Insurance News

Insurance Rating Factors Actually Benefit Consumers

Posted on: May 12, 2009

The April 13 “Final Say” by Gregory Squires (“Insurers Pile On To Consumer Hardships”)—about the use of education, employment status, credit and other insurance rating factors—is wrong on the facts and wrong on sound policy regarding risk classification. There are, however, a few areas of potential agreement that we would like to pursue.

Despite his statement that “the issue is NOT” about risk- and cost-based pricing, his editorial endorses—and calls for more—regulatory obstacles to risk- and cost-based pricing.

Insurance is all about risk—how to identify it, price for it and transfer it. Unlike some others in financial services, property-casualty insurers maintained a strict adherence to risk- and cost-based underwriting and pricing in recent times, and the insurance market is much sounder as a result.

Insurers’ identification and pricing for risk is always in motion, propelled by developments in actuarial science, the emergence of new risk predictive statistical data and good old competition.

In auto insurance, legacy rating methods so criticized by “consumer advocates” have been supplemented recently by more individual risk assessment, made possible through the use of newer factors—such as insurance scoring.

Nowhere in Prof. Squires’ editorial does he offer any evidence that the use of more personalized rating variables to assist insurers in underwriting and rating—such as education, occupation and credit information—has actually “hurt” consumers.

With respect to the more veteran of these variables—credit information—the reality is balanced public policy and a well-functioning market that benefits most consumers.

Laws such as the National Conference of Insurance Legislators’ model on credit (26 states have either adopted legislation or issued regulations based on it), along with the federal Fair Credit Report Act and Fair and Accurate Credit Transaction Act, enumerate specific consumer protections.

Some states have even adopted “extraordinary life circumstances” language requiring insurers to make exceptions in their use of credit information for things like temporary unemployment or catastrophic illness.

Contrary to industry critics, credit scores are not declining en masse in the current economy, while complaints to state departments of insurance are low. Credible evidence proves a majority of consumers benefit from use of credit-based insurance scores. For example:

• A 2008 Arkansas Department of Insurance study (“Use and Impact of Credit In Personal Lines Insurance Premiums”) reported that “91 percent of consumers either received a discount for credit or it had no effect on their premium.”

It went on to say that “for those policies in which credit played some role in determining the final premium, those receiving a decrease outnumbered those who received an increase by 3.44 to 1.” (Bolding is the report’s emphasis.)

• The Federal Trade Commission’s 2007 study on credit for Congress (“Credit-Based Insurance Scores: Impacts On Consumers Of Automobile Insurance”) indicated that when scoring is used, 59 percent of consumers would see premium decreases, concluding that “credit-based insurance scores are effective predictors of risk under automobile policies.”

The introduction of education and occupation as insurance risk variables is too new to have such a robust body of evidence as credit, but in some states where it has been examined, their use has not been found to violate any antidiscrimination or insurance laws.

A 2006 report on the issue by Maryland’s insurance commissioner (“GEICO’s Use of Education and Occupation in Underwriting”) concluded that “…there is no evidence…use of these factors is intended to have, or actually has, a disparate impact on any protected class.”

The commissioner’s report went on to say that “education and occupation, as underwriting factors, meet the actuarial standards of practice related to classification. In addition, both education and occupation have been shown to be valid predictors of loss.”

New Jersey made similar findings after formal administrative proceedings.

Taking away individualized rating tools from insurers would be a step backward to a time with monolithic rates and mass subsidization. Consumers ultimately win when their insurance rates match as closely as possible to their expected risk.

As to Prof. Squires’ notion that insurers should collect race and other demographic information about customers, the best response would be: Put that notion to the test of a legitimate public opinion survey. We are sure that the response would be a resounding “NO.”

Prof. Squires speaks of the importance of insurers in risk prevention. We get that, and that’s why we have long championed efforts to improve vehicle standards, pass anti-drunk driving, teenage driving and safety belt use laws, as well as implement stronger building codes and land use controls.

More could be done, especially if Prof. Squires and his allies would help, but there are real world impediments, such as:

• Incomplete and increasingly expensive Department of Motor Vehicle records.

• The inability to accurately verify usage and miles driven.

• Political impediments, like legislative language prohibiting insurers from considering important traffic law violations in rating and underwriting.

Finally, Prof. Squires ignores the greatest impediment of all to the achievement of improved risk-based pricing—prior-approval rate regulatory systems that consume valuable resources, as well as delay the introduction of innovative products amid the confusing mishmash of current personal lines regulation.

We would welcome his assistance in our efforts to relax the very controls that stand in the way of the progress he wants.

© Copyright 2009 National Underwriter Property & Casualty

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