Insurance Credit Scoring

Are you aware that your credit score can affect your monthly car insurance premium? The insurance industry has been using consumer’s credit scoring for years to produce and direct relationship between financial stability and risk. In other words, a good credit score is deemed by insurance companies as a better financial risk compared to a poor credit score.

According to statistics based on consumer credit reports from Equifax, Experian, and Trans Union, there is a direct correlation between insurance claims and credit. An insurance company uses a consumer’s credit report to measure the likelihood that he or she will file a complaint. Depending on the agent’s finding, he or she will offer a quote according to the risk determined. The concept sounds reasonable but how do they reach their conclusions?

One of the studies involved information from 170,000 policy holders that filed complaints with in a three year period and pulled their credit reports. The test found that there are a set of credit characteristics found on consumers filing more and expensive claims. These characteristics include number of late payments, adverse public records, duration of late fees, tax liens and bankruptcies. The insurance industry sees this as direct evidence that a poor credit scores correlate to a higher risk of insurance loss.

The studies are fine and good but what does your credit report have to do with your driving record? Absolutely nothing, the insurance companies are not worried about you getting into an accident; they are only concerned when you file a complaint as a result of an accident. Insurance companies only record loss when a complaint is filed as a result of an accident or other factors.

According to studies like previous mentioned one, a proven history of a poor driving record holds less weight then a snapshot of a poor credit history. Insurance companies consider insurance credit scores as their number one predictor of loss.

The worse part about insurance credit scoring is that companies have the ability to increase or lower credit scoring at will without ever applying to the department of insurance for a rate increase. Department of insurance regulates rates, but not underwriting. This means that an insurance company could accept or decline your business by simply adjusting their underwriting model by increasing or lowering the cutoff for credit scores.

How does this affect you? If you have a good credit score, then you are probably in good shape. But if you have been divorced, filed for bankruptcy, lost your job then you might have already fell victim. It should also be noted that most people at some point of time fall into some bad luck and their credit takes a beating. In other words, no one is really exempt from credit scoring. The only winner out of this is clearly the insurance industry!

Now what can you do? We suggest researching on the topic further and write to your state congressman about your concern and try to get it banned. Insurance credit scoring has been banned in Hawaii already, so it is possible.