Casualty Actuarial Society

Seminar on Ratemaking“American Academy of Actuaries Update on Credit Scoring”

Moderator: Walter C. Wright, Chairperson, Risk Classification Subcommittee

Panelists: Lisa Smego, Senior Policy Analyst,Office of Insurance Commissioner, Washington StateAlan Wickman, Administrator, Actuarial Department, Nebraska Department of Insurance

March 27 - 28, 2003San Antonio, TX

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The American Academy of Actuaries is the nonpartisanpublic policy organization for the U.S. actuarial profession. The Academy provides independent analysis to elected officials and regulators, maintainsprofessional standards for all actuaries, andcommunicates the value of actuarial work to the mediaand the public.

Mercer Risk, Finance & Insurance Consulting

AmericanAmerican AcademyAcademy of Actuariesof Actuaries

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The Parties InvolvedThe Parties Involved

The Credit Scoring Working Group

of the

Market Regulation & Consumer Affairs (D) Committeeof the

National Association of Insurance Commissioners

requested assistance from

The Risk Classification Subcommittee

of the Property/Casualty Products, Pricing and Market Committee

of the

American Academy of Actuaries

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The NAIC’s RequestThe NAIC’s Request

The NAIC requested specific assistance:

1. Review and critique four published papers, by:

• Monaghan (2000) • Fair, Issac (1999)• Conning & Company (2001) • Virginia Insurance Bureau (1999)

2. Provide guidance/parameters on how the NAIC could conduct a study of credit scoring, including:

• Determination of causality• Whether credit scoring has disproportionate impact on protected classes or on low income groups

3. Recommend best regulatory practices that states could use for reviewing rating plans

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Risk Classification SubcommitteeRisk Classification Subcommittee

Chairman:Walter Wright, Mercer Risk, Finance & Insurance

Members:Leo Bakel, State Farm Insurance CompaniesJames Monaghan, MetLife Auto and HomeChet Szczepanski, Pennsylvania Insurance DepartmentRae Taylor, Oregon Insurance DivisionPat Woods, Insurance Services Office, Inc.

Affiliate Member:George Dieter, Travelers Insurance CompanyAlan Wickman, Nebraska Department of Insurance

American Academy of Actuaries Staff:Greg Vass, Senior Casualty Policy Analyst

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Role of the SubcommitteeRole of the Subcommittee

• Represent the Academy

• Provide disinterested actuarial advice and guidance

• Do not advocate or lobby for any particular position

• Do not represent our employers

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Major Challenge for the SubcommitteeMajor Challenge for the Subcommittee

Issue of disproportionate impact on protected classes and low income groups

• What is meant by disproportionate impact?• Why is this an appropriate standard?• How much is too much?• Most rating tools probably have a disparate impact.• Disparate impact: defined as disproportional impact with no business necessity.• Measuring disparate impact much more complicated than measuring disproportionate impact.• Which protected classes (race, religion, ethnicity) and income groups to study? There are hundreds of possibilities.

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Future WorkFuture Work

The NAIC has asked that we review papers by:

• Consumer Federation of America

• Texas Department of Insurance

• Alaska Department of Insurance

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