The FTC wouldn’t know a reasonable survey if they stepped over one. This theory of theirs is ridiculous. If you examine credit score banding in the United States at this juncture of time, you will find that almost 45% of our nation has credit scores under the so called minimum prime level of 640. In fact, some lenders like AmeriCredit’s CEO stated last December that their “sweet spot” in subprime was 639 down to 550. It is highly unlikely that a large number of Americans are at a greater risk at these levels than those with scoring bands in the 700 to 800 range. In fact, those bands have had pronounced risk factors associated with them.
The insurance industry needs to UNDERWRITE their risks, and look at past performance not some idiotic FTC report with no actuarial basis.
This is nothing more than a scam for the insurance industry to assess higher rates on risk factors which are non-existant.
The FTC wouldn’t know a reasonable survey if they stepped over one. This theory of theirs is ridiculous. If you examine credit score banding in the United States at this juncture of time, you will find that almost 45% of our nation has credit scores under the so called minimum prime level of 640. In fact, some lenders like AmeriCredit’s CEO stated last December that their “sweet spot” in subprime was 639 down to 550. It is highly unlikely that a large number of Americans are at a greater risk at these levels than those with scoring bands in the 700 to 800 range. In fact, those bands have had pronounced risk factors associated with them.
The insurance industry needs to UNDERWRITE their risks, and look at past performance not some idiotic FTC report with no actuarial basis.
This is nothing more than a scam for the insurance industry to assess higher rates on risk factors which are non-existant.
I need help with how to explain our rate determination methodology to my customers here in Arkansas.
Upon renewal, even though the majority are receiving our 30/60, ultra preferred, and super preferred discounts for safe driving and no accidents, citations or claims in the past 3 to 5 years their premiums are increasing by from 10% to 45%.
Nearly all of my customers foolishly believe that auto premiums are determined primarily by their driving record and partially by the type vehicle they drive.
I am aware that according to the “studies” people with what Insurance Companies have determined to be bad “Insurance Scores” are much more likely to file claims than those with “good” credit scores. Now, looking at my second paragraph above the facts do not appear to support the “studies”. Additionally, from what we are allowed to see of the reasons for some the negatives in the risk assessment process I don’t believe that some of the negatives are valid in the real world but some appear to be very valid. I have customers we show as having a very bad score making them an insurance risk yet they are to lending institutions acceptable customers. Who has the most risk?????
Anyway, the bottom line is look at the second paragraph. Those are the people I need to be able to provide some logical explanation to for their rate increase because of their propensity to file claims when they have not filed claims in the past 3 to 5 years.
The scoring model my company uses does not even include an individual’s credit score. Our formula takes into account certain pieces of the credit history, such as number of late pymts and defaults and uses those specific items to determine a score. Those scores are divided into tiers and that is how we determine the rate each customer will be charged.
These factors, along with OTHER UNDERWRITING tools, allow companies to evaluate each risk and assign the proper premium.
Have the customer write a letter to the insurance company asking for an explanation. Companies are required to respond with a reason for any adverse action taken agaist a customer with regards to credit information.
It really doesn’t matter what facts are put out, many will not agree with this procedure. Other studies have shown it works and is reflective of the exposure, but they, of course, are slanted or wrong somehow. I am not involved in a line affected by this procedure, but I know from our company experience that it works. It’s a good indicator of risk. Prove it’s not somehow and then come back with your facts.
Read my comments. Those are facts. They are the facts that raise the rates charged based on credit score but not on driving record or claims filed. I have more claims filed by people with “excellent” scores that those with bad. I assume you work for an insurance company or the FTC.
CB/Peter Polstien – It’s really as simple as 2 + 2 = 4. Use of a credit model + other underwriting variables = proper rating. Virtually every study shows this strong correlation.
Put whatever spin on it you like CB/Peter, at the end of the day, you’re still wrong.
“I have customers we show as having a very bad score making them an insurance risk yet they are to lending institutions acceptable customers. Who has the most risk????? ”
Possibly the insurance company. If the lending instituation is a mortgage company or financing a car loan, if the customer defaults the can foreclose or reposses and recoup some of their losses.
For an insurance company, it may be risking a $100k plus claim with little or no chance of recouping any of that money.
Depending on the lending institution, there are different risk levels. I know people that can get a $200k home loan, but can’t get a $2k furniture loan. The mortgage company has a better chance of recouping a greater percentage of their losses through foreclosure than a credit company repossessing furniture if that is even a possibility.
Credit scoring works. Why? I don’t know, but I’ve analyzed the numbers at my company and the higher the credit score, the higher the losses. I didn’t really buy into credit scoring until I ran the numbers myself on my company’s data.
For those of you that say, I have customers with good credit scores and lots of claims and vice versa… insurance is about large numbers. Even if you’re looking at a few hundred customers, I’ve looked at numbers for over a hundred thousand customers. And that’s not even for a large company.
We don’t use it as a rater variable, but a simpler thing I’ve looked at is late installment payments. We looked at customers who are late with their installment payments more than twice, even if they never cancel, and they have about a 20% higher loss ratio than customers who pay on time. Again I don’t know why, but the numbers are there.
ok, we can make a cup 1/2 empty or 1/2 full. we can always strew numbers to fit any category we want. the fact of the matter is, usually someone with a higher score, can probably afford a small minor repair on their car and not file an insurance claim. but those of the lower statue, uses the filing correctly to get their vehicle fixed (or so they are supposed to). some folks take the money to fix their car for other items of need. concern i have is truly – are we making this a bigger deal than it shud be. personally, a risk is based on how they use the car and drive it. the credit score that is being used is based mainly on those whom are likely to file a claim for an incident. problem with that is, it’s truly an unfair predictor of someone’s driving habits. afterall, an insurance company was designed to restore the value of the object at the time of the loss. some folks are just not flowing with real cash and can afford any vehicle he/she wants. we should not penalize those folks whom are not as fortunate as those whom have the silver spoon. we should flag those whom have a considerable incidences to ensure that they are actually viable payouts vs a driving habit/error. what we shud be concerned with is that the amount to be pd for fixing the veh or injuries is paid to the invidiual entities involved or to make sure the repair is done. remember, just because i might have bad credit does not mean i can’t be a good risk and deserve great rates.
Amen wudchuck. I would assume based on the admant comments supporting credit scoring for insurance that those companies the do not use it and have very competitive rates will all be out of business by the end of next month.
No they won’t. Those companies that don’t use credit scoring are not as competitive with the better risks. Studies show credit scoring works and doesn’t illegally discriminate against minority group. What is so hard to understand here? It works, get over it.
1) i never brought up the issue of minority. so settle down w/that issue.
2) remember, what was written – it was the fact that they related increased of filed claims if the credit score was lower. in reality, just because we file claims does not mean we are a bad risk or bad driver. it means, that we need to have someone fix the car because we don’t have the funds to fix it with our own $$$. Someone whom has lots of money and a great credit score, does not necessarily file a claim – but yet, he/she could be a bad driver and high risk.
****
society today is so set on not owning up to it’s own responsibility for their own actions (rather blame it on someone else or a corporation). or folks like to blame it on being minority. let’s get over it!! our society today has forgotten values of integrity and honor. we let folks take up frivilous lawsuits just to be money hungry. and even then, it’s the lawyers whom make the money off that issue more than the one whom wanted to bring the lawsuit.
so let’s get back to the facts:
insurance was based on risk of the driver. remember the days of lloyds of london – sailing ships and cargo. that was based on the captain’ ability and the ship he commanded. the captain knew that he makes good profit when all the goods arrived at the port. a captain made calls on where to sail, avoid weather damages and many other options throughout the voyage. driving a vehicle is very similar, but it never should be based on how well i do financially. i don’t drive my car for business, making $$$. i work as an agent in the industry. my company uses credit but i don’t agree with it. but as with any numbers value, we can always make/construe the consumer to think anything. JUST LIKE IN POLITICS! i think truly, a fair competive rate is based on their driving skills and not adding in their financial stability/credit.
Auto insurance has little to do with individual exposure. It’s based on the law of large numbers. Based on valid and scientific factors it’s based on how likely you are to file a claim and for what amount. People with better credit scoring file fewer claims for less money. It works and studies show it. What is so bad about this factor as opposed to the other factors used for rating as long as it doesn’t unfairly discriminate, which it does not.
Having seen the effect of credit scoring on premium my concern from a societal view is that it has created a situation for young adults and people with poor credit were they can no longer afford to have insurance. They either do not buy insurance or purchase minimum coverages. The consequences of which are dire. As a part of the insurance industry,, I guess I shouldn’t care, until my car is hit by an uninsured motorist. maybe people with poor credit won’t buy insurance anyway, but if they can’t afford insurance and my insurance company pays for an unisured claim aren’t my rates going to go up eventually anyway?
Having a good score helps me though and I like it.
I dont’ remember who said it, but if I have insurance, why would I ever pay out of pocket for something my policy would cover? Then why would I need insurance at all????
All conpanies do not use credit scoring for some reason. Something no one has mentioned is that credit scoring is not universally applied. Each company receives approval for the way they will apply the credit score unless I am very mistaken.
The risk of a driver is not just in how he drives, but in his ability not to file claims. You are correct that a person with good credit might be a bad driver. That doesn’t mean that the person will file claims.
Not even considering the physical damage portion on the insured’s own car, let’s look at liability. If a driver has a minor fender bender requiring less than $1000 to fix, if that person chooses to pay out of pocket instead of filing the claim, they are “owning up to their responsibility.” In fact they may be owning up more than the person who would rather file it on their insurance. That’s $1000 straight out of the insured’s pocket instead of pawning it off on an insurance company because they’re big and can afford a $1000 payment.
If this person gets into several minor $1000 or less fender benders, does that make them a bad driver? Yes. Does that make them a bad risk if they pay for all of them? Maybe. They may be a bad risk for the big payout because eventually that minor fender bender may become a big liability claim. But for small claims, they’re a great risk because the insurance company doesn’t have to pay out.
Ideally that person would be charged a higher amount for all of the accidents that reflect their poor driving record, but not as high as someone who files all of the claims which would be discounted based on credit.
I think one thing I haven’t seen in any post is the fact that good insurance scores may actually be a good predictor of your driving habits. The truth is, people generally do not act all that differently in different aspects of their lives. If you are responsible with your money, is it that far of a stretch to believe you will be responsible with your driving?
Yes, some people who are responsible financially will be bad drivers, but on average this does not appear to be true. This does not mean that some of your best insurance scores will not file claims. It does mean that on average they file fewer claims than a bad insurance score. This is not just because they don’t file them, some of it is because they simply don’t have claims to file.
Also, simply because you have a lot or a little money does not mean you are a good or bad insurance score. The scores measure how you use your money, not how much of it you have. I am not rich, but I have a very good insurance score because I act responsibly with the money I do have. Many wealthy people have poor insurance scores because they overextend their finances.
As for the idea that insurance score only measures whether you will file a claim or not, I doubt this is true. Yes, people with better scores file fewer claims. But they also have better loss experience on liability, which are claims filed against them. In addition, I do not think the simple filing of a claim can account for the experience difference between the best and worst scores, which is dramatic.
Having worked with scoring, I can tell you that there are definitely two sides to this story.
First, Scoring is a valid predictor. But it is just that, a predictor. Not everyone with eight moving violations is going to have an accident. The same is true for those individuals with low scores… not everyone is going to have an accident. And while we can easily lump those people with multiple violations into the “Bad Risk” group, the same can not be said for those with bad credit scores.
Part of the problem is that we understand moving violations. Those individuals got caught by a law enforcement agency and got a ticket. We don’t understand credit scores. We don’t know what goes into a credit score, we don’t know how to improve our credit score and we sure don’t understand how there can be a relationship between credit scores and driving patterns.
To make matters worse, there are three primary algorithms used to generate a credit score and each of these algorithms look at the information in the credit history differently. It makes it even more difficult to explain credit scoring when a person scores 667 in one company and 845 in another (which isn’t as far fetched as it may sound).
So yes, credit scoring is a valid tool that helps lower premiums for more people than it raises premiums for. However I believe that even though we can prove the benefits of scoring, unless we as an industry begin to use the same scoring algorithms and can help our insured’s understand what helps and hurts their scores, it will be a tool that ultimately will be eliminated.
Now that the issue of integrity has been brought up, let me get on my soap box… for an industry which necessarily has to rely on integrity and honesty, I found that these values are hard to find in people in this industry. What matters most is the bottom line. the pure loss ratio, the combined ratio, the ROI, these are the things that make business profitable….and it affects everyone. so I have to accept that credit scoring is based on valid methodologies, on valid statistics and assumptions. But when these same insurance professionals play in a “just-for-fun” golf league, the need to win at all costs is borne out by their willingness to pad their scorecards…the sandbaggers!” and that is why our industry is always going to be questioned and ridiculed and vilified….as well as any of the tools used to set rates….
so if we want fair, then let’s not make a a counted incident when we hit animals! we can’t control mother nature, we already remove hail dmg and other similar claims. again, the insurance industry can claim anything for rates to climb. if i have a parking claim, and yet because i filed to get my vehicle fixed that might be a bad thing because my credit says HEY, I am going to file a CLAIM! where is the fairness in that? simply put, it’s not a fair way of solving the issue of what kind of risk that driver is — keyword: DRIVER not his credit or the ability to file claims based on damages. i truly believe we try sometimes to make things more than they are. or easily blame the other folks instead of ourselves when we are truly at fault.
Wudchuck sounds like a 6 year old. Grow up. Life isn’t fair, not at least in the illogical way you present your arguements. Credit scoring is proven to reflect the likelihood of filing claims over large groups. Even someone of your limited intelligence should be able to understand a statistical fact. Study after study (independent studies) show this as a fact. Why shouldn’t a company looking to compete for the best and most profitable classes of business use one of the many statistical methods of going for that business? Hundreds of companies are out there competing, choose one you like, or hate the least in your case.
By now you should have all figured out that “Nobody important” is the all knowing expert as evidenced by his view that anyone who disagrees with him has limited intelligence or is ignorant.
No, I am not all knowing. I do know this subject pretty well so I feel qualified to comment. So if I disagree with you I am bad and if you disagree with me you are just stating your opinion. Sounds fair to me.
I have a frustration in general with the posters on this site who don’t understand insurance and won’t take the time to learn anything about it. At the same time they feel qualified to slander the hard working and honest people in my industry by calling them criminals in no uncertain terms. Then when they are called on to state facts, oh, you are so awful. Get real. I am proud of what our industry does and no insurance company haters (which you may not be) will make me less proud. I’m sorry you can’t take someone disagreeing with you. If you think my stating my informed opinion on my industry is in poor taste, who cares.
HEADLINE:FTC Commissioner Disowns Agency’s Credit-Based Insurance Scoring Study
SUMMARY
A member of the Federal Trade Commission says she distrusts the agency’s own study on the use of credit-based insurance scoring in insurance underwriting because its methodology is flawed and the study was far less thorough than other industry probes.
Commissioner Pamela Jones Harbour, the only one of the five FTC commissioners to vote against releasing the report, said in a statement the research was poorly conducted and that its conclusions can’t be trusted.
“Because I distrust the integrity of the underlying data set upon which the study was based, I also doubt the reliability of any conclusions the report might draw,” Harbour added.
Nobody important I agree you probably are. I hate to disapoint you old timer but I started in the insurance industry in 1964.
The FTC wouldn’t know a reasonable survey if they stepped over one. This theory of theirs is ridiculous. If you examine credit score banding in the United States at this juncture of time, you will find that almost 45% of our nation has credit scores under the so called minimum prime level of 640. In fact, some lenders like AmeriCredit’s CEO stated last December that their “sweet spot” in subprime was 639 down to 550. It is highly unlikely that a large number of Americans are at a greater risk at these levels than those with scoring bands in the 700 to 800 range. In fact, those bands have had pronounced risk factors associated with them.
The insurance industry needs to UNDERWRITE their risks, and look at past performance not some idiotic FTC report with no actuarial basis.
This is nothing more than a scam for the insurance industry to assess higher rates on risk factors which are non-existant.
The FTC wouldn’t know a reasonable survey if they stepped over one. This theory of theirs is ridiculous. If you examine credit score banding in the United States at this juncture of time, you will find that almost 45% of our nation has credit scores under the so called minimum prime level of 640. In fact, some lenders like AmeriCredit’s CEO stated last December that their “sweet spot” in subprime was 639 down to 550. It is highly unlikely that a large number of Americans are at a greater risk at these levels than those with scoring bands in the 700 to 800 range. In fact, those bands have had pronounced risk factors associated with them.
The insurance industry needs to UNDERWRITE their risks, and look at past performance not some idiotic FTC report with no actuarial basis.
This is nothing more than a scam for the insurance industry to assess higher rates on risk factors which are non-existant.
HELP ME PLEASE !!!
I need help with how to explain our rate determination methodology to my customers here in Arkansas.
Upon renewal, even though the majority are receiving our 30/60, ultra preferred, and super preferred discounts for safe driving and no accidents, citations or claims in the past 3 to 5 years their premiums are increasing by from 10% to 45%.
Nearly all of my customers foolishly believe that auto premiums are determined primarily by their driving record and partially by the type vehicle they drive.
I am aware that according to the “studies” people with what Insurance Companies have determined to be bad “Insurance Scores” are much more likely to file claims than those with “good” credit scores. Now, looking at my second paragraph above the facts do not appear to support the “studies”. Additionally, from what we are allowed to see of the reasons for some the negatives in the risk assessment process I don’t believe that some of the negatives are valid in the real world but some appear to be very valid. I have customers we show as having a very bad score making them an insurance risk yet they are to lending institutions acceptable customers. Who has the most risk?????
Anyway, the bottom line is look at the second paragraph. Those are the people I need to be able to provide some logical explanation to for their rate increase because of their propensity to file claims when they have not filed claims in the past 3 to 5 years.
The scoring model my company uses does not even include an individual’s credit score. Our formula takes into account certain pieces of the credit history, such as number of late pymts and defaults and uses those specific items to determine a score. Those scores are divided into tiers and that is how we determine the rate each customer will be charged.
These factors, along with OTHER UNDERWRITING tools, allow companies to evaluate each risk and assign the proper premium.
Chuck,
Have the customer write a letter to the insurance company asking for an explanation. Companies are required to respond with a reason for any adverse action taken agaist a customer with regards to credit information.
It really doesn’t matter what facts are put out, many will not agree with this procedure. Other studies have shown it works and is reflective of the exposure, but they, of course, are slanted or wrong somehow. I am not involved in a line affected by this procedure, but I know from our company experience that it works. It’s a good indicator of risk. Prove it’s not somehow and then come back with your facts.
Read my comments. Those are facts. They are the facts that raise the rates charged based on credit score but not on driving record or claims filed. I have more claims filed by people with “excellent” scores that those with bad. I assume you work for an insurance company or the FTC.
I certainly do work for an insurance company. A degree in Insurance and 30 years in the business. What qualifications do you you have?
CB/Peter Polstien – It’s really as simple as 2 + 2 = 4. Use of a credit model + other underwriting variables = proper rating. Virtually every study shows this strong correlation.
Put whatever spin on it you like CB/Peter, at the end of the day, you’re still wrong.
“I have customers we show as having a very bad score making them an insurance risk yet they are to lending institutions acceptable customers. Who has the most risk????? ”
Possibly the insurance company. If the lending instituation is a mortgage company or financing a car loan, if the customer defaults the can foreclose or reposses and recoup some of their losses.
For an insurance company, it may be risking a $100k plus claim with little or no chance of recouping any of that money.
Depending on the lending institution, there are different risk levels. I know people that can get a $200k home loan, but can’t get a $2k furniture loan. The mortgage company has a better chance of recouping a greater percentage of their losses through foreclosure than a credit company repossessing furniture if that is even a possibility.
Credit scoring works. Why? I don’t know, but I’ve analyzed the numbers at my company and the higher the credit score, the higher the losses. I didn’t really buy into credit scoring until I ran the numbers myself on my company’s data.
For those of you that say, I have customers with good credit scores and lots of claims and vice versa… insurance is about large numbers. Even if you’re looking at a few hundred customers, I’ve looked at numbers for over a hundred thousand customers. And that’s not even for a large company.
We don’t use it as a rater variable, but a simpler thing I’ve looked at is late installment payments. We looked at customers who are late with their installment payments more than twice, even if they never cancel, and they have about a 20% higher loss ratio than customers who pay on time. Again I don’t know why, but the numbers are there.
ok, we can make a cup 1/2 empty or 1/2 full. we can always strew numbers to fit any category we want. the fact of the matter is, usually someone with a higher score, can probably afford a small minor repair on their car and not file an insurance claim. but those of the lower statue, uses the filing correctly to get their vehicle fixed (or so they are supposed to). some folks take the money to fix their car for other items of need. concern i have is truly – are we making this a bigger deal than it shud be. personally, a risk is based on how they use the car and drive it. the credit score that is being used is based mainly on those whom are likely to file a claim for an incident. problem with that is, it’s truly an unfair predictor of someone’s driving habits. afterall, an insurance company was designed to restore the value of the object at the time of the loss. some folks are just not flowing with real cash and can afford any vehicle he/she wants. we should not penalize those folks whom are not as fortunate as those whom have the silver spoon. we should flag those whom have a considerable incidences to ensure that they are actually viable payouts vs a driving habit/error. what we shud be concerned with is that the amount to be pd for fixing the veh or injuries is paid to the invidiual entities involved or to make sure the repair is done. remember, just because i might have bad credit does not mean i can’t be a good risk and deserve great rates.
Amen wudchuck. I would assume based on the admant comments supporting credit scoring for insurance that those companies the do not use it and have very competitive rates will all be out of business by the end of next month.
That’s pretty hard to believe considering your ignorance on this issue. Maybe it’s time to retire. Times and methods change.
No they won’t. Those companies that don’t use credit scoring are not as competitive with the better risks. Studies show credit scoring works and doesn’t illegally discriminate against minority group. What is so hard to understand here? It works, get over it.
1) i never brought up the issue of minority. so settle down w/that issue.
2) remember, what was written – it was the fact that they related increased of filed claims if the credit score was lower. in reality, just because we file claims does not mean we are a bad risk or bad driver. it means, that we need to have someone fix the car because we don’t have the funds to fix it with our own $$$. Someone whom has lots of money and a great credit score, does not necessarily file a claim – but yet, he/she could be a bad driver and high risk.
****
society today is so set on not owning up to it’s own responsibility for their own actions (rather blame it on someone else or a corporation). or folks like to blame it on being minority. let’s get over it!! our society today has forgotten values of integrity and honor. we let folks take up frivilous lawsuits just to be money hungry. and even then, it’s the lawyers whom make the money off that issue more than the one whom wanted to bring the lawsuit.
so let’s get back to the facts:
insurance was based on risk of the driver. remember the days of lloyds of london – sailing ships and cargo. that was based on the captain’ ability and the ship he commanded. the captain knew that he makes good profit when all the goods arrived at the port. a captain made calls on where to sail, avoid weather damages and many other options throughout the voyage. driving a vehicle is very similar, but it never should be based on how well i do financially. i don’t drive my car for business, making $$$. i work as an agent in the industry. my company uses credit but i don’t agree with it. but as with any numbers value, we can always make/construe the consumer to think anything. JUST LIKE IN POLITICS! i think truly, a fair competive rate is based on their driving skills and not adding in their financial stability/credit.
Auto insurance has little to do with individual exposure. It’s based on the law of large numbers. Based on valid and scientific factors it’s based on how likely you are to file a claim and for what amount. People with better credit scoring file fewer claims for less money. It works and studies show it. What is so bad about this factor as opposed to the other factors used for rating as long as it doesn’t unfairly discriminate, which it does not.
Having seen the effect of credit scoring on premium my concern from a societal view is that it has created a situation for young adults and people with poor credit were they can no longer afford to have insurance. They either do not buy insurance or purchase minimum coverages. The consequences of which are dire. As a part of the insurance industry,, I guess I shouldn’t care, until my car is hit by an uninsured motorist. maybe people with poor credit won’t buy insurance anyway, but if they can’t afford insurance and my insurance company pays for an unisured claim aren’t my rates going to go up eventually anyway?
Having a good score helps me though and I like it.
DO YOU THINK THE LAW SHOULD BE A CRYSTAL BALL? CALL THE The Federal Trade Commission’s ASK — HOW THEY HANDLE ALL OF THE CALL ABOUT THE INS- BAD FAITH.
insurance industry,, I guess I shouldn’t care, until my car is hit by an uninsured motorist . YOU CAN PAY FOR UNINSURED MOTORIST BUT ITS A BIG JOKE,
I dont’ remember who said it, but if I have insurance, why would I ever pay out of pocket for something my policy would cover? Then why would I need insurance at all????
All conpanies do not use credit scoring for some reason. Something no one has mentioned is that credit scoring is not universally applied. Each company receives approval for the way they will apply the credit score unless I am very mistaken.
The risk of a driver is not just in how he drives, but in his ability not to file claims. You are correct that a person with good credit might be a bad driver. That doesn’t mean that the person will file claims.
Not even considering the physical damage portion on the insured’s own car, let’s look at liability. If a driver has a minor fender bender requiring less than $1000 to fix, if that person chooses to pay out of pocket instead of filing the claim, they are “owning up to their responsibility.” In fact they may be owning up more than the person who would rather file it on their insurance. That’s $1000 straight out of the insured’s pocket instead of pawning it off on an insurance company because they’re big and can afford a $1000 payment.
If this person gets into several minor $1000 or less fender benders, does that make them a bad driver? Yes. Does that make them a bad risk if they pay for all of them? Maybe. They may be a bad risk for the big payout because eventually that minor fender bender may become a big liability claim. But for small claims, they’re a great risk because the insurance company doesn’t have to pay out.
Ideally that person would be charged a higher amount for all of the accidents that reflect their poor driving record, but not as high as someone who files all of the claims which would be discounted based on credit.
I think one thing I haven’t seen in any post is the fact that good insurance scores may actually be a good predictor of your driving habits. The truth is, people generally do not act all that differently in different aspects of their lives. If you are responsible with your money, is it that far of a stretch to believe you will be responsible with your driving?
Yes, some people who are responsible financially will be bad drivers, but on average this does not appear to be true. This does not mean that some of your best insurance scores will not file claims. It does mean that on average they file fewer claims than a bad insurance score. This is not just because they don’t file them, some of it is because they simply don’t have claims to file.
Also, simply because you have a lot or a little money does not mean you are a good or bad insurance score. The scores measure how you use your money, not how much of it you have. I am not rich, but I have a very good insurance score because I act responsibly with the money I do have. Many wealthy people have poor insurance scores because they overextend their finances.
As for the idea that insurance score only measures whether you will file a claim or not, I doubt this is true. Yes, people with better scores file fewer claims. But they also have better loss experience on liability, which are claims filed against them. In addition, I do not think the simple filing of a claim can account for the experience difference between the best and worst scores, which is dramatic.
Having worked with scoring, I can tell you that there are definitely two sides to this story.
First, Scoring is a valid predictor. But it is just that, a predictor. Not everyone with eight moving violations is going to have an accident. The same is true for those individuals with low scores… not everyone is going to have an accident. And while we can easily lump those people with multiple violations into the “Bad Risk” group, the same can not be said for those with bad credit scores.
Part of the problem is that we understand moving violations. Those individuals got caught by a law enforcement agency and got a ticket. We don’t understand credit scores. We don’t know what goes into a credit score, we don’t know how to improve our credit score and we sure don’t understand how there can be a relationship between credit scores and driving patterns.
To make matters worse, there are three primary algorithms used to generate a credit score and each of these algorithms look at the information in the credit history differently. It makes it even more difficult to explain credit scoring when a person scores 667 in one company and 845 in another (which isn’t as far fetched as it may sound).
So yes, credit scoring is a valid tool that helps lower premiums for more people than it raises premiums for. However I believe that even though we can prove the benefits of scoring, unless we as an industry begin to use the same scoring algorithms and can help our insured’s understand what helps and hurts their scores, it will be a tool that ultimately will be eliminated.
Now that the issue of integrity has been brought up, let me get on my soap box… for an industry which necessarily has to rely on integrity and honesty, I found that these values are hard to find in people in this industry. What matters most is the bottom line. the pure loss ratio, the combined ratio, the ROI, these are the things that make business profitable….and it affects everyone. so I have to accept that credit scoring is based on valid methodologies, on valid statistics and assumptions. But when these same insurance professionals play in a “just-for-fun” golf league, the need to win at all costs is borne out by their willingness to pad their scorecards…the sandbaggers!” and that is why our industry is always going to be questioned and ridiculed and vilified….as well as any of the tools used to set rates….
so if we want fair, then let’s not make a a counted incident when we hit animals! we can’t control mother nature, we already remove hail dmg and other similar claims. again, the insurance industry can claim anything for rates to climb. if i have a parking claim, and yet because i filed to get my vehicle fixed that might be a bad thing because my credit says HEY, I am going to file a CLAIM! where is the fairness in that? simply put, it’s not a fair way of solving the issue of what kind of risk that driver is — keyword: DRIVER not his credit or the ability to file claims based on damages. i truly believe we try sometimes to make things more than they are. or easily blame the other folks instead of ourselves when we are truly at fault.
Wudchuck sounds like a 6 year old. Grow up. Life isn’t fair, not at least in the illogical way you present your arguements. Credit scoring is proven to reflect the likelihood of filing claims over large groups. Even someone of your limited intelligence should be able to understand a statistical fact. Study after study (independent studies) show this as a fact. Why shouldn’t a company looking to compete for the best and most profitable classes of business use one of the many statistical methods of going for that business? Hundreds of companies are out there competing, choose one you like, or hate the least in your case.
By now you should have all figured out that “Nobody important” is the all knowing expert as evidenced by his view that anyone who disagrees with him has limited intelligence or is ignorant.
i work for a major insurance company. i may not always agree. so i am well educated in the insurance industry.
No, I am not all knowing. I do know this subject pretty well so I feel qualified to comment. So if I disagree with you I am bad and if you disagree with me you are just stating your opinion. Sounds fair to me.
Nobody important — no one said you had limited intelligence or were ignorant.
I have a frustration in general with the posters on this site who don’t understand insurance and won’t take the time to learn anything about it. At the same time they feel qualified to slander the hard working and honest people in my industry by calling them criminals in no uncertain terms. Then when they are called on to state facts, oh, you are so awful. Get real. I am proud of what our industry does and no insurance company haters (which you may not be) will make me less proud. I’m sorry you can’t take someone disagreeing with you. If you think my stating my informed opinion on my industry is in poor taste, who cares.
HEADLINE:FTC Commissioner Disowns Agency’s Credit-Based Insurance Scoring Study
SUMMARY
A member of the Federal Trade Commission says she distrusts the agency’s own study on the use of credit-based insurance scoring in insurance underwriting because its methodology is flawed and the study was far less thorough than other industry probes.
Commissioner Pamela Jones Harbour, the only one of the five FTC commissioners to vote against releasing the report, said in a statement the research was poorly conducted and that its conclusions can’t be trusted.
“Because I distrust the integrity of the underlying data set upon which the study was based, I also doubt the reliability of any conclusions the report might draw,” Harbour added.