Auto insurers are looking at more than a consumer’s driving record when determining rates; they are also examining how drivers manage their finances, according to a recent Conning & Company study.
Auto insurers are using credit data, a proxy for how one manages his/her assets and finances, as a key predictor of future claims costs. These insurers believe that including credit scores (known as insurance scores in the insurance industry), as part of a driver’s overall risk profile allows them to underwrite and price policies more efficiently, accurately and consistently. Insurers also believe that, in some cases, a consumer’s credit rating (i.e., insurance score) may be more important than his/her driving record.
The use of credit scoring is often a highly sensitive issue. The Conning study raises the possibility of a consumer backlash and more restrictive regulation over credit if insurers fail to educate their constituents as to how and why they use credit scores in their underwriting and rate making.
According to the Conning study, “Insurance Scoring in Personal Automobile Insurance: Breaking the Silence,” 92 percent of the respondents to Conning’s survey of the 100 largest personal automobile insurers use credit data in underwriting new business. This trend is relatively new, as over half of this group began using credit data only within the last three years. Thirty-eight percent of insurers responding to the survey use credit to determine eligibility into different underwriting programs. Fifty-two percent use it to determine both eligibility and rating classification. Conning learned that larger insurers tend to fall into the latter group, particularly if they are developing more advanced segmenting techniques as part of an aggressive price penetration strategy.
One strategy insurers may take in appealing to consumers is to explain that the use of credit scoring will likely improve their chance of receiving a better rate. Using credit data to enhance risk classifications reduces the likelihood that consumer groups with low loss expectancy will subsidize consumer groups with higher loss expectancy. Further, the use of automated underwriting decisions based on objective data like insurance credit scores removes the potential for human bias and helps to ensure that prices are distributed equitably across risk classifications. Proponents of credit scoring have also argued that since most consumers (about 75 percent of adults) have good credit, there is little reason for consumers to believe that their credit scores will be used against them to increase their premiums.
Another issue for auto insurers is demonstrating that their insurance scoring models can respond to changes in consumer behavior. Consumers’ lifestyles and how they use credit is not static, it is dynamic. Many have extended their credit level, while others are using credit simply for convenience. As the economy continues to slow, credit profiles will likely continue to deteriorate. If insurers’ scoring models are not adjusted to reflect changing economic conditions and buying patterns, it is likely that more consumers will be adversely affected by insurance scores. This would raise the attention of consumer advocates and regulators alike.
The Conning Study, “Insurance Scoring in Personal Automobile Insurance: Breaking the Silence,” is available for a fee from Conning & Co. A complete listing of all Conning Strategic Studies can also be found at www.conning.com.