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The ultimate question an insurer uses to figure rates is, how likely (or unlikely) is it that this insured suffers a claim? If statistics support using a persons credit as one of these factors, then it just makes sense that an insurer use credit.
Recently an u/w of ours reviewed the credit profile of an applicant an found a prior vehicle repo. They also saw that their current vehicle loan was 4-5 months past due. Comprehensive was one of the coverages being offered. Our u/w declined the risk. If you were an u/w would you have decided any differently?
I agree with the underwriter in that specific situation, but that example doesn’t really fit the question here, as it was using information from a credit profile, not using a credit score to come up with a rate.
My question is what rates do debt-free people get ? Talk show host Dave Ramsey says his credit score is 0 because he doesn’t borrow money. There are 1000s that have followed his plan and become debt-free and most are probably a better risk than someone who is in debt up to their eyeballs but (barely) making the payments, and keeping a high credit score.
I think credit-scoring rating is just a cop-out for underwriters (insurance or mortgage) who are too lazy to actually underwrite each account (as the UW in the example WAS doing by reviewing the information in the profile, not just plugging in a credit score).
Why are the credit profiling procedures and formulas used by the insurance carriers so secret? If credit profiling is such a ‘magic bullet’ and the greatest thing since the DMV extract and CLUE report for underwriting and predicting risk, let’s see the magic formulas out in the open in language the average insurance-buying person can understand. I can see the DMV extract. I can see the CLUE report. Why can’t I see the ‘credit profile’ procedures? Anyone smell anything bad? You can prove anything with enough ‘snapshot’statistics, but where is the 10 year research data that supports a direct relationship between credit profile and the potential for claims? If it is such a no-brainer, let the public see it in full light. We’re waiting…….
DarNovak,
I agree that the tiering methods should be more accessible for scrutiny. It would help agents better understand the process and explain it to their insureds.
D R,
This country is so heavy into debt that the MAJORITY of people (remember insurance is based on the law of large numbers) do have mortgages, car loans and maybe a couple credit cards. A credit profile usually does a pretty good job at painting an individual’s financial portrait. Maybe if the Dave Ramsey crusade (of which I AM a personal fan) continues, the whole FICO system will crumble and this will be an issue of the past.
Aren’t everyone missing something here? In a competitive environment, if an applicant does not like the price offering, based on whatever information the insurer chooses to make their offer on, then they will not buy and seek coverage elsewhere. If an insurer does not write enough business based on their criteria, and they are seeking to grow profitable business, then they will adjust their pricing (through scoring) to write more business. It is a free and competitive environment, and applicants can choose whoever they want to provide coverage at a rate acceptable only to them.
Correction: Isn’t, not aren’t
Most insurance company use a third-party insurance credit model for insurance credit scoring. It’s not your FICO score. If you were a company that made financial models, would you give it away? The FICO score certainly isn’t a freely available model. Why spend money researching when you have to give it away?
Correct Ratemaker.
The issue regarding Credit Scoring really boils down to an emotional issue. If you’re against the use of credit scoring for insurance pricing then justify your arguments against it’s use with solid data & facts to back it up. You can’t? Then it’s really an emotional issue. Insurance companies have dissected this issue so many ways but no one can provide data, based on objective arguments showing that credit isn’t some type of indicator.
For an insurance application, Mr. Ramsey’s approach to finances would not get him a “zero” score. It would get him a “thin file” or “no score.” This is not the same thing.
Regulatory responses to credit-based insurance scoring pay special attention to “no scores” and rightly so. The usual requirement is to give them a “credit-neutral” rate or better, meaning Mr. Ramsey would receive either no change to his premiums or a slight benefit from his non-use of credit.