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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 financial Credit score used in lending decisions, as insurance scores are not intended to measure creditworthiness, but rather to predict Risk management. 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.
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.
The Impact of Personal Credit History on Loss Performance in Personal Lines, by James Monaghan ACAS MAAA. 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.
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. Insurers' Use of Credit Scoring for Homeowners Insurance in Ohio, Birny Birnbaum, Center for Economic Justice (January 2003) 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. Insurance Credit Scoring: An Unfair Practice, Center for Economic Justice (January 2005) 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. The Use of Credit Scoring in Automobile and Homeowners Insurance, Frank M. Fitzgerald, Commissioner, Office of Financial and Insurance Services, Michigan (December 2002) 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. Use of Credit Information by Insurers in Texas, Texas Department of Insurance (December 2004) 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. Insurance Credit Scoring in Alaska, State of Alaska, Division of Insurance (February 2003) 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.
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