Auto Insurers are Paying Closer Attention to Credit Scores, says Conning & Company Study

(Hartford, CT) July 31, 2001 — 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% 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 (38%) of insurers
responding to the survey use credit to determine eligibility into different underwriting
programs. Fifty two percent (52%) 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.

“Insurers have been sold on the competitive advantage
of utilizing credit data in underwriting and pricing. It has been built into many of their
underwriting and/or pricing models,” said Clarence Smith, Assistant Vice President
and author of the study. “The auto industry’s most pressing agenda will be to
convince consumers that credit scores will not be used solely to deny coverage or charge
higher premiums, or to discriminate against people in any way. This will require
significant educational outreach.”

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% 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 from Conning & Company
for $575 by calling toll free (888) 707-1177 or (860) 520-1245. A complete listing of all
Conning Strategic Studies can also be found by visiting the company’s Web site at

About Conning & Company

Conning Corporation, through its subsidiaries,
provides asset management services to insurance companies and institutional investors,
manages private equity funds investing in financial services companies, and conducts
in-depth research on the financial services industry. Conning & Company (member
NASD/SIPC) is located at CityPlace II, 185 Asylum Street, Hartford, CT 06103.

Anne Steinberg
Kitchen Public Relations
[email protected]