Credit Based Insurance Scores

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Insurance companies continually strive for accuracy to correlate rates for insurance policies as closely as possible with the actual cost of claims. If insurers set rates too high, they will lose market share to competitors who have more accurately matched rates to expected costs. If they set rates too low, they will lose money. This goal of accuracy is good for consumers, too, because the majority benefit with lower insurance rates.
 

In the insurance arena, credit information has been used for decades to help underwriters decide whether to accept or reject applications for insurance. New advances in information technology led to the development of insurance scores to give insurers a way to better assess the risk of future claims.
 
An insurance score is a numerical ranking based on a person’s credit history. Actuarial studies show that how a person manages his or her financial affairs, which is what an insurance score indicates, is a good predictor of insurance claims. Insurance scores help insurers differentiate between lower and higher insurance risks so premiums are equal to the risk they are assuming. Statistically, people who have a poor insurance score are more likely to file a claim.
 
 
  1. Credit history is a fact of 21st century life. It is used for securing a loan, finding a place to live, getting a phone, even by employers filling job openings.
  2. Insurers use credit scores to generate a numerical ranking based on a person’s credit history to determine an “insurance score” when underwriting and setting rates for insurance policies. Insurance scores differentiate between lower and higher insurance risks so that premiums match the risk a company is assuming. This enables insurers to offer their lowest rates to those who pose the lowest risk.
  3. Credit-based insurance scores are very different from FICO® scores. Insurance scores are designed to predict insurance losses; FICO®
  4. Actuarial studies as well as studies by the Federal Trade Commission and Federal Reserve show that how a person manages his financial affairs is an accurate predictor of insurance losses.
  5. Seventy-five percent of consumers have good credit, and they benefit when it is used by insurers.
  6. Credit-based insurance scores are just one of many factors insurers consider when determining a policyholder’s risk level.
  7. Each insurer uses credit-based insurance scores differently. Some use it for ratemaking, others for underwriting, and some companies do not use it at all. This keeps the market competitive and gives consumers more choices.
  8. Insurance scores are objective. They do not adversely or disproportionately impact low-income, elderly, or minority policyholders. 
  9. Prohibiting the use of credit scores in determining rates is unfair to consumers. It would mean that people who deserve lower rates would pay more than they should by subsidizing the higher-risk drivers.
  10. Fair Isaac says credit scores have remained the same for the general population and, in fact, credit scores may be improving, despite the recession. This is because the recession spotlights the necessity of paying bills on time, limiting credit obligations, and reducing debt.