The arguments surrounding the issue of using a person’s credit score for rating personal lines policies have been around since the practice was first developed more than 30 years ago. R Street Institute, a Washington-based free market research organization, hosted a panel on March 31 to examine the rating factor that has resurged as a hot-button political issue in recent years.

Jerry Theodorou, director of the Finance, Insurance and Trade Program, at R Street Institute, moderated the panel that included Mory Katz, legacy practice leader for BMS Group, and Roosevelt Mosley, principal and consulting actuary with Pinnacle Actuarial Service.

Theodorou was direct: There have been arguments presented that suggest the use of insurance scores may be unfairly discriminatory as it is a proxy for race and has a disparate impact on racial minorities. Both Katz and Mosley were in the industry in the 1990s when credit-based insurance scores first became a tool for pricing and underwriting. Together, they explained the history of the credit-based scores and addressed the sensitive issue of social unfairness.

Mosley, an actuary, said the term “unfairly discriminatory” in rate making historically has meant that actuaries were required to defend a factor based on loss experience associated with it. Mosley said the term means something else in a social sense, and that is where the controversy lies.

The timing of bringing the issue to the forefront of public policy debate has much to do with the summer of 2020, said Mosley. “It’s no secret that what happened in the summer of 2020 really was a reckoning in this country. There were a lot of areas in our nation that got increased scrutiny because of our history. Insurance was no exception to that.” Indeed, the summer of 2020 brought focus to the issue, said Mosley, but the issue had been building for years.

In 2007, said Theodorou, the Federal Trade Commission released a report to Congress on the issue that is often quoted as the seminal study on the issue. This report concluded that credit-based insurance scores are predictive of risk and do not act as a proxy for membership in any racial, ethnic or income groups. Other more recent studies reach the same conclusion, said Theodorou. He estimated that 85 percent of personal lines insurers use credit scoring in their rate setting because the scores are highly predictive of future losses.

Still, states like Colorado, Maryland and Washington press the issue and move toward banning insurers’ use of credit scores, said Theodorou. While all states have some restrictions on insurers’ use of credit-based insurance scores, these three states have more rigorous restrictions, Colorado and Maryland by law, and Washington by regulation. In 2021, the Colorado legislature passed the most restrictive law on credit scoring, said Mosley.

Katz explained how insurers’ use of the credit factor came about. Insurers are always looking for a way to implement new products and get accurate pricing, said Katz. Credit scoring was already being used by banks. So Transunion, where Katz was working at the time, and Fair Isaac performed retrospective reviews of claims and losses, then pulled the credit files on the claimants from two years prior. The result, said Katz, was “We’ll tell you now what we could have told you then.”

Statistical studies have borne out the relationship between credit scores and insured losses, said Mosley. “There is no argument that risky behaviors like hard braking lead to accidents. Hard braking also correlates to lower credit-based insurance scores,” he said.

Katz said that insurers look for stability (of their policyholders) and they find stability factors in credit scores. Katz expressed some astonishment at how credit scoring gets such scrutiny, but other factors bypass these closer analyses. He said companies have used motor vehicle reports for ages. MVRs vary by state, he said. “If you think about it, some people have the wherewithal to reduce or eliminate a ticket and other people don’t. So, there are discriminatory aspects, in the social sense, to almost every variable” insurers use in setting personal lines automobile rates.

Studies show, said Katz, that the use of credit scores allows many people to get a better rate than they would otherwise. Still, the regulators and legislators focus on the people who get a worse rate, he said.

The Casualty Actuarial Society has published a series of papers on Race and Insurance Pricing, a few of which Mosley has coauthored. Theodorou recommended reviewing the CAS papers which represent a new commitment by mathematically inclined actuaries to participate in the public policy discussion of potential racial bias in insurance pricing.