FACT ACT Study of the Effects FACT ACT Study of the Effects of Credit Scores and Credit-of Credit Scores and Credit-

Based Insurance Scores on the Based Insurance Scores on the Availability and Affordability of Availability and Affordability of

Financial ProductsFinancial Products

Midwest Actuarial ForumSeptember 22, 2005

Rick Smith and Greg Hayward

Fair and Accurate Credit Fair and Accurate Credit TransactionsTransactions Act of 2003 Act of 2003(FACT ACT)(FACT ACT)(62 Pages)(62 Pages)

An Act to amend the Fair Credit Reporting Act, to prevent identity theft, improve resolution of consumer disputes, improve the accuracy of consumer records, make improvements in the use of, and consumer access to, credit information, and for other purposes.

This session will focus on one section of the FACT Act.

Section 215 of the FACT Act Section 215 of the FACT Act Requires a StudyRequires a Study

Who: Federal Trade Commission and Federal Reserve Board

What: Credit Cards, Mortgages, Auto Loans, and P&C Insurance

How: Statistical Relationship Utilizing Multi- Variate Analysis that controls for prohibited factors

When: Due to Congress by December 4, 2005

FACT Act StudyFACT Act Study One Joint Report to Congress

FTC – Will focus on Auto and Homeowners Insurance

Federal Reserve Board – Will focus on Banking Products

NAIC Multi-State Data Call was Withdrawn – Five Member State Panel was established by

NAIC to work with FTC

Three Trade Associations Are Three Trade Associations Are Coordinating Industry Cooperation Coordinating Industry Cooperation

With the FTCWith the FTC

American Insurance Association (AIA)

National Association of Mutual Insurance Companies (NAMIC)

Property Casualty Insurance Association Of America (PCIAA)

Actions Taken by the Three Trades Actions Taken by the Three Trades

Established a Technical Support Group

Recruited Data Providers for both the Auto and Homeowners Study

Responded to Numerous Requests from the FTC

FTC Request for Comments in the Federal Register:

1. June 18, 2004

2. February 17, 2005

June 18, 2004 FTC June 18, 2004 FTC RequestRequest

Ten questions asking about methodology and research design:

1. How should effects of credit be studied? (methodology)2. What is hypothetical alternative situation?3. What is appropriate multivariate technique? What data?4. How to determine whether negative impact exists?5. What methodology will determine specific (credit)

factors causing problem?6. Same for factors not in credit scores7. Are data available?8. If not, what are proxies?9. If proxies, what analysis would allow inferences to be drawn?10.If only proxy is Census-level, what analysis would allow

inferences to be drawn?

June 18, 2004 FTC June 18, 2004 FTC RequestRequest

112 Responses are shown on the FTC website (www.ftc.gov)

Most were from individuals with personal complaints about the use of credit.

American Academy of Actuaries

Use insurance loss data Don’t try for “causal relationship” Define yardstick needed to establish concern

June 18, 2004 FTC June 18, 2004 FTC RequestRequest

Center for Economic Justice

How would consumer be treated w/o credit? (Although they would do so improperly)

AAA/SOP – Econometric, not actuarial Don’t use Industry Study database – can’t check for “intentional bias” Don’t study Loss Ratio Try to get policyholder-level race, etc.

via SSA, DMV’s, etc. Try surname for some groups Get application data, not just policies issued

(e.g. broad data call) Suggest also studying average credit score

as independent variable Capture proof of payment on expenses such as

rent and utilities

June 18, 2004 FTC June 18, 2004 FTC RequestRequest

Others

Coalition to Implement the FACT Act (insurers, other financial institutions) Credit Bureaus Specific insurers

Need to control for geographic risk If race proxy is used, use Census Block Don’t use average values, and

extrapolate (like MO study)

Nat’l Assoc. of Realtors Causal analysis Longitudinal analysis

June 18, 2004 FTC June 18, 2004 FTC RequestRequest

Others (continued)

Trade associations:

• Model losses – with and without insurance score

• Study residual market population

• Study ‘lift’ among classes

• Recognize geographic differences

• Study non-controversial variable first: e.g. driving record

FTC Insurance Study PlanFTC Insurance Study PlanAs Presented by FTC at CAS SeminarAs Presented by FTC at CAS Seminar

Append race and income to subset of sample, along with FICO score.

Build one model w/o risk scores, 2nd model with risk scores. Compare the two.

Add race/income to model. Will test to see if score is predictive within demographic groups.

Will test individual attributes.

February 28, 2005 FTC February 28, 2005 FTC RequestRequest

Twenty-one questions asking about how models are developed and used plus evidence regarding the effect on expenses, accuracy, availability, and affordability.

101 Responses are shown of the FTC website (www.ftc.gov)

Some Key Advice Provided to the FTC:

Numerous personal complaints about the use of credit.

Interesting study by NCRC – suggests study of non-prime (and non-traditional data sources – rent, utility payments etc.)

Michigan OFIS concern - length of time credit affects scores

Data CallsData Calls

• Trade associations working with member companies

• Multiple companies providing data voluntarily

• Separate data calls for Auto and Homeowners.

Auto Data CallAuto Data Call Will use subset of data from 2003 Insurance Score study

• Over 2 million earned car years• Majority of original data providers

Industry group working with FTC to add:• Credit attributes• Census block (via geo-coding address)• Vehicle MSRP

File with name/address will be handled separately• Add SSN• Send to Soc. Sec. Administration – add self-reported

race and income information• This data will be sent directly to FTC

Separate (new) call for ZIP code data• Multiple years• All data for three years• Have “clustered” Property Damage results

Homeowners Data CallHomeowners Data Call New database

• Will collect three years of data by peril• Approx. 3 million policies, 7 million exposures

Industry group working with FTC and vendors to add:• Insurance scores• Credit attributes• Census block (via geo-coding address)• CLUE

File with name/address will be handled separately• Add SSN• Send to Soc. Sec. Administration – add self-reported

race and income information• This data will be sent directly to FTC

Separate call for ZIP code data• Multiple years• All data for three years• Will analyze and clustered results

FTC Insurance Study PlanFTC Insurance Study PlanAs Presented by FTC at CAS SeminarAs Presented by FTC at CAS Seminar

FTC is interested in protecting and preserving US economy.

FTC realizes parties feel strongly on both sides of this issue, but FTC will build a balanced report.

FTC believes data base is fair and is generally pleased with the industry’s cooperation.

Final detailed report will include many results, charts, and graphs.

QuestionsQuestions ? ?