic potion that would help them squeeze those extra profits.”

16. All in the Family! • “Huge insurance companies are trying to electronically categorize drivers so they can reduce their underwriting costs. You can only go so far with computers, but somewhere in the formula there should be some common sense.”

17. All in the Family! • “Credit scoring has given the whole industry a bad name because a few companies have used credit to deny insurance.” • “We would rather use credit scoring information over any other…rating tool.”

18. All in the Family! • “Every day, hundreds, if not thousands, of people are affected negatively by their credit score.” • “It’s intriguing that people would jump to the conclusion that those with lower incomes are not as good at managing credit. How much money you have does not determine how well you manage it.”

19. Know Thy Enemy! • “Suppose people with dark hair had higher loss experience…Should you rate on that? I think it’s a surrogate for race and income.”

20. Search for Good Numbers • Two million households applying for auto insurance will be affected by credit. • Three of four maintain good credit. • Two-thirds of policyholders benefit. • People with financial instability account for 40 percent more losses. • 40 percent of accidents were never picked up on state motor vehicle reports.

21. Communications Challenge • Maintain simple, positive, consistent industry messages that reinforce how credit benefits the consumer. • Generate more and better data. • Identify beneficiaries and advocates. • Increase transparency, consistent with proprietary concerns.