UPDATE ON THE USE OF CREDIT INFORMATION SCORING IN PROPERTY/CASUALTY INSURANCE

1. UPDATE ON THE USE OF CREDIT INFORMATION SCORINGIN PROPERTY/CASUALTY INSURANCE Presentation by D. Lee Barclay, FCAS, MAAA, ARMSenior ActuaryWashington Insurance Commissioner’s Office  CAS Spring Meeting - May 2002

2. OUTLINE • Some history • Risk classification and public policy • 2002 legislation in Washington • Actuarial and public policy issues CAS Spring Meeting - May 2002

3. WASHINGTON AUTO INSURANCE REFORM (1995) • Five bills proposed by Commissioner • No crisis, so bills were DOA in legislature • One bill prohibited “declination or termination” based on credit history CAS Spring Meeting - May 2002

4. “LIFESTYLE FACTOR” BULLETINS (1995) • Lifestyle factors: credit history, employment history, home ownership • 95-4: Rating on this basis is “prima facie unfair and prohibited” • Appearance before Joint Administrative Rules Review Committee • 95-7: Submit a sound analysis or withdraw use of lifestyle factors CAS Spring Meeting - May 2002

5. NAIC WHITE PAPER (1997) • Industry did not agree with NAIC’s failure to conclude that there is clearly a relationship between credit score and loss ratio • Tillinghast report, done for Fair, Isaac, attached as an appendix CAS Spring Meeting - May 2002

6. MULTIVARIATE ANALYSIS REQUIREMENT (2001) • Washington Technical Assistance Advisory T 01-02 • Requires multivariate analysis to support rate changes involving tiering or credit scoring • Applies to filings received on or after March 1, 2002 CAS Spring Meeting - May 2002

7. HOUSE BILL 2544 (2002) • Commissioner Kreidler interested in credit scoring issues • Talks with industry about what they do • Ideas for legislation • Proposal to Legislature by Insurance Commissioner, Attorney General, and Governor • Legislation also being considered in at least 24 other states CAS Spring Meeting - May 2002

8. NAIC CREDIT SCORING WORKING GROUP (2002) • Co-chairs Washington and Oregon • Moving quickly to have a work product done by the end of 2002 • American Academy of Actuaries has offered help • Will this working group give more focus to state legislation in 2003? CAS Spring Meeting - May 2002

9. “FINAL EXAMS” • How does credit score differ from the other factors listed? • Were you able to put on your “public policy hat”? CAS Spring Meeting - May 2002

10. ENGROSSED SUBSTITUTE HOUSE BILL 2544 • Proposed 20% cap on rating difference abandoned • Passed House, 93-4; passed Senate, 36-11 • Underwriting requirements effective January 1, 2003 • Rating requirements effective June 30, 2003 • Attempts to keep a “level playing field” CAS Spring Meeting - May 2002

11. APPLIES TO PERSONAL LINES • Private passenger auto • Homeowners, including mobile homeowners, renters, etc. • Dwelling property • Earthquake coverage for residence or personal property • Personal liability and theft • Personal inland marine • Mechanical breakdown insurance CAS Spring Meeting - May 2002

12. REQUIRES WRITTEN NOTICE OF “ADVERSE ACTION” • The term is used with the same meaning as in the federal Fair Credit Reporting Act • Cancellation, denial, or non-renewal • Not charging the lowest available premium • Not offering the broadest available coverage CAS Spring Meeting - May 2002

13. REQUIRES FILING OF MODELS • Credit scoring models must be filed, whether used for underwriting or rating • Include all attributes and factors used in calculating the insurance score • Information will be kept confidential • Information may be made public for purpose of enforcement actions CAS Spring Meeting - May 2002

14. RESTRICTS UNDERWRITING • Cannot use credit history or insurance score in whole or in part to cancel or non-renew • Cannot deny coverage based on credit history or insurance score alone CAS Spring Meeting - May 2002

15. RESTRICTS SCORING MODELS • Cannot use number of inquiries • Cannot use medical collection accounts • Cannot use initial purchase or finance of vehicle or house • Cannot use consumer’s use of particular types of credit cards • Cannot use total available line of credit CAS Spring Meeting - May 2002

16. OTHER PROVISIONS • Cannot use no-hit or no-score “unless the insurer has filed actuarial data segmented by demographic factors in a manner prescribed by the commissioner that demonstrates compliance with RCW 48.19.020” • Underwriting and rating decisions based on disputed credit information that is resolved in the consumer’s favor must be undone (reissue or rerate) CAS Spring Meeting - May 2002

17. IMPLICATIONS • Modelers will each have a model unique to Washington • Models must be filed in Washington • Rates must be revised to be based on new models • Rates must be based on multivariate analysis CAS Spring Meeting - May 2002

18. ACTUARIAL AND PUBLIC POLICY ISSUES • Importance of multivariate analysis (see examples in handout) • Myth of “causality” (good student discount?) • “Disparate impact” (rating by territory?) • Why don’t arguments focus on consistent criteria for risk classification? CAS Spring Meeting - May 2002