One burdensome fact of professional life for agents is that the industry may be the unrivaled champion when it comes to accessing and maintaining consumer information. This information can come from a variety of sources ranging from the ISO “All Claims” data base, ChoicePoints “CLUE,” and Fair Isaacs to standard MVR data.
Powerful arguments abound which rightly defend the notion that having reliable consumer information is necessary for properly underwriting insurance. After all, without valid information about prospective insureds, underwriting decisions would amount to little more than blind guesses.
One piece of this information pie is growing particularly contentious: credit scoring. A recent study by Conning & Company that takes a look at auto insurers’ use of credit scores points out that consumer backlash and zealous regulation over the use of credit to determine insurability is possible, especially if the current economic slowdown begins to pinch the usually creditworthy.
The study suggests that if credit scoring models do not adjust to account for changing buying patterns, it is likely more consumers may be adversely affected by credit scores, and that would catch the attention of both consumer advocates and regulators. I suspect the industry would be slow to extend the welcome mat.
The study indicates that 92 percent of the respondents to Conning’s survey of the 100 largest personal auto insurers use credit data in underwriting new business. This trend is new in as much as half of these have begun using credit data in the past three years. Insurers also are using this data to determine class eligibility and rating classification. Of course, the use of credit reports in making underwriting decisions is nearly 20 years old.
Why burdensome? It’s agents who must sit face-to-face with consumers, ask to collect the information about which many consumers are sensitive, and explain why coverage was denied or is rated.
The Independent Insurance Agents of Texas advises that a major concern for agents should be the additional responsibilities that result when a company chooses to use insurance scoring or credit reports as an underwriting tool. The federal Fair Credit Reporting Act, as amended in 1996, covers insurance underwriting as a situation where credit information may be used. The act is designed to protect the consumer from suffering as the result of wrong credit information.
The FCRA stipulates that adverse decisions based on credit information mandate specific notification requirements. Essentially this means that the agent is responsible for such notification. Maintaining professional consumer relationships and clean carrier relationships while at the same time avoiding possible legal liability under the FCRA requires careful preparation.
Agencies should develop a comprehensive education initiative aimed at helping customers understand the business of credit scoring. Further, agencies should implement consistent procedures for handling the notification requirements of “adverse actions;” establish procedures to ensure all employees are well-prepared to comply with provisions of the FCRA; and put in place controls to manage the unintentional release of information normally construed as private, such as social security numbers, DL numbers, etc.
Agents should also have in place agreements with every carrier represented that clearly spell out the roles and responsibilities of all parties if insurance scoring is used as an underwriting tool.