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Understanding Insurance Credit Scoring
Why do insurers use credit? Insurance companies use financial history along with other factors (such as, in the case of auto insurance, years of driving experience) to properly classify an insured according to his/her potential risk. Studies have shown a correlation between a consumer's financial history and his/her future insurance loss potential. Thus, some insurance companies believe the use of credit helps to underwrite an applicant at a cost that reflects their specific risk.
What information is in a credit report?
Why do insurance companies use scored credit reports? Scores provide an objective and consistent tool that some insurers use along with other applicant information to better predict the likelihood of a consumer filing future claims. Scores also help streamline the decision process, so policies can be issued more efficiently. By predicting the likelihood of future claims, insurers can control risk, thereby enabling them to offer insurance coverage to more consumers at a fair cost.
What is an insurance score? How does it differ from a financial credit score? An insurance score is a credit-based statistical analysis of a consumer's likelihood of filing an insurance claim within a given period of time in the future. This data can help underwriters better assess risk exposure prior to granting insurance coverage. A financial credit score is a credit-based statistical analysis of a consumer's likelihood of paying an installment loan (mortgage, auto loan, etc.) or revolving debt (credit card, etc.) when due. Creditors use the score to help determine whether to grant credit. Using statistical programs, a consumer's credit information is compared to the performance of consumers with profiles similar to the subject consumer. A credit scoring system awards or subtracts points for various factors or variables in the credit report to determine the score. The score predicts the likelihood of certain events occurring. Most scoring systems generate "reason codes" in addition to the numeric score. The reason codes will identify up to four principal factors that influenced the score.
What variables (data elements in a credit report) are used in calculating an insurance score? Some credit variables that are used include: outstanding debt, length of credit history, late payments, new applications for credit, types of credit used, payment patterns, available credit, public records, and past due amounts. A credit report can contain both positive and negative information. Different scoring models may use different credit variables. All variables in a model are considered together to produce the best prediction.
What variables are NOT used in calculating an insurance score? Race, color, religion, national origin, gender, marital status, sexual orientation, age, address, salary, disability, occupation, title, employer, date employed or employment history are not used for scoring purposes. Inquiries made for account reviews, promotions or insurance purposes are not used in calculating an insurance score. Also, other variables that, by law, may not be considered are disregarded.
What are the different types of scores delivered by ChoicePoint for insurance purposes? Insurance companies use a variety of score models. Some companies use generic insurance scores that have been developed by ChoicePoint or other third parties. A growing number of insurance carriers use custom scores that have been developed to meet that company's specific underwriting criteria. There are different types of insurance scores. Some are used for auto insurance purposes, and others are used for homeowner's insurance purposes. The scores usually incorporate credit data, but some models also consider other data, such as claims history. Different insurance score models will/may calculate a different numeric score and reason codes.
What is ChoicePoint's role in supplying the credit report and/or insurance score to the insurance company? ChoicePoint is a reseller of credit information. ChoicePoint provides a system for the carrier's home office or insurance agent to access credit bureaus in order to receive an individual's credit report. Once the report is obtained by ChoicePoint, a score may be systematically calculated and returned to the insurance company to assess the risk and assist in making an underwriting decision. The data returned to the insurance company or agent can include the full credit report, a subset of the credit report, an insurance score, reason codes, a customized message based on the credit data and the carrier's underwriting guidelines, or a combination of these information products. ChoicePoint is considered a Consumer Reporting Agency under the Federal Fair Credit Reporting Act and its state analogues ("FCRA"), but ChoicePoint is not a credit bureau or insurance company. ChoicePoint does not make credit decisions or determine insurance underwriting guidelines. ChoicePoint's role is to supply information to the insurance carriers, which the carriers can review in order to assist them in making an underwriting decision.
Who makes the decision to grant or deny insurance coverage or to charge a particular rate or premium? Decisions about insurance coverage and/or rates are made by the insurance companies. Each insurer develops underwriting decisions based on their own business requirements. Insurance companies evaluate credit reports and/or insurance scores according to their own proprietary strategies. Other information, such as application data, prior claims/loss data or motor vehicle records, may also be evaluated as part of the insurance underwriting process. Many insurance companies have automated the evaluation process. The decision may be delivered to an agent via a ChoicePoint system, but the guidelines used to make that decision are determined by the insurance company.
What is the Fair Credit Reporting Act (FCRA)? The Fair Credit Reporting Act is a federal law designed to promote the accuracy, fairness, and permissible use of information contained in the files of Consumer Reporting Agencies. In general, the FCRA requires that:
Section 604(f) of the FCRA prohibits any person or company from obtaining a consumer report from a Consumer Reporting Agency unless the person has certified to the Consumer Reporting Agency (by a general or specific certification, as appropriate) the permissible purpose(s) for which the report is being obtained and certifies that the report will not be used for any other purpose. Section 607(e) of the FCRA requires any person or company who obtains a consumer report for resale, as ChoicePoint does, to disclose the identity of the end user to the Consumer Reporting Agency (in our case, this is one of the credit bureaus) from which such report is obtained and to identify to such Consumer Reporting Agency each permissible purpose for which the reports are resold.
Are insurance companies authorized to obtain a copy of the consumer's credit report? The protection of personal privacy and the responsible use of information are cornerstones of ChoicePoint's business practices. Only businesses or individuals with a "permissible purpose" can access a consumer's credit report. ChoicePoint complies with the guidelines of the FCRA which was approved by Congress in 1970 and amended effective 1997. Per the FCRA, ChoicePoint (as a Consumer Reporting Agency) may furnish a consumer report for the following insurance related purposes:
In both circumstances, the transaction to ChoicePoint ordering the credit report is initiated by and at the request of the insurance company or agent.
How can I find out what my insurance score is? Per the FCRA, a Consumer Reporting Agency shall, upon request, clearly and accurately disclose to the consumer all information in the consumer's file at the time of the request. The federal FCRA does not require a Consumer Reporting Agency to disclose to a consumer any information concerning credit scores or any other risk scores or predictors relating to the consumer. However, ChoicePoint feels this information is valuable for a consumer to know. Thus, ChoicePoint is currently designing a mechanism to disclose insurance scores to consumers in the near future.
What are the different types of inquiries on my credit report and do they affect my score? An inquiry is posted to a consumer's credit report every time an individual or a business reviews or obtains a copy of the credit report. Inquiry types of "AR" (Account Review) and "PRM" (Promotional) appear only on credit reports received directly by the consumer from the credit bureau itself. These types of inquiries do not appear on credit reports sold to a commercial user (any entity that buys a credit report for a permissible purpose) or on credit reports ordered via the ChoiceTrust web site.
Only commercial inquiries initiated at the consumer's request are used in scoring models. Additionally, certain types of inquiries may not be used in some insurance or financial scoring models (such as inquiries made by insurance agents or companies). Other inquiries (such as auto loan inquiries) may be counted only once if multiple inquiries appear over a given period of time. The insurance models supported by ChoicePoint do not consider the presence of insurance inquiries as an adverse characteristic. Furthermore, they believe the predominant scoring models in the marketplace also do not consider insurance inquiries to be an adverse characteristic; however, some institutions may. A consumer may obtain insurance quotes from an agent representing multiple insurance companies, or directly from several insurance companies. In this case, if these companies use credit as part of their underwriting criteria, there may be multiple inquiries posted on the consumer credit file - one for each insurance company. If a credit report is obtained via ChoicePoint, the name of the ordering entity posted on the inquiry may be shown as ChoicePoint (which orders the report as a reseller), the name of the insurance company on whose behalf ChoicePoint places the order, the name of the insurance agent/agency on whose behalf ChoicePoint places the order, or some combination of these names.
For how long may a Consumer Reporting Agency report adverse information about me? Generally, no Consumer Reporting Agency may make any consumer report containing any of the following information:
How do I obtain a copy of my credit report? If adverse action was taken against the consumer, based in whole or in part on the consumer's credit information, within the 60 days preceding the consumer's request for disclosure, the FCRA requires credit bureaus to provide a copy of the credit report to the requesting consumer free of charge. For insurance purposes, adverse action can include, among other things, a consumer being denied insurance or being charged a higher premium. It is the responsibility of the insurance company to notify the consumer of the adverse action. If an Experian or Equifax credit report was obtained via ChoicePoint, the insurance company should include the ChoicePoint Consumer Disclosure Center contact information and NCF Reference Number in this notification. The consumer may contact ChoicePoint, and ChoicePoint will order a copy of the credit report from the credit bureau on the consumer's behalf. The credit bureau will then send a copy of the credit report directly to the consumer's address. If the credit report was obtained from Trans Union via ChoicePoint, the insurance company should include the Trans Union contact information in the notification. The consumer will need to deal directly with Trans Union. Since ChoicePoint is a reseller for the credit bureaus, ChoicePoint does not have access to the consumer's credit file and is unable to change any data contained therein. Therefore, once a copy of the credit report is obtained by the consumer, he/she should contact the credit bureaus directly to question or dispute any information contained in the credit file. By law, the credit bureau must investigate and respond to the request within 30 days. Consumers who wish to receive a copy of his/her credit reports should contact the credit bureaus directly: Equifax: 800-997-2493
How do I get more information? If the consumer has been affected by a product delivered by ChoicePoint, please visit their web site www.consumerdisclosure.com. For more information about ChoicePoint, please visit the web site www.choicepoint.net.
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