By Russ Banham
Carrier Management magazine
The annual ATECH Conference in Aruba is promoted as, “Where Tech, Innovation, and Creativity Meet to Become the Future.” At the 2015 conference, two young tech entrepreneurs, Carey Anne Nadeau and John Henry, did, indeed, meet and are now hoping to become the future of automobile insurance.
The co-founders of Loop, a managing general agency, plan to sell automobile insurance policies with premiums priced by a combination of telematics-produced driving behaviors and AI-provided data on unsafe road conditions. Loop has lined up investors and a fronting carrier, is engaged in talks with several reinsurers, and expects to file for a license to sell automobile insurance in Texas “any day now,” said Nadeau. “We will go live this summer.”
While other insurers are using telematics to assess unsafe driving behaviors like speeding and hard braking, the amalgamation of this data by Loop with information on road safety risks is novel. Somewhat unusual, too, is its formation as a socially conscious B-Corp—businesses that balance profit and purpose. “We’re using modern measurements to create more fairly priced insurance products for all people,” said Henry.
He’s referring to the wide use in the industry of a policy applicant’s credit score, education, occupation and ZIP code to price automobile insurance—practices that are biased against people of color, “unfairly grouping” these individuals “into a ‘high-risk’ category that pays 50 to 70 percent more” for coverage, Henry wrote in a recent article.
This contention is not new. Since insurers began using credit scores in the early 1990s, consumer advocacy organizations and activists have maintained that it penalizes people of color. On the other hand, studies by the federal government and most state insurance departments have found that credit scores are a remarkably accurate predictor of a policy applicant’s risk of loss.
Putting this debate aside for the moment, Austin, Texas-based Loop’s innovative combination of telematics and road safety data is a compelling and important development, as the data is more directly related to the two causes of collisions: poor driving behaviors and unsafe road conditions.
“We’re able to tap into local and state transportation databases to geospatially map the scene of auto accidents in a region, which we overlay with additional data on road construction and traffic volume,” said Henry. “This information is dynamically provided to drivers as actionable insights, informing policyholders to stay away from a particular road or intersection.”
To ensure policyholders avoid the unsafe areas, their routes are identified by GPS data within the Loop app on their smartphones. Policyholders who heed the safety considerations are rewarded with a premium discount at the six-month policy renewal. “We see Loop as more than just insurance; it’s a driver companion tool giving customers informed suggestions on safe driving,” Henry said.
As Nadeau put it, “We’re providing a feedback loop for drivers to make their own risk decisions.”
Right Place, Right Time
Loop as an idea germinated for five years, ever since the co-founders ran into each other at the ATECH Conference. Back then, Henry was a managing partner at Harlem Capital Partners, a for-profit venture capital fund that invests in tech-enabled startups focused on minority and women founders. He gave the keynote speech at the conference on entrepreneurship, which Nadeau attended. She was there to participate in a startup pitch competition, which she won, taking home the $10,000 first prize award.
“I saw Carey Anne’s pitch, and it was impressive,” Henry said. “She had a really sophisticated view of how to incorporate geospatial statistics into predictive models. I wasn’t sure how it could be valuable at the time, but it stuck with me.”
Nadeau’s resume includes stints mentoring Native American Fellows at The Urban Institute and as a research analyst at The Brookings Institution. She subsequently helped quantify a living wage for U.S. families, working as a research affiliate at the Massachusetts Institute of Technology’s Lab for Regional Innovation and Spatial Analysis (she holds a master’s in City Planning from MIT). “I started my career in jails, working at The Urban Institute trying to quantitatively understand the intersection of someone living in poverty, coming from a disadvantaged background, and the risk of incarceration,” she said.
Henry is perhaps best known as the co-creator, executive producer and host of “Hustle,” a cable-TV show on VICE Media. On the show, he provides advice to minority businessowners and diverse entrepreneurs on how to build their businesses. In a 2015 profile of Henry in Atlanta Black Star, an online news outlet, he is described as “a first generation Dominican-American known for his infectious optimism and preternatural business savvy” at the “intersection of doing well and doing good.”
Henry’s career as an entrepreneur began serendipitously. During his first semester of college, he worked as a doorman in Williamsburg, Brooklyn. “One of the residents, an entrepreneur, presented me a business opportunity,” he said.
The entrepreneur (Henry prefers keeping the person’s name private) guided him in launching an on-demand, logistics-driven dry-cleaning, laundry and housecleaning service, Mobile City Services, in Harlem, a neighborhood in upper Manhattan, New York. Henry quit college to focus on building the company, which evolved to serve the city’s film and television industry. He eventually sold Mobile City Services and launched Harlem Capital Partners, which was backed by $40.3 million in venture capital funding, in 2015. “Opening doors for others opened doors for me,” he said.
After the ATECH Conference concluded, Nadeau and Henry kept in touch. He like her quantitative capabilities, and she was intrigued by his entrepreneurial zest and focus on helping underserved communities. “We’re like ‘yin and yang,’ but we have the same important aims in mind,” Nadeau said.
Discrediting Credit Scores
These aims target the need for a more equitable automobile underwriting process, Henry said. “The insurance industry works well for preferred customers—people with homes and affluence—but this comes at the expense of people at the other end of the spectrum,” he said.
Asked for an example, he provided the following comparison. “An affluent person with an upper-middle-class income and a four-year college degree who has several speeding infractions and a DWI (an arrest for ‘driving while impaired’) will get a better rate in an underwriting model than someone else without speeding tickets or a DWI, a college degree, much lower income, and missed payments on a student loan or a mortgage by a few days,” he said.
When asked for a link to a study affirming the example, Henry introduced Ed Arovas, Loop’s head of insurance and an industry veteran, into the conversation. Arovas provided a link to an article prepared by the Washington State Office of the Insurance Commissioner, whose commissioner, Mike Kreidler, has long opposed the use of credit scoring. The article states, “What would you think if someone with a DWI and good credit pays less than you even if you have an excellent driving record and less-than-perfect credit? That is what’s happening today.”
The article, however, does not link or footnote an actual example of someone with a DWI getting a better rate than someone with an excellent driving record. Henry nonetheless does not fault insurers for the alleged disproportionate treatment. “We’re not calling on regulators to ban credit scores. We’re proving you can underwrite without them,” he said.
Not exactly, as Loop does factor into its pricing a policy applicant’s “geographic territory,” which is drawn from census tracts, Henry said. Asked how this data is different than a ZIP code, Henry replied in an email that ZIP codes “are large and aggregated, consolidating many drivers together in undifferentiated fashion. [We use] a more refined geographic unit, allowing us to more accurately assess the risk of roads across local communities—often resulting in more competitive rates for customers.”
He added, “The omittance of proxy factors like credit, occupation and education—paired with more refined territory factors—creates a unique blend of both inclusiveness and precision.”
These proxy factors remain in wide use throughout the industry to underwrite and price automobile insurance. “Several insurers have begun to use telematics in their pricing decisions, but they still rely on proxies like credit history and employment status that appear to correlate with driver risks but can unfairly penalize someone who is actually a great driver,” said Arovas, former president and chief operating officer at commercial auto insurer Amalgamated Casualty Insurance Company.
Numerous studies conducted by state insurance regulators and industry representative take a position counter to the executives at Loop on credit scores. (See related sidebar, “Another View: Crediting Credit Scores.”) But even those who support the use of credit scores commend Loop’s co-founders for developing the technological means to collect and deliver accurate and timely information to drivers on unsafe road conditions.
“Crash data has been very difficult to aggregate, as there are thousands of police forces across the country using different forms to report the crashes to insurance carriers,” said Tony Cotto, a former Kentucky state regulator who has served on the staff of the National Association of Insurance Commissioners. “This information is extremely useful for automobile underwriting purposes,” said Cotto, who is currently director of Auto and Underwriting Policy at the National Association of Mutual Insurance Companies.
Robert Hartwig, a clinical associate professor of finance and director of the Risk and Uncertainty Management Center at the University of South Carolina, said the information also is useful to anyone behind the wheel of an automobile. “By lowering the premiums of policyholders that adhere to the feedback on dangerous roads, highways and intersections, Loop incentivizes overall safety,” he said. “That’s a differentiating value proposition.”
Coming Soon
The events surrounding the death of George Floyd on May 25, 2020 catalyzed Nadeau and Henry to accelerate the development of Loop. In recent months, they have engaged a fronting carrier to issue insurance policies on Loop’s behalf and are in “final discussions,” Henry said, with a group of reinsurers to absorb the related risks. He is not permitted by Loop’s agreements with the various companies to disclose their names.
Loop also has partnered with a global technology company to use its cloud platform to build and generate AI-driven collision models. Henry said he is not permitted to disclose the company’s name at the present time.
The co-founders foresee no obstacles in Loop’s path to become a licensed MGA in Texas to sell automobile insurance in the state.
However, the question remains: Could Loop’s elimination of traditional underwriting criteria like credit score, occupation and education send up a red flag for the Texas Insurance Department, suggesting a potential solvency problem?
“That’s a good question,” Cotto replied. “Recently, the state’s insurance commissioner [Kent Sullivan] stepped down and a new commissioner has yet to be appointed. Whoever it is will have to make a judgment on the solvency issue. Frankly, I hope they get through. I’ve met them and I like them. They’re not pressing legislators or regulators to ban the use of anything [meaning rating criteria]. I think the fact they’re pretty well funded will be taken into account.”
He’s referring to Loop’s successful closure in January of a $3.25 million seed round of funding, led by venture capital firm Freestyle.VC. In a statement about Loop’s seed funding, Dave Samuel, founder and managing partner at Freestyle.VC, said, “Carey Anne and John are top-decile founders taking on a once-in-a-generation opportunity to transform an industry that touches so many lives.”
If anything, the company’s formation as a B-Corp testifies to the sincerity of Nadeau and Henry to do just that.
Sidebar: An Alternative View: Crediting Credit Scores
While InsurTechs like Loop and Buckle are trying to reshape the future of insurance without using credit scores to underwrite or price policies, the rest of the industry has yet to embrace the change.
“Several insurers have begun to use telematics in their pricing decisions, but they still rely on proxies like credit history and employment status that appear to correlate with driver risks but can unfairly penalize someone who is actually a great driver,” notes Ed Arovas, Loop’s head of insurance and a former president and chief operating officer at commercial auto insurer Amalgamated Casualty Insurance Company.
Past studies conducted by state insurance regulators take a different position, affirming clear and equitable benefits for all drivers from the use of credit scores. A 2017 Arkansas Department of Insurance study, for instance, determined that 80 percent of consumers “either received a discount for credit or it had no effect on their premium.”
A 2016 study by the Bureau of Insurance in Virginia concluded, “It would be difficult to conclude that [automobile] insurance policyholders are unfairly burdened by insurers’ use of consumer credit information or credit scores.” And an earlier study by the U.S. Federal Trade Commission stated that credit scores have “little effect as a ‘proxy’ for membership in racial and ethnic groups in decisions related to insurance.”
Robert Hartwig, a clinical associate professor of finance and director of the Risk and Uncertainty Management Center at the University of South Carolina, agreed with these conclusions. “It’s important to understand that no insurer knows the race of anyone applying for insurance; this information is not collected,” Hartwig said. “The industry is 100 percent race blind. It has always been that way and always will be.”
Asked if credit scores and other proxies inadvertently result in penalizing people from disadvantaged backgrounds, Hartwig demurred. “All underwriting criteria cannot be unfairly discriminatory. That’s the law,” he explained. “This means the criteria have to be backed up, first and foremost, by actuarial data proving an irrefutable and significant statistical association with claim frequency and severity.”
“Every insurer, every state insurance department and even federal agencies that have looked at credit scores have found an extremely strong correlation with claim frequency and severity from an actuarial and statistical perspective,” he said.
This correlation is “so high,” Hartwig said, that were credit scores to be eliminated as an underwriting factor in automobile insurance, “it could potentially have an adverse impact on the policyholders who generate fewer losses. In effect, they would be required to subsidize the policyholders generating more losses.”
Sharing this opinion is Tony Cotto, a former Kentucky state regulator who has served on the staff of the National Association of Insurance Commissioners. “Credit-based insurance scores are extremely correlated to the risk of loss,” said Cotto, presently the director of auto and underwriting policy at the National Association of Mutual Insurance Companies (NAMIC).
“There’s no disputing that,” Cotto continued. “A person’s credit score is a snapshot of the risk of loss the individual poses at a particular point in time. They are not static, meaning the person has control over their credit. If they pay their bills and taxes on time, pay off their debt, and keep their credit card balances low, they will benefit in many ways—auto insurance among them.”
R.B.