Insursnce credit score is a huge factor in premuum

Insurance score


An insurance score - also called an insurance credit score - is a numerical point system based on select credit report characteristics. There is no direct relationship to financialcredit scores used in lending decisions, as insurance scores are not intended to measure creditworthiness, but rather to predict risk. Insurance companies use insurance scores for underwriting decisions, and to partially determine charges for premiums. Insurance scores are applied in personal product lines, namely homeowners and private passenger automobile insurance, and typically not elsewhere.

Contents

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• 1 Background
• 2 Support and opposition
• 3 Public information
• 4 Key reports and studies
• 5 References
• 6 Sources
• 7 External links

Background[edit]

Insurance scoring models are built from selections of credit report factors, combined with insurance claim and profitability data, to produce numerical formulae or algorithms. A scoring model may be unique to an insurance company and to each line of business (e.g. homeowners or automobile), in terms of the factors selected for consideration and the weighting of the point assignments. As insurance credit scores are not intended to measure creditworthiness, they commonly focus on financial habits and choices (i.e., age of oldest account, number of inquiries in 24 months, ratio of total balance to total limits, number of open retail credit cards, number of revolving accounts with balances greater than 75% of limits, etc.) Therefore it is possible for a consumer with a high financial credit score, and excellent payment history, to receive a poor insurance score. Insurers consider credit report information in their underwriting and pricing decisions as a predictor of profitability and risk of loss.
Various studies have found a strong relationship between credit-based insurance scores and profitability or risk of loss. The scores are generally most predictive when little or no other information exists, such as in the case of clean driving records, or claims-free policies; in instances where past claims, points, or other similar information exist on record, the personal histories will typically be more predictive than the scores. Insurers consider credit report information, along with other factors, such as driving experience, previous claims and vehicle age, to develop a picture of a consumer's risk profile and to establish premium rates. The correlation, between credit-based insurance scores and overall insurance profitability and loss, has not been disputed.
Support and opposition[edit]

The use of credit information in insurance pricing and underwriting is heavily disputed. Proponents of insurance credit scoring include insurance companies, the American Academy of Actuaries (AAA),[SUP][1][/SUP] the Insurance Information Institute (III),[SUP][2][/SUP] and credit bureaus such as Fair Isaac[SUP][3][/SUP][SUP][4][/SUP] and TransUnion.[SUP][5][/SUP] Active opponents include many state insurance departments and regulators, and consumer protection organizations such as the Center for Economic Justice,[SUP][6][/SUP] the Consumer Federation of America,[SUP][7][/SUP] the National Consumer Law Center[SUP][8][/SUP] and Texas Watch.[SUP][9][/SUP] As a result of successful lobbying by the insurance industry, credit scoring is legal in nearly all states. The state of Hawaii has banned all use of credit information in personal automobile underwriting and rating, and other states have established restrictions.[SUP][10][/SUP] A number of states have also made unsuccessful attempts to ban or restrict the practice. The National Association of Insurance Commissioners has acknowledged that a correlation does exist between insurance scores and losses, but asserts that the benefit of credit reports to consumers has not yet been established.[SUP][11][/SUP]

Public information[edit]

Insurance credit-scoring models are considered proprietary, and a trade secret, in most cases. The designers wish to protect their models from view for a number of reasons: they may provide competitive advantage in the insurance marketplace, or they anticipate consumers might alter results[SUP][clarification needed][/SUP] if the computations were common knowledge. Thus there is little public information available about the details of insurance credit-scoring models.

• One actuarial study has been published, The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan, ACAS MAAA.[SUP][12][/SUP]
• Allstate has published a private passenger automobile credit scoring model, the ISM7 (NI) Scorecard (where "NI" indicates no inquiries are considered).[SUP][13][/SUP]

Key reports and studies[edit]

Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, A Report to Congress by the Federal Trade Commission.[SUP][14][/SUP] This study found that insurance credit scores are effective predictors of risk. It also showed that African-Americans and Hispanics are substantially overrepresented in the lowest credit scores, and substantially underrepresented in the highest, while Caucasians and Asians are more evenly spread across the scores. The credit scores were also found to predict risk within each of the ethnic groups, leading the Federal Trade Commission (FTC) to conclude that the scoring models are not solely proxies for redlining. The FTC stated that little data was available to evaluate benefit of insurance scores to consumers. The report was disputed by representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, for relying on data provided by the insurance industry, which was not open to examination.[SUP][15][/SUP]
The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan ACAS MAAA.[SUP][12][/SUP] This actuarial study matched 170,000 policy records with credit report information to show the correlation between historical loss ratios and various credit report elements.
The Use of Credit History for Personal Lines of Insurance: Report to the National Association of Insurance Commissioners, American Academy of Actuaries Risk Classification Subcommittee of the Property/Casualty Products, Pricing and Market Committee.[SUP][1][/SUP]
Insurers' Use of Credit Scoring for Homeowners Insurance in Ohio: A Report to the Ohio Civil Rights Commission, from Birny Birnbaum, Center for Economic Justice.[SUP][16][/SUP] Birny Birnbaum, Consulting Economist, argues that insurance credit scoring is inherently unfair to consumers and violates basic risk classification principles.
Insurance Credit Scoring: An Unfair Practice, Center for Economic Justice.[SUP][17][/SUP] This report argues that insurance scoring: is inherently unfair; has a disproportionate impact on consumers in poor and minority communities; penalizes consumers for rational behavior and sound financial management practices; penalizes consumers for lenders’ business decisions unrelated to payment history; is an arbitrary practice; and undermines the basic insurance mechanism and public policy goals for insurance.
The Use of Credit Scoring in Automobile and Homeowners Insurance, A Report to the Governor, the Legislature and the People of Michigan, by Frank M. Fitzgerald, Commissioner, Office of Financial and Insurance Services.[SUP][18][/SUP] This report reviewed the viewpoints of the industry, agents, consumers, and other interested parties. In conclusion, insurance credit scoring was found to be within the scope of Michigan law.
Use of Credit Information by Insurers in Texas, Report to the 79th Legislature, Texas Department of Insurance.[SUP][19][/SUP] This study found a consistent pattern of differences in credit scores among different racial/ethnic groups. Whites and Asians were found to have better scores than Blacks and Hispanics. Differences in income levels were not as pronounced as for racial/ethnic groups, but average credit scores at upper income levels were better than those at lower and moderate income levels. The study found a strong relationship between credit scores and claims experience on an aggregate basis. In 2002, the Texas Department of Insurance received a peak of 600 complaints related to credit scoring, which declined and leveled to 300 per year.
Insurance Credit Scoring in Alaska, State of Alaska, Department of Community and Economic Development, Division of Insurance.[SUP][20][/SUP] The study suggested unequal effects on consumers of varying income and ethnic backgrounds. Specifically, the higher income neighborhoods and those with a higher proportion of Caucasians were the least impacted by credit scoring. Although data available for the study was limited, the state of Alaska determined that some restrictions on credit scoring would be appropriate to protect the public.

 

The early 90's wants there news flash back!

For real, this has been going on for 20 years. I knew it back when I first got my license in 92'. It is only used for an excuse to charge you more.

 

Not true. Due to legal troubles my credit score took a HUGE hit. In the past three years I've gone from a 550ish avg fico score between Equifax and TransUnion to a 680+. I've had to learn everything there is to know about credit scores. You can go on Capitalone.com and see if you're pre-approved for a credit card. To see if you're pre-approved, they do a soft-pull, which does not effect your score. Same as a insurance soft-pull. You could do 100 a day, and it wouldn't change your score. It's a hard pull that lowers your score.

 

You're absolutely right. A persons credit score will tell you a lot about a person.

 

Since the crash of 2008, a lot of folks who previously had excellent credit now have poor credit. Millions had their homes repossessed and it started a downward spiral that ruined their credit. Things do happen, sometimes out of the control of the applicant. At one time I think the majority of truck drivers had poor credit. It wasn't that they didn't want to pay their bills, but they were never home. Until recent years, you had to use the mail to pay bills and unless there was someone at home you could rely on to pay the bills, it was difficult to pay your bills on time. With the internet and bill pay offered by most banks, it is much easier to pay on time. But, life happens and there are any number of reasons why some may have had their credit destroyed or damaged. In any case, I don't see why someone who didn't pay a credit card statement on time could be considered more of a risk to be involved in an accident than someone with perfect credit. I have heard the arguments, but I don't think it is a valid argument. I can see someone as a "potential" of being at higher risk of burning down their house or car rather than having them repossessed, but that would be comprehensive, not liability or cargo. Prohibiting insurance companies and others from accessing credit reports should be a top priority for all of us.

 

yep, all it takes, is TWO words to ruin your credit for the next 8 years or longer.

by the way, it's possible to have some of the worst credit while still maintaining an excellent score.

maxing out your credit cards and having zero balances. makes a HUGE difference in score. i use privacygaurd.com. not the greatest, but it's the most accurate score.

but i've been wondering about this very question for years. what does the score have to do with insurance. there ARE people who have perfect payments, but low scores becuase they have no cards. they don't beleive in the use it or lose it mentality. they have cash. who wants a card that may get shut down anyways. but they get penalized. while the people racking up the collections but have paid off cards. pay less.

 

While that is the accepted as fact, when pressed to provide some proof to it, either in a study or an actuary report, I have yet to have an insurance company rep come up with it.

When I worked in a Pharma company, I worked with a bunch of actuaries who said when they went through their studies, they heard it but no one ever saw it - it was like a unicorn to them.

While credit ratings are a great snapshot of a person's finances, it isn't always a measurement of their risk.