Insurer Group Urges Supreme Court to Overturn Ruling on Credit Scoring

November 29, 2006

  • November 29, 2006 at 7:50 am
    wudchuck says:
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    The problem with using credit, is that the insurance industry is claiming that more folks with file a claim if they have bad credit. The idea of getting insurance is to help recover the cost of an accident. If a false claim is filed, the claim will be denied. In some cases, it might take sometime to get those issues resolved. Even then, they should and in some cases, pay the company back for the amount spent on researching a false claim. Just because you might not have good credit, should not make you more of a risk for how well you drive. Afterall, insurance is normally based and should be based on the location where you primarily live,how you drive, and years of driving experience. Here\’s the other problem with that issue of credit. If it is a spouse/friend that is on the policy, we don\’t run credit on those folks. So is it fair we only run credit on the named insured? What about the co-named insured (in most cases, spouse)? Credit needs to be removed and based insurance on the driving history of all drivers.

  • November 29, 2006 at 8:23 am
    Ratemaker says:
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    Wudchuck — depending on the company, some do run credit on every driver named on the policy, and use the best score among them.

    There seems to be a general misconception that insurers are using credit information to rate policies and no longer using any of the traditional rating factors, such as driving history, rating territories, etc. This is not the case at all. If the credit information did not carry predictive power above all the traditional factors, it wouldn\’t be used in the first place. None of the traditional stuff has gone away.

  • November 29, 2006 at 8:44 am
    wudchuck says:
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    I work for an major insurance company. I know that we do not use just credit alone. But to think that it has a true bearing on someone\’s risk of driving, I think not! In today\’s society we over extend the power of numbers even to where it does not affect things. It\’s like when we talk about politics. In the truth of it all, is it not the concern is the actual production. What you do and not percieve what might happen. We all take risks, but they should not be considered as an extra based in financial standing. That would be like the Lloyds of London, thinking that a small company plans on having fraud to make money. They don\’t! So why should we have the same for insurance for auto\’s? Again, let\’s take the part of the equation out of the picture. Keep it strickly to their driving history and all drivers.

  • November 29, 2006 at 9:25 am
    Mark says:
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    You\’re right, it doesn\’t have to do with how people drive. But, it does correlate with how often they FILE CLAIMS. If you have someone with very poor credit, and a $500 loss, they are more likely to file it under insurance than someone with very good credit and cash on hand – they\’re going to pay for it out of pocket to avoid using insurance. That is a prediction, and it makes perfect sense. I\’m an agent in Texas, and I can definately tell you in my book of business there IS a correlation there in home and auto insurance. My good credit customers pay on time, I never have to rewrite a policy because of non-pay, and they file few claims. It costs an insurance company money to rewrite policies and have habitually late payers, a well as claims paying. It\’s only fair that those costs are recovered.

    Besides, if we didn\’t use credit, do you realize the giant rate increase the \”good credit\” people are going to have? You\’ll get more complaints than compliments, I assure you of that.

  • November 29, 2006 at 9:40 am
    Ratemaker says:
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    What you say has merit, but the same can be said of many of the traditional rating factors, too. I mean, do you really think every young male is automatically a worse risk? What many of the rating variables in use by the industry are trying to measure is responsibility and attentiveness – personality characteristics that can\’t be measured directly.

    While it may not directly impact driving ability, a person who is inattentive and irresponsible with their finances is probably inattentive and irresponsible in other facets of their life. Yes, I know that not everyone with a poor credit history is irresponsible or inattentive – some are just unlucky. However, many jurisdictions require insurers to apply a \’neutral\’ score in cases when a major life disruption (such as divorce, death of a spouse, loss of job, or major illness/surgery) is the root cause of a poor score.

    I too work for a major insurer, and I\’ve seen our numbers – the difference in losses from the lowest to the highest scores is consistent and real.

    Yes, Credit has its flaws, but so does every other variable we use. I\’m not saying credit should go away, but I would like to see the industry find new variables to replace credit to the extent possible. If the influence of credit can be lessened in favor of more socially acceptable and more easily understood variables, I\’m all for it. But I don\’t want the government to tell me what I can and can\’t use to price my product any more than they already do.

  • November 29, 2006 at 11:05 am
    Jane Agent says:
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    What about someone like Dave Ramsey (see daveramsey.com if you don\’t know who he is) who says he has a credit score of \”0\” because he doesn\’t borrow money ? Wouldn\’t credit score rating show a \”false negative\” for a person that is exceptionally responsible about their finances – thus, no debt – and most likely, their driving and everything else. What about the person who has an excellent credit score, as they are making payments on time, but are permanently in debt, up to their max — wouldn\’t someone living paycheck-to-paycheck like this be MORE likely to file a claim ? The rating basis is probably true when averaged out but I can see it being false for alot of individuals.

  • November 29, 2006 at 11:21 am
    Joe says:
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    Hi Wudchuck, you stated \”But to think that it has a true bearing on someone\’s risk of driving, I think not!\”

    I would estimate that someone in your organization fully understands the direct and consistent bearing credit has in predicting loss and even persistency. Otherwise your company would not be spending the money to pull credit.

    Even if your company does not have the \”be all, end all\” method for modeling credit data, certainly someone recognized that not making some attempt to incorporate even an over-the-counter credit model would certainty lead to adverse selection against your company.

    Nobody spends money on credit, just for the sake of spending money.

  • November 29, 2006 at 12:00 pm
    Ratemaker says:
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    The score used by insurers to measure insurance risk is not the same score used by the banks to measure risk of default. Certain values that the bank can use (income, bank balances) cannot be used by the insurer in calculating a score.

    In Dave Ramsey\’s case, Most insurance credit score models would return a \”thin file\” indicator, showing that there is not enough information to return a score. Insurer handling of thin files varies from company to company. I think most companies currently treat thin files about the same as above average scores.

    As for your second example, the person who makes their payments on time but is carrying max balances on everything, that person is likely to have an average to below average score, as insurer credit scores usually use balance-to-limit ratios as an input.

    As for the scores being right on average, but a false indicator for many individuals, I have two responses:
    1) Many insurers are working on more stable, more accurate credit score models. As the modeling expertise increases, the overall accuracy should increase as well.
    2) Insurance is rated on the aggregate, not the individual. Even as simple and widely accepted a rate factor as driver age can be a false indicator for some individuals. I\’ve met 17-year-olds that are the safest drivers you\’ll ever find, but the class of 17-year-old drivers has terrible loss experience as a whole, so they pay more as a group. Those with poor credit scores have terrible loss experience as a whole, so they pay more as a group as well.

  • November 29, 2006 at 12:33 pm
    wudchuck says:
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    As with the company I work for, credit is of course not the only factor used to determine insurance risk. In PA, it is a major hit. Now, in PA, we have a genderless rating for our youthful drivers. Again, I think, we focus so much of our ratings based on numbers. In most cases, I agree (vehicle, age of driver, nbr yrs driving exp and a few other factors showing responsibility). I could have a lousy credit, but be a great driver and not file a claim. I could have great credit, but have lots of money and be a lousy driver. The conundrum is that we need to apply same weighted factors and put credit as a side burner factor. In fact, if he/she is a good driver, you are going to make money due to no payout for a claim.

  • November 29, 2006 at 1:00 am
    YA in NC says:
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    Ya know, I can see how a correllation can be made between poor credit and the tendenct to turn in ALL claims, but I have to say that when we look at our substandard book of business and compare that with our preferred in terms of loss rations, our substandard book consistently outperforms our preferred book. MAybe it is because we have more physical damage coverages on our preferred book, maybe we\’re an oddity. I find that the most of our claims are coming from our middle class segment. Their credit scores are above average and higher, they own their homes, have at least 3 vehicles, but they tend to be the most active in terms of claims. Things that make you go hmmmmmm.

  • November 29, 2006 at 1:18 am
    Southern Agent says:
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    YA, your point about the middle class people having more claims , could it be there\’s more exposure? My clients with two boats, two houses and three vehicles, two wage earners are going to have more claims than a single person who lives in an apartment and ownes just one vehicle. Of course, the \”middle class\” person with the \”toys\” will pay alot more in premiums.

    On another note:
    Let me get this straight, I fight and save and do without all my life to keep and protect my good credit rating but my rates equal the rates of irresponsible people who, because they either:
    1. Lied to themselves or others about their ability to re-pay
    2. Cannot manage their lives financially
    3. Have their financial \”backs\” to the wall.
    That\’s not right.
    Insurance has many \”moral delimmas\” by it\’s very nature. This is another tool that thinking, mature people should embrace.

  • November 29, 2006 at 2:47 am
    Joe Agent says:
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    The long and short of it is simply that there is a strong correlation between credit score and loss ratio. It\’s been documented numerous times by numerous groups. Heck- even the NAIC even stated that their findings support the use of credit.

    We always hear about this one person who has horrible credit blah blah blah.. Which is no different with any other characteristic. The law of large numbers apply.

    Closing your eyes to that fact will eventually put your company at a disadvantage to those companies who utilized the more sophisticated rating models.

  • November 29, 2006 at 3:26 am
    just wondering says:
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    Everyone is saying that the \”preferred credit\” drivers are less likely to file claims. If there is a need to file a claim, isn\’t that usually due to an incident / accident occuring? Then they\’re not necessarily a better driver, just financially able to cover it up….

  • November 29, 2006 at 3:29 am
    wudchuck says:
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    still the fact is, we can use the law of large numbers, but in fact, credit is being used for all kinds activity. From credit cards, mortgages, insurance, etc; but in fact, when it comes to insurance, it does not have to with driving only with the possibility of filing a claim adversely/fraudently. The problem is if I file a claim, whether or not I have bad credit or not, the claim will be paid if not fraudelent. Just because the numbers say that your more likely to file a claim due to credit, that is not true.

  • November 29, 2006 at 3:50 am
    Einstein says:
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    In very simple terms credit scoring is dicrimination at the highest level. Yes, it is true, but so is rating but many other discrinating factors. The rightoues truth is that corperate america is winning this battle only because people with low credit scores have no power or identity to protect them. The fact is Michael Richards could scream at people with low credit scores because they have no group to protect them. Wake up.

  • December 4, 2006 at 4:41 am
    Credit Scoring Victim says:
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    We used to have a very good credit score. Until we were in an accident. The other driver\’s insurance company drug their feet for years and eventually was liquidated. I ended up disabled for a few years and our credit ruined. I eventually recovered sufficiently to return to work. Then, about 10 years later, my husband became disabled. His income dropped to base pay only (about 60% of his prior net pay), then after six months to 60% of base pay, then after two years his long term disability insurance was terminated completely because it had a two year limit for mental problems unless they were organic. It was not discovered until about a year later that the real problem all along was that he had a seizure disorder. We went three years with no benefits of any kind for my husband and me making only a small fraction of what he had made. My income could only cover keeping a roof over our head and the doctor visits and prescription co-pays that had to be paid up-front. There was nothing left. Our credit that we had worked so hard for the past 10 years to restore was once again ruined. Our vehicles were repossessed, we had tax leins (we owed for the last year he had made a lot of money) and we eventually had to file bankruptcy. He was finally approved for his social security disability benefits and we were able to get vehicles instead of me having to bum rides to work. But I have been having to pay outrageous prices for insurance. If the things on the credit report were medical bills I was told they would not count them, but they are not. We could not see the doctor or take the prescriptions without paying the co-pays up front. That\’s how things work these days. The bills that we couldn\’t pay because of his medical condition were the car notes, school loans, a small limit credit card, and a few small misc bills. Some insurance companies won\’t even consider writing us because of our credit. And the ones that will are charging us at least three times what we used to pay. In the past 20 years of driving we have never had an at fault accident and never had a moving violation at all. And this is the thanks we get. And no, I don\’t make claims for little things because I can\’t afford for my insurance to go up any more.

  • December 4, 2006 at 4:58 am
    wudchuck says:
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    As this is the reason why so many folks get upset. There are some that would file a claim of some sort trying to get themselves out of the $$$ grave. But I think in many cases, it\’s like the lady stated. Sometimes it is hard to stay above water and that should not be used to determine your risk of DRIVING! Key to solve these issues is the states willingness to pursue fraud and make them pay not only the restitution of the $$ paid out, but also the time involved with the court and the time involved with the investigation by the companies involved. FRAUD is causing the credit to be used and it should not be. Risk for insurance should be solely on your driving and the area you live.



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