Credit Scoring-An Insurance Department Perspective
The use of personal credit information in underwriting homeowners and personal automobile insurance is a significant topic of concern for regulators. Numerous insurance industry studies have demonstrated a strong correlation between an individual's "financial responsibility" as measured by a credit score and the expected loss. These studies claim to have shown that the use of credit scores in underwriting unfairly harms low income and minority consumers, and are therefore unfairly discriminatory. Other studies have been presented to demonstrate that credit scores are valid predictors for all classes of insureds and conclude that the use of credit scores for underwriting does not discriminate unfairly.
Other unresolved issues continue to present a major concern for insurance regulators. Some of these are directly related to the use of multivariate underwriting models and the industry's reluctance to open the "black box." Others relate to improper application of credit information and insurance company disclosure when credit information is being used. Insurance departments are unable to satisfy consumer complaints when premiums increase from deterioration in a policyholder's credit score, especially when the policyholder has a clean driving record.
Insurance departments have addressed these concerns in a number of ways. Some state regulators would prefer to ban the use of credit information, while others have accepted this information as a valuable underwriting tool and have developed rules to mitigate the consumer concerns. This panel will discuss the use of credit scoring models from a regulator's perspective.
Michael J. Miller, Principal and Consulting Actuary, EPIC Consulting LLC
Dudley B. Ewen III, Chief Examiner, Compliance & Enforcement Unit, Maryland Insurance Administration
Brent Kabler, Supervisor of Research, Division of Market Regulation, State of Missouri Department of Insurance
John R. Pedrick, Chief Actuary, Property & Casualty Division, Ohio Department of Insurance
Dan Steinberg, CEO of Salford Systems, a data mining company based in San Diego, will discuss applications of predictive modeling in credit risk scoring, targeted marketing, and fraud detection. He will also highlight what he considers the major directions of advances in predictive modeling and data mining.