Pa. Lawmaker Seeks to Stop Insurers’ Use of Credit Scores

June 19, 2007

  • June 19, 2007 at 8:23 am
    LL says:
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    I am totally for credit-scoring.
    Why should’t I get preferential treatment as a reward for alwas paying my bills on time?
    Also, I prefer clients who wouldn’t dream of making a claim if the damage is less than $5000. That’s the true correlation between credit score and premium.

  • June 19, 2007 at 9:08 am
    Blonde3 says:
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    I have mixed feelings about this subject. It does seem that the people who need the insurance the most are often the ones who have bad credit – thus have high premiums. It is especially hard since most of these people are living pay check to pay check. I think we should find a better way of rating. It is also true that having bad credit itself is a bad risk and why should people who have good credit have to deal with those that don’t. It’s all apart of the sharing the “risk” of insurance. I do think that Agents should be more up front and not have to apologize for “educating” the public on their credit scores. If the public only could see what we agents see – it would make them more appreciated of what insurance is about. No easy answer to this problem.

  • June 19, 2007 at 9:27 am
    b'gate says:
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    All the comments reference bad credit. If a person chooses to pay cash, own their home with no mortgage, and not rely on credit card debt, their credit score will also be low but should not be penalized if they have years of good driving record. A person could pay all of their revolving debt on time, but be defrauded and have a major credit hit causing a low credit score, but still be resoponsible. Why should he have to pay more for insurance?

  • June 19, 2007 at 10:20 am
    LL says:
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    We are discussing claims, not driving records. Premium is based on the likelihood of a claim, not the likelihood of a speeding ticket.
    Get over it. Don’t make frivolous claims, and you will have very affordable insurance.

  • June 19, 2007 at 12:43 pm
    Not Blonde says:
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    I thought the people who need insurance the most are the people with assets to protect? If you have no assests, you probably have poor credit or no credit.

  • June 19, 2007 at 12:53 pm
    Not Blonde 2 says:
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    The intent of insurance/credit scoring is to charge an adequate premium for the risk. Essentially, insurance scoring is similar to that of a 16 year old driver. For years, 16 year olds have paid higher auto premiums because industrywide, 16 year olds have more accidents. Industrywide, people with certain characteristics in ther credit file have been statistically proven to have more insurance losses. Therefore the people who are statistically known to have losses will pay a higher (yet justified) premium than those that statistically do not have losses. Isurance scoring helps to reduce the problem of premiums going up annually for people who have never had a loss.

    Believe it or not, there is a huge correlation between credit history and insurance loss.

  • June 19, 2007 at 1:00 am
    aunti everything says:
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    How dare you mention statistical proof? Only feelings matter. We don’t want to hurt anyone’s feelings by charging a statistically valid rate. We should only charge what they can afford to pay. My heart bleeds.

  • June 19, 2007 at 1:04 am
    Stat Guy says:
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    I was unaware of this correlation until I mentioned this to one our our actuaries and found that this is really well documented. But since insurance is such a political issue, there will always be pressure to “level” the playing field but in the rush to do that, good drivers, good responsible consumers end up having to subsidize those who are not. I have no doubt that those who have good credit, that is, those who have a history of using credit responsibly, paying their bills on time and in full, they also tend to be responsible drivers. Banning the use of credit scores would penalize those who are responsible. The only drivers who could possibly benefit from this are those whose credit scores would increase their rates, not the responsible consumers….

  • June 19, 2007 at 1:05 am
    Be original with tag names!! says:
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    I am totally against insurance scoring. The people who are least able to afford high pricing, people with poor credit, are expected to then pay the higher prices and try to maintain or improve a good credit score. But as Blond said, many are living paycheck to paycheck…so the viscious circle continues.

    And no, people who need insurance are not necessarily thoes who have assets to protect, especially regarding the TOPIC we are on…which is car insurance. Car insurance is mandatory and thus when premiums are excessive for credit reasons, it becomes a huge burden. Having a car is not a luxury in many areas.

    I say, driving history should be adequate to set premiums. My credit is poor due to my younger days of being a doofus, but my driving record is exceptional. So credit scoring, IMO, is not fair at all. Statistics can be made to show proof for whatever one wants to show.

  • June 19, 2007 at 1:14 am
    Ray says:
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    Poor credit scores don’t correlate with a person’s income. It is how you handle your money. There are many folks with a more than adequate income who just don’t worry about paying their bills on time and the other actions that create good credit.

    On the other hand, there are many “blue collar” folks who have a great credit score because they took care to manange there finances well.

    20+ years ago when I first began to work for a small insurance agency I was told that it wasn’t the folks on the “East Side” we had to worry about making their payments on time, it was the folks from the “West Side”, the doctors, lawyers and other professionals who expected the small businessman to give them exra hand-holding.

  • June 19, 2007 at 1:17 am
    Rick says:
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    Looking at this from the selfish side banning credit scoring would certainly make it more difficult for the GEICO’s of the world.

  • June 19, 2007 at 1:34 am
    CreditShmedit says:
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    Yes…and also NOT allowing the “white collar” discount. Anyone see that article? Made me sick.

    What does the job you hold or whether or not you went to college make a difference? Soo, we will not even have to worry about driving related criteria to rate policies…

    Seriously…I rated a recent DUI with one of the well know companies and because the credit score was good, he got a much lower rate than the State assigned risk pool…and much better than someone else who had a perfect record and a low credit score. I gave a DUI a rate that I cannot even get.

    Mind Boggling.

  • June 19, 2007 at 2:59 am
    SJW says:
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    I personally feel this is a way of “red lining” and should be stopped. I do think that your driving record should play the largest part of the rate derived for each individual. I would like to see the statistics of the past couple of years matched up to the statistics of a few years ago when there was no credit scoring and see if the scoring actually does make a difference. You know what they say, figures can lie and liars can figure!

  • June 19, 2007 at 3:27 am
    Rekless Drivin says:
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    What’s the big deal?…so I’m a little late with my bills and a little early with my crack pipe…Chill!

  • June 19, 2007 at 4:13 am
    Mark says:
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    Insurers have proved and can continue to prove that there is a correlation between managing finances and managing driving behavior. Yes, there are exceptions to the rule, just like in most things in life, but insurance companies don’t deal with exceptions, they deal with large pools of data.

    On the other hand, Legislators deal with the public and credit scoring, insurance companies, and a “poor” voting bases are easy targets.

    Sorry, but someone’s credit score is a rating variable that is within their control, unlike other rating variables like gender.

    No one likes to singled-out but the facts are indisputable. If you got 10 of your buddies together and formed your own little insurance company where you paid premiums to each other and self-insured your own autos (impossible, I know),you darn sure wouldn’t knowingly include your friends that had a financial life that was a “wreck” would you.

  • June 20, 2007 at 4:58 am
    Ray says:
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    What you are talking about is the unusual situation. In MOST cases, the folks with bad credit got themselves there. It is the old 80/20 rule – and I, for one, don’t want to have the rules made for the 20% who have the problems.

  • June 20, 2007 at 9:14 am
    Nebraskan says:
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    I don’t make frivolous claims, nor do I have a bad driving history. I do have a poor credit history. WHY SHOULD I be penalized because someone with good credit has a poor driving record and frivolous claims? maybe you shouldn’t compare apples to oranges.

  • June 20, 2007 at 9:44 am
    aunti everything says:
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    Credit scores are not the sole determining factor. All other available underwriting factors available are taken into consideration. These scores are used to determine the rate level, not whether the risk is acceptable. The facts for using these scores are out there, if anybody actually cares about facts.

  • June 20, 2007 at 12:37 pm
    Ray says:
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    aunti everything – well said. The big problem is when people get emotional about the discussion. Yes, credit scores are considered, but they are far from being the only consideration. In New York, for instance, other factors considered include age of driver, location of the insured vehicle, type of vehicle and, more importantly, the driving record of the operator.

    Folks will ***** about someone with a DWI and good credit getting better rates than a poor credit score/clean driving records. Bah!!! The person with the DWI may well end up in the Risk pool or being written with a substandard (and much higher rates).

  • June 20, 2007 at 1:14 am
    Nebraskan says:
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    My response was a bit emotional…I appreciate the perspective!!

  • June 20, 2007 at 1:47 am
    Mark says:
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    Nothing wrong with getting a little emotional. Credit is an emotional issue with many people and it’s not intuitive for most people that credit results are linked to losses. That’s exactly why legislators want to get invloved in this. They know it’s a hot button with the public. If credit didn’t matter, do you think insurance companies would waste their time on it. No. It’s not free to run credit inquiries when rates are generated or develop pricing techniques that use credit. Plus many companies spend time and money fighting politicians and insurance departments. Common sense says they’d drop it and move on to bigger things if it wasn’t worthwhile. Fact is, credit, when used with other data (driving record, gender, etc) is predictive. Too much data to dispute it.

  • June 20, 2007 at 1:53 am
    Nebraskan says:
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    Yeah, it just saddens me because even though my credit is bad, i’m not stupid when it comes to rent, my car payment, my car/renters insurance payment. I’ve yet to miss a car payment, yet to miss an insurance payment, yet to miss a rent payment. I would be lying if I didn’t say I would be infuriated to see my rates go up because of my credit. I guess, in my opinion, it should work both ways(?). if credit can be used to determine my insurance rate, then why can’t my (on time) insurance payments be a factor in my credit score?

  • June 21, 2007 at 6:51 am
    Underwriter says:
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    Back in the dark ages (i.e. about six years ago) insurance companies had two types of risks: good risks and not-so-good risks. To price for them, they picked a target price somewhere in the middle, which meant that the good drivers paid a price that was too high for their risk and the not-so-good drivers paid a rate that was too low for their risk. Unfair, right?

    Fast forward to a time when insurance companies start thinking about really getting rate for risk. They examine their actuarial data and come up with lots of “things” that were predictive of the likelihood to file a claim. People who live in urban areas have more collisions and more thefts; people who live in rural areas are more likely to hit a deer. Sixteen year olds are a menace on the roads; the very elderly also have a greater accident frequency. People with lower credit scores are more likely (by a large factor) to file insurance claims.

    Someone hit it right on the head – insurance companies deal with the law of large numbers. There will always be someone who has lousy credit through no fault of their own, but who represents the best possible insurance risk. That’s what your independent agent is for – they’re your advocate to help you get the best price. Back in the good-ole-days, insurance was very subjective. If your agent went to bat for you, he/she could basically determine what your price was going to be. Now, it’s objective – the price is what it is. That said, agents are still able to talk to an underwriter and get an exception. I digress.

    On a grand scale, though, the statistical data doesn’t lie. The fact is, using insurance scoring has allowed companies to lower prices because they have hundreds (and in some cases, thousands) of pricing points. They look at lots of data for each customer: age, garaging address, past driving history, frequency of accidents, severity of accidents, the type of car you drive…literally dozens of factors combine to create a price for each customer.

    The best price is reserved for folks with great credit and a great driving history and cars that don’t make insurers sweat. The worst price is for folks who are irresponsible with their money and have tickets/accidents. Everyone else falls in the middle and that seems pretty fair to me. Believe it or not, insurance carriers want to charge the lowest possible price to their customers, which is what credit scoring helps them to do. The lower their price, relative to the competition, the more customers. More customers = more growth and more profit. More growth and more profit = happy shareholders.

    For those of you with lousy credit, knock it off with the “I’m a great customer with a perfect driving record.” Every company will tell you there are statistical anomolies; like I said before, though, law of large numbers says credit scoring works and it results in many folks getting big premium discounts. In the long run, every policy gets priced where it needs to relative to the competition and to allow for a profit.

  • June 22, 2007 at 7:57 am
    Ray says:
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    Underwriter – if people think straight, this should quelch a lot of the argument. But you know the next objection is that this method is harder on the poor, blah, blah, blah…

  • June 22, 2007 at 9:49 am
    Stat Guy says:
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    I used your comments to demonstrate to my 20 year old why his use of credit and his bad driving record are driving up his premiums. He has no idea about the consequences of his actions. His comment is “whatever” or “does anyone really care?” Thanks for a great primer on the use of credit for scoring. Although you posted as underwriter, you spoke like one of our actuaries.

  • June 22, 2007 at 12:04 pm
    Nebraskan says:
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    Hi Underwriter – Thanks for the comments. I appreciate the insight. (i’m one of those “bad credit, good driving habits” people)

    I’m sincerely asking this, so please don’t laugh if it’s completely stupid. I’m working really hard to restore my credit (and by the way, I have NO complaints about my insurance rate, I think I have been fairly charged.) if credit can be used to deterimine my insurance rates, could it be possible for my insurance history (making payments, rate, etc…) be used to help my credit score?

    In my mind that sounds like a fair question, but am I asking for apples to be converted into oranges?

    I’m just curious what you think…or anyone else for that matter.

    Thanks!

  • June 26, 2007 at 1:04 am
    Underwriter says:
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    Nebraskan – my apologies for a late reply, I’m honored that you would ask for advice. The easy answer is absolutely! If you have your insurance with a large, national carrier they will periodically recheck your credit score. Some companies (like the one I work for) use a scoring method that will use your highest score of record, so as your credit improves, your potential for rate decreases improves. And, if your credit worsens, it will have zero affect on your premium. This is particularly beneficial for small business owners who often have to take on a lot of debt to get their businesses off the ground. Keep in mind, not all companies operate in this fashion. Underwriting or your agent should be able to educate you about the use of credit.

    If you have done a lot of work on your credit (and it takes only about 12 months to see a marked improvement in your score) you can always contact your carrier and ask them to rerun your score. You’ll want to be careful doing this, as some states will require that the company use whatever the most recent score is in the case the customer requests a credit review. This means if it goes down it could adversely affect you. One such state is Michigan (unless something has changed recently). In most cases, though, it will only help you.

    What most folks don’t understand is that IBS scores (what the industry refers to as the credit score) is calculated very differently from your Beacon score (your raw credit score with the credit bureaus). Each company has a proprietary formula used to generates a score.

    I know most companies are looking at things like debt/credit ratio (maxed out credit cards = higher proponderence for filing claims) and overall payment history (late payment of credit cards = late payment of insurance – policy maintenance is very expensive for the company), recent collections (increased likelihood of filing a claim due to need of cash – over 20% of your premium pays for fraudulent claims) and new accounts being opened (ditto). There are other factors, but often these are the most critical.

    Another option is to shop your insurance. Some regional carriers still aren’t using credit scoring – you might be able to find a lower rate with them. That said, they are artificially selected against regularly, since they aren’t able to rate for credit, and their loss experience will be higher and ultimately their rates will have to go up to compensate.

    One more option – depending upon your agent and your carrier (some are more flexible than others), you could ask for a tier upgrade if you’ve been with the company for several years (say 3-5+). With long-term good driving record and no claims filed, many underwriters will give you a tier upgrade.

    Barring that – this time next year you can shop your insurance to another carrier and get a lower rate. In this soft market, most carriers are looking to hold on to whomever they can. It never hurts to ask for an upgrade :) If you have a really good agent (i.e. the agent has a large book of business with the carrier) this increases the likelihood you’ll get some extra special treatment. If you are the agent, even better.

    Good luck!

  • June 25, 2007 at 2:00 am
    StatPhD87 says:
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    Don’t be naive. One of the first things they taught us in graduate school was that a good statistician can manipulate the same identical numbers to prove or disprove anything. I doubt anyone hear is paying less premium than they were 6 years ago, even if you have a 780 credit score like mine. There is one thing for sure, the industry has much higher profits than they did 6 yrs. ago.

    What about the exceptions? ID Theft is rampant and as a result many now have erroneous credit data. A good decent friend of mine was a victum of identity theft 2 yrs. ago and still is trying to get the reporting agencies to correct his credit report/score. This is not a small issue. Did you know the number one item on top of the FBI’s list is identity theft? That’s right, even ahead of terrorism.

    Current laws state that we are not to consider credit scores when an exception exsist. However, there has been no vehicle or process put in place by the insurance companies to handle the exceptions and no one is held accountable if they do not make the exception. So my good friend still gets financially penalized because of a erroneous credit score.

    What’s next…….will statistics indicated that Black Americans file more claims that Whites? Do Christians file more claims than Jews? Do Democrats file more claims than Republicans? Where will it end???????

  • June 25, 2007 at 2:54 am
    Ray says:
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    Do you really think that comparing insurance costs today with the costs 6 years ago is a valid comparison. What about that old devil inflation? The only folks who badmouth insurance/credit scoring are those who don’t know that there is a correlation. End of story.

    As for insurance companies making profit – you had better hope that they do. Like any business, their first concern is profit. No profit, stockholders dump them, and a downward spiral ends with them going out of business. When the stock market takes a hit, insurance companies have to scramble to make ends meet. Loss ratios (money in vs. claims paid) really drive premiums in the absence of a strong stock market where they can make up the shortfalls.

  • June 26, 2007 at 7:30 am
    Underwriter says:
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    I’ve not thought of this before – it’s an interesting proposition. What you’re suggesting is that credit bureaus actually take the time to measure your credit worthiness based upon more than your handling of credit. It seems to me that being responsible behind the wheel, paying rent on time (for us non-homeowners), and other hallmarks of being a responsible adult might give a bigget picture to companies considering us for credit-worthiness.

    I doubt Experian, TransUnion or their ilk will ever want to get into that line of business. It’s certainly an interesting proposition, though. A company like ChoicePoint (sort of an information broker) could compile a complete info packet on someone and mine it for statistical trends on a large scale.

    Perhaps they could find trends like someone who always pays rent on time, makes car payments and had pay problems in the past is a better risk (for insurance or for more credit) once they have X months of solid credit pay history.

    To answer your question – no, your insurance doesn’t affect your credit, but it’s a fascinating idea. I don’t know if there is correlative data to support that people who are responsible behind the wheel make better credit-worthy risks. I almost wish I had a few million dollars to start a data-mining company to see what I could come up with.

  • June 26, 2007 at 5:57 am
    Nebraskan says:
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    Thanks for the reply! I appreciate the thought you put into it!! And I will certainly do that, well maybe. I’m with American Family Insurance, and feel I have a great rate! I honestly can’t complain.

    However, I’m not sure if I made my real question clear. If insurance companies can use my credit score to establish my rate, then vice versa, can credit companies look at my insurance history to improve my credit score? (i’m not looking for lower insurance rates, i’m looking for things to beef my credit rating). Meaning, if i have had NO claims, NO tickets, NO DUI’s, etc…and I pay my insurance premiums on time, then shouldn’t credit companies take THAT into consideration?

    Just a thought!

    THANKS AGAIN!

  • June 27, 2007 at 9:56 am
    Nebraskan says:
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    Underwriter, if you start that business, let me know!

    And Ray, thanks for the info. I kind of thought it might play a part in my credit score, I just wish it played a BIGGER part.

    I think this is the first time I’ve had a very useful and informative discussion on this website!

    Thanks!!

  • June 27, 2007 at 6:53 am
    Ray says:
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    Actually, part of what Nebraskan proposes is being considered in the credit score. By paying their insurance on time, not getting the non-pay cancellations and being turned over to collections for bad debt to the insurance company is a plus (or at least not a negative) for your credit score.



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