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Credit Report Score And Insurance Losses |
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The insurance industry has also joined the
bandwagon of lenders who use credit report scores to estimate a person's
financial responsibility. They have begun using credit histories to create
credit report score for the people who apply for or renew automobile and other insurance policies. This is a number between 200 and 1000 and is being used by insurers to decide the rates. People with a good credit history and a consequent high credit score are offered lower premium rates whereas people with a poor credit history and a consequent low credit score are offered higher premium rates. Some insurers might also use your credit report score in underwriting procedures, including placement of policyholders within groups. The extent to which credit scoring is used varies from one insurance company to the other. There has been a lot of public debate about the use of credit scoring in insurance as the relation between one's credit history and one's automobile insurance claims has not been clearly established. People feel that an insurance premium should be based primarily on the amount of risk that a customer brings to the insurance company. There is, therefore, need to find out whether a statistically significant relationship indeed exists between credit report score and loss history. Moreover, hasn't the new information of the credit report score been used in pricing the insurance? Data obtained from research has shown that the statistical correlation between incurred losses and credit report score is extremely high and statistically significant. An analysis of the data indicated that the average loss per policy was $695. For those policies in the lowest 10% of credit report score, this average loss was $918, whereas within the highest credit report score decile, the average loss per policy was $558. Thus the lowest credit report score deciles produced a higher average loss per policy and the highest credit report score deciles produced a lower average loss per policy. Insurers say that two-thirds of policyholders have a lower premium because of good credit but consumers think that most people do not benefit and are upset at the fact that some insurers might reject the application for insurance based on their credit report score, whereas others might accept the same. The consumers cannot seem to understand how insurers' responses can be so different when they are all working from essentially the same credit report information. The credit scoring models used by large insurance companies have been developed by them, using their own proprietary information in combination with standard actuarial data. Even if they use other scoring models, they modify them to suit their own target market. Some insurance companies target only the best kind of drivers or homeowners, with no recent accidents or traffic violations whereas others accept people with a less than perfect record also. The main concern of any insurance company is the likelihood of a consumer filing claims and they use credit report score along with other application information to predict the above concern and thereby they streamline their decision making process to bring more efficiency in the issuance of the policies. The insurance companies are basically concerned about the risk factor and to control it, they have to accurately predict the likelihood of future claims so that they can offer insurance coverage to more consumers at a reasonable cost. Moreover, they only consider those items from credit reports that are relevant to insurance loss potential. Research has shown that there is a strong correlation between a consumer's credit report score and his or her future insurance loss potential. As such, insurance companies use your financial history with other factors to classify you according to the likelihood of future losses. They believe that credit information is very helpful for underwriting and rating applicants. The anticipated risk factor also determines the costs to the consumers. Credit report score is indeed an objective tool, which is very useful to the insurers. |
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