The main benefit of using credit history to underwrite auto and homeowners insurance policies is that it allows insurers to charge lower risk consumers less for their coverage, according to the Property Casualty Insurers Association of America (PCI).
PCI submitted detailed comments on the value of credit history as an underwriting factor to the Federal Trade Commission (FTC) as it prepares to conduct a national study on the impact of credit history on insurance consumers. The FTC study is a part of a larger federal study, required as a result of enactment of the FACT Act in 2004, on the overall impact on consumers of the use of credit histories by financial services industries.
“Credit scoring improves underwriting equity by allowing more accurate risk evaluation,” said Diana Lee, PCI’s assistant vice president, research, in her response to the FTC questionnaire. “What that means is that high risk consumers pay more for their coverage and that low risk consumers – the majority of the nation’s drivers and homeowners – pay less. That’s a tangible consumer benefit that study after study has verified.”
The FTC questionnaire covered a wide range of topics on the credit history issue, from the factors used in developing credit-based insurance scores, to the number of scoring models in use, to the impact that credit history – and legislation that has banned its use in some states – has had on consumers. PCI cited results from a survey of its own members in its 15-page response.
According to the survey of PCI member companies, the use of credit history has enabled insurers to offer lower rates to 53 percent of homeowners insurance consumers and 72 percent of auto insurance consumers. More than 75 percent of the insurers responding to the survey reported that the use of credit history has enabled them to accept applicants for auto and homeowners insurance who would probably not be accepted if credit were not available. “The bottom line is that credit history allows more insurers to write more policies at lower prices for more consumers,” said Lee.
PCI also pointed out a recent study by the Texas Department of Insurance (TDI) that found that credit scoring not only improves pricing accuracy, but also yields new information not contained in other underwriting variables.
More importantly, the TDI study indicated that a ban on credit history would homogenize risk classification and lead to an unfair pricing system where everyone would be charged the same price regardless of risk.
“The results of the TDI study cannot be underestimated,” said Lee. “They turned the most commonly used arguments against the use of credit history upside down and changed the tone of the debate on the issue. The TDI study will have a significant impact on how the FTC develops the methodology for its study and evaluates the results.”
The FTC will consider comments from PCI and other stakeholders in the credit history debate before moving forward with the study. The FTC, in cooperation with the Federal Reserve Board, will conduct their analyses in compliance with the FACT Act that requires a study on the effects of credit scores and credit-based insurance scores on the availability and affordability of financial services.
The study is expected to be completed by December 2005.