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THE BLACK BOX IN A BLACK BOX

THE BLACK BOX IN A BLACK BOX

THE BLACK BOX IN A BLACK BOX
October 12
07:30 2021

Many agents concede the value of credit history for predicting loss experience, and some relish how credit-based scoring has helped eliminate crude pricing tiers and multiplied purchasing options. What’s changing?

THE BLACK BOX IN A BLACK BOX

With lingering reservations, agents embrace credit-based scoring

By Joseph S. Harrington, CPCU

It’s a little hard to imagine that in 2011 the Massachusetts affiliate of the Independent Insurance Agents and Brokers of America (IIABA) was leading a campaign for a ballot initiative to ban the use of credit-based insurance scoring in the state. (The campaign was dropped.)

Fast forward 10 years to the state of Washington, and you’ll find agent associations joining the fight to overturn Insurance Commissioner Mike Kreidler’s March 2021 emergency order requiring insurance carriers to rescind the use of credit-based scoring for rating personal auto, homeowners, and personal liability policies.

Kreidler’s immediate rationale was that provisions of the federal CARES Act, passed in 2020 to protect consumers from certain financial consequences arising from the COVID-19 pandemic, effectively altered the manner in which credit histories were reported.

As a result, he later wrote, “credit bureaus are collecting a credit history that is objectively inaccurate for some consumers and therefore results in an unreliable credit score being assigned to them. Consequently, this untrustworthy credit score degrades any predicative value that may be found in a consumer’s credit-based insurance score.”[1]

Agents aren’t in a position to dispute that, but they dispute unilateral executive action that disrupts the market for coverage for thousands of households all at once. Therefore, the state’s two independent agent associations have signed on to a lawsuit filed by a carrier trade group challenging the order.

Who ya gonna call?

Since the order took effect in June 2021, personal lines agents are reportedly hearing from clients unhappy about their renewal premiums. Thanks to Kreidler’s action, “there has never been a more important time for insurance customers to utilize the expertise of an independent agent,” says the Independent Insurance Agents and Brokers of Washington (IIABWA).[2]

That expertise is tested, however, when agents have to endorse a practice that they have long been ambivalent about. Indeed, Kreidler has cited protests from individual agents over the use of credit-based scoring to support his opposition to the practice.[3]

Over time, most agents have come to concede the value of credit history for predicting loss experience, and some relish how credit-based scoring has helped eliminate crude pricing tiers and multiplied purchasing options.

“[B]ureaus are collecting a credit history that is objectively inaccurate for some consumers and therefore results in an unreliable credit score being assigned to them. Consequently, this untrustworthy credit score degrades any predicative value… .”

—Mike Kreidler
Washington Insurance Commissioner

But the benefits of credit-based scoring come at the cost of transparency in the agent-client relationship. For one thing, the market disruption allegedly instigated by Kreidler’s order belies the argument that credit-based scoring accounted for only a small share of insurance pricing.

Opacity over clarity

Most consumers are confused about how their credit score is calculated, and even the savviest of them are subject to credit factors that seem counterintuitive or out of their control. Experian, for example, includes “you closed a credit card,” which one might think is a prudent action, to be among the factors that can contribute to a decrease in one’s credit score.

Describing the application of credit-based scoring to insurance rates becomes, then, an exercise in describing one opaque process inside another, a black box within a black box, to consumers and at least one regulator.

Agent positions on the matter don’t necessarily add clarity.

Consider that the IIABWA earlier supported a bill (which was not enacted) that would have allowed the use of credit-based scores for new accounts, but not for renewal business, unless such use benefitted the policyholder.[4] Other than to boost the value of agent-owned renewals, why would credit be a valid risk factor for someone seeking a new insurer but not if the same person was seeking to renew with his or her current insurer?

If Commissioner Kreidler is seeking popularity, he won’t find it among insurance professionals. Like him or not, he is determined to act on issues that force carriers and producers to address core questions of insurance practice.

Having disputed that one’s credit history is relevant to how you drive or maintain your residence, Kreidler is apparently set to deny that an insurer can depreciate the cost of labor in a property claim. An online hearing on a proposed rule on that controversial topic is scheduled for mid-October.

[1] State of Washington, Office of the Insurance Commissioner, Emergency Rule Making Order, March 21, 2021; accessed at https://www.insurance.wa.gov/sites/default/files/documents/r-2021-02-cr-103e_0.pdf

[2] Independent Insurance Agents and Brokers of Washington, “Emergency Rule to Remove the Use of Credit History;” accessed at https://www.wainsurance.org/Resources/SiteAssets/Pages/Corona/
Credit%20Scoring%20Emergency%20Rule/Creditscoringrule.pdf

[3] Mike Kreidler, “Ban unfair use of credit scores for insurance,” The Seattle Times, Jan. 10, 2021; accessed at https://www.seattletimes.com/opinion/ban-unfair-use-of-credit-scores-for-insurance/

[4] IIABWA, “Emergency rule . . .,” op. cit., p. 2

The author

Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.

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