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PIA Washington Position On Credit Scoring
Position on the Use of Credit as an Underwriting and
Rating Factor in Personal Lines of Property and
Casualty Insurance
Members of the Professional Insurance Agents Association
vigorously support public policies that foster a competitive
market for personal lines of property and casualty insurance
in Washington State. A dynamic competitive market provides
maximum choice for the insurance-buying public - choice of agent; choice of carrier and insurance product; and finding a premium that fits within a budget. While it is generally understood that insurers compete on factors such as price and service, it is less well known that they compete on many other factors as well - including the ability to identify and classify risks.
Perhaps no principal of insurance is as fundamental as is risk classification. Risk classification is an elemental priority for insurance because it is rooted in a concern for fairness: one classification should not subsidize, nor be subsidized by, any other risk classification. Risk classification provides a structure for treating the public with fairness. The public expects those convicted of drunk driving to be treated differently for insurance than those without such a record. The public understands and expects youthful and inexperienced drivers to be treated differently for insurance than drivers with many years of experience. The public expects that a poorly maintained home with an outdated electrical system will be treated differently for insurance than a new home with a current electrical panel and a hard-wired fire alarm. Where the risks of loss are different, the public expects, and deserves to see, differential treatment in costs and availability of insurance.
Because risk classification is so important, insurers actively compete on the ability to accurately evaluate and classify the risks presented. Insurers actively compete for talent - fighting for the best and most innovative actuaries to assist in meeting and beating the competition. Formulas and algorithms are closely guarded competitive secrets. Failure to do the job right could mean the unnecessary loss of business or the loss of millions on the financial statement. Doing the job correctly means that risks are appropriately classified and placed for coverage at a rate that is not excessive, inadequate nor unfairly discriminatory. The insurance-buying public benefits from competition in underwriting just as it benefits from competition based on price and service.
One of the most recent tools used by insurers to classify risks is to review an applicant's credit history or score. As observed in numerous publications available to the Office of the Insurance Commissioner, credit has proven to be an exceedingly accurate tool in classifying risks - those with poor credit histories and scores present significantly higher risks of loss than those with favorable credit histories and scores. The Professional Agents Association in Washington supports the continued use of credit histories and scores by insurers for personal lines of property and casualty insurance. The PIA supports such use for both underwriting and rating purposes so long as the credit history or score is not the sole factor used.
The insurance-buying public will be damaged if these tools are prohibited or unnecessarily curtailed. Removing tools which are proven to be accurate will only result in unfair cross-subsidies between risk groups. If there is a question of accuracy with regard to credit histories or scores, let's address it. If there is a question as to whether credit histories or scores truly predict risks of loss, let's put the question to the test. If, however, there is agreement that credit histories or scores are accurate and that they are objectively predictive, then these tools should be allowed to remain a part of the competitive market.
The Professional Insurance Agents Association in Washington further believes that accurate underwriting tools, such as credit histories and scores, are important from an agent's perspective. An agent wants to write business - but more importantly, an agent wants to write profitable business. An agent with a bad loss ratio is an agent whose appointment is in jeopardy. Agents want to classify risks so that an appropriate insurance product is provided at an appropriate rate. Agents want accurate tools to keep the book of business strong. Although some agents want the easy way out, and don't want to do the tough work of carefully evaluating risks before placing the coverage, most agents appropriately focus on doing the job right.
So long as it is not used as the sole factor for underwriting and rating purposes, the PIA supports the continued use of credit histories and scores by insurers for personal lines of property and casualty insurance. These are accurate tools. They are important to the maintenance of a competitive insurance market in Washington State. They help agents maintain a strong and profitable book of business, and they serve the interests of the insurance-buying public.
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