EFFECTIVENESS OF CREDIT BASED INSURANCE SCORES

Seventy-three percent of U.S. Consumers Have Raised or Maintained their Credit Score During Downturn, I.I.I. Reports

Arlington,VA, April 30, 2009 — U.S. consumers are shedding debt and spending more responsibly during the current economic downturn, resulting in higher credit scores for many Americans, according to Dr. Robert Hartwig, president of the Insurance Information Institute (I.I.I.), who testified today before the National Association of Insurance Commissioners (NAIC).

In fact, 43 percent of U.S. consumers increased their credit score earlier this year, while only 27 percent saw a decrease, and 30 percent remained unchanged, San Francisco-based Credit Karma found, in a March 2009 report based on a sampling of tens of thousands of U.S. consumers, Dr. Hartwig said.

“Thus a silver lining of the current financial crisis is a change in the credit profile of the average American household whereby outstanding debt is reduced to more manageable levels.This should lead to an improvement in the health of the typical consumer’s (and family’s) balance sheet,” Dr. Hartwig stated.“It is a common misconception that during a recession virtually all consumers’ credit scores, and hence insurance scores, will fall.”

The I.I.I. president’s remarks came today as part of his formal testimony during the NAIC’s all-day public hearing on the impact of credit-based insurance scores on consumers. An insurance score is a numerical ranking based on an individual’s credit history.Actuarial studies show that how a person manages his or her financial affairs is a good predictor of the number and size of insurance claims they may file. Indeed, insurers have used this rating criterion for almost 20 years in order to differentiate effectively between lower and higher insurance risks.

“Insurance scoring is a proven, accurate, objective and consistent risk assessment tool used widely in the underwriting of auto and homeowners insurance.The data supporting its use are statistically irrefutable, and the benefits to consumers are significant,” Dr. Hartwig testified “Moreover, the use of credit information leads directly to a fairer and equitable premium charge for all policyholders because scoring allows premiums to be more closely matched to risk.”

“Importantly, insurance scores incorporate only those elements from credit reports that correlate with future loss,” Dr. Hartwig added.

The NAIC’s hearing comes at a time when numerous state legislatures are considering laws which would either restrict or ban outright an insurer’s use of credit-based insurance scores when rating potential auto and homeowners insurance policyholders, or determining the premium they should charge for these products.

“Prohibiting insurers from using credit-based insurance scores would instantaneously result in inherently unfair outcomes: higher rates for people with lower risk, and lower rates for those with a higher likelihood of submitting claims. In other words, bans or severe restrictions on insurer use of credit-based insurance scores would lead to massive subsidies for people who impose greater costs on the system,” Dr. Hartwig stated.

The I.I.I. president also noted that the property/casualty insurance industry’s risk management model had proven more resilient during the current economic downturn than that employed by U.S. banks, in part because of the ability of P/C insurers to measure the financial histories of the customers with whom they conducted business.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.

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