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PIA National Hosts Insurance Scoring CE

As part of its September 2003 annual meeting in Milwaukee Wisconsin, PIA National hosted a continuing education program and luncheon for PIA of Wisconsin...
October 20, 2003

By Ellen Sanders
Assistant Vice President, Regulatory Affairs
PIA National

As part of its September 2003 annual meeting in Milwaukee Wisconsin, PIA National hosted a continuing education program and luncheon for PIA of Wisconsin members and leaders from PIA National and PIA state affiliates.

The topic for this first of what may become an annual CE session on an emerging issue was insurance scoring. PIA of Wisconsin and PIA National leadership selected this topic because there have been several changes in law over the past year and because agents are receiving an increasing number of inquiries and complaints from their customers about insurance scoring.

PIA was honored to have two excellent speakers with substantial experience in this field. The first presenter was Jeffrey Skelton of ChoicePoint, a major producer and marketer of underwriting information products, including insurance scoring, C.L.U.E., motor vehicle reports and insurance scores. The second speaker was John Fitts of Progressive, a company that appoints many PIA members.

"Credit" vs "Insurance" Scores

Skelton's presentation focused on insurance scores generically: what they are and are not. Some people use the terms "credit score" and "insurance score" interchangeably. While both rely on credit information to develop the score, there are some important distinctions between the two. A credit score differs from an insurance score in that the former predicts financial stability and ability to pay back a loan over the long term.

Insurance scores, on the other hand, predict claim frequency and severity over a shorter period: 12 months. Skelton further explained that one can have different insurance scores for auto and home, because the attributes included in the calculations are similar but not identical. Finally, different carriers have different models for determining the score based on the carrier's experience and tolerances.

Many people question what type of information is used to calculate the insurance scores. The information comes from information collected by credit bureaus. Differingmodels may differ slightly in the type of information collected and the weight applied to different factors. Certain items available from the credit bureaus are not included in the calculations. Skelton pointed out that non-scored elements include: the customer's location and address, net worth or salary, income, marital status, occupation, nationality, age, religion, race and gender.

Skelton addressed the question that many insurance producers have been asked by their customers: How can one improve one's score? In responding, Skelton noted that there are no quick fixes, but in general one can improve one's insurance score by:

  1. Reducing late pays and collections;
  2. Eliminating bankruptcies and liens;
  3. Limiting recent activity associated with new accounts;
  4. Maintaining low leverage on revolving accounts;
  5. Having accounts established many years; and
  6. Having a limited number of accounts, with a good mix of types.

In closing, Skelton shared an example of an insurance score and listed information where insurance producers could obtain more information for themselves, their staff and their customers.

Uses of Insurance Scores

Following Skelton, Fitts explained how Progressive approaches insurance scoring: Progressive has a proprietary model; it does not rely on calculations from vendors such as ChoicePoint. Applying Progressive's model, 63% of its policyholders received lower rates than they would have without insurance scores being factored into the process; 1 percent paid the same amount; and 36% paid more. Progressive has found that insurance scores identify lower-cost customers that traditional underwriting overlooks and thereby increases the availability of insurance. For example, Progressive has sustained urban growth since it began using insurance scores.

Progressive has been on the cutting edge in insurance scoring, even drafting its own model. This insurer believes that insurance scoring should not be used to refuse to insure, cancel or non-renew, and that carriers should be required to disclose how they calculate insurance scores. Progressive recently instituted several improvements to its insurance scoring system, including to the following:

  1. Periodic re-underwriting based upon insurance scores;
  2. Publication and distribution of brochures to agents to help explain insurance scoring to consumers;
  3. Initiation of a Credit Information Team to consider exceptions due to extraordinary life events such as job losses or medical catastrophe; and
  4. Providing a personalized report to those who inquire about how credit affected their rate.

Fitts summarized his presentation by stating that the use of insurance scoring means more people pay less and that insurance scoring is actuarially justified and fair. He said transparency is important, as consumers need to know how their scores are calculated.

Those in attendance greatly appreciated the presentations. Even PIA members with years of experience with insurance scores said they came away with new understandings.

Ellen Sanders can be reached at ellens@pianet.org or (703) 518-1363.

This article originally appeared in the October 2003 PIA Connection.