Insurers to Fight Credit Scoring Ban on Colo. House Floor

January 28, 2008

  • January 29, 2008 at 10:51 am
    wudchuck says:
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    here’s the problem i have w/the credit. let’s put this in perspective as per the reported article:

    “This legislation is a major step backward and could hurt the majority of consumers in Colorado,” said Kelly Campbell, regional manager and counsel for PCI. “Every credible study demonstrates the strong connection between credit information and risk of loss. As a result, the use of insurance scores enable insurers to make more accurate predictions about which consumers are likely to experience claims. Insurers have been using credit information for many years and some companies report that up to two-thirds of their customers have lower premiums due to having a good credit-based insurance score. If companies were prohibited from using these scores, the lowest risk customers end up paying more to subsidize higher risk consumers.”

    Penn. classifies credit as a major factor in determining rates. other use it a minor and if you have great credit – possible give you preferred rates (if no activity).

    the article lists that there is a correlation between good credit and risk loss. in reality – this is not a true assessment of risk loss.

    1) if i am rich and have a minor fender bender, i would gladly fix the other person and my car out of pocket – so i don’t file a claim. if not filed, i don’t have to tell anyone and not get hit on it. in some states if below a threshold, it does not affect my rate. but does the accident truly show my risk? i had one, and if i keep paying out of my pocket, although the insurance is not paying, my risk is not good.

    2) just because i have insurance, i would definately want my car to be fixed, because i am not a rich man (could be middleclass or lower). the idea of insurance is to imdemnify my loss. so why not have them fix the car and pay for it minus my deductible. i have now noticed finally, and have been waiting to see this. but a lawsuit against the insurance company and a dealership because when the vehicle was being traded – they did not get the value of the car like it had not been in an accident. lower value of the car was given.. um… did not the insurance company that got my car fixed at a repair shop (of my choosing) imdemify the value of the car? so why is it lower just because it had been in an accident. there are some folks that don’t get their car fixed and sure, the value is still the same since they cashed the check instead of repair. so where’s the solvency in getting it repaired and getting valued when i turn it in?! just because i filed a claim to fix my car means i have bad credit?! NO! is it more likely i will file a claim? NO! this is why the law of larger numbers does not work, we use the glass 1/2 full vs 1/2 empty. sounds like a political solution (haha, election year!).

    personally someone’s driving record is a risk and more concern than their credit. i would look at credit if it meant they might be fraudlently filing a claim but not the rate. accidents and tickets are valid, along with suspensions – many folks drive while on suspensions and truly need to stay off the road. especially since they don’t have insurance to cover them.

  • January 29, 2008 at 11:40 am
    lastbat says:
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    wudchuck, since underwriters look at loss-ratios, from their point a better credit rating does equal better risk. It’s less of a risk to insure somebody who is never going to use the insurance company’s money than it is to insure somebody who will use the insurance company’s money. It’s not that the rich guy is a better driver, he just costs less to insure – by definition a better risk.

    This of course avoids the issue that the rich guy will eventually, according to statistics, get into a fatal accident as a result of his bad driving and the other guy probably won’t. But if the fender-benders are never reported to the police, the insurance company wouldn’t have that data to base their risk calculations on, so would have to go with who is going to cost them less in pay-outs.

    I’m not saying it’s morally right, but it makes sense when looked at from a pure-risk sense.

  • January 29, 2008 at 11:42 am
    wudchuck says:
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    agreed to a point…but i think slightly unfair…

  • January 29, 2008 at 1:58 am
    Nobody Important says:
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    Life’s not fair woody. Credit scoring has proven to be right on statistically in independent studies. Last I knew, MVR’s we not terribly accurate since a lot of accidents go unreported and police are always downsizing tickets to a lower cost for “better” drivers. If I remember information is not shared well between states either. Credit scoring is a tool that can help point out drivers more likely to file a claim. What’s unfair about that?

  • January 29, 2008 at 2:18 am
    wudchuck says:
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    but filing a claim?! how is that fair? why should we punish somebody because they want their car fixed. they purchased a policy for such a reason. but how does it compare, if the other person at fault, i filed a claim against the other party. yea, i filed a claim but not you say because i have low credit i would file a claim anyways…. where’s the logic in that…this is why that does not correlate. how do you separate me filing a claim against my own company to fix my car vs the other company when they hit me?! this is why credit is BAD! here we go again, is the glass 1/2 empty or 1/2 full? now if i filed a claim and i might have bad credit, did i file that claim fraudelant? then credit would be an issue. i might use the claim check to pay for my other needs, which is ok, so long as i don’t file another claim against the same scrape on my car. just remember, i did not fix my car w/the first payment. this is why credit can’t be a good use of your driving skills. you keep saying poor credit i will more likely to file a claim to get my car fixed. is it more likely i have poor credit but a good driver, but i don’t have the finances to fix my car out of pocket, i do have insurance that will whether i am at-fault or not-at-fault. if it’s a parking lot hit or an uninsured motorist hit, i file a claim to fix my car but you had put me in a bad risk only because —– my CREDIT…. don’t that is correct. now for those living in PA, CREDIT is a major factor to determine company placement.

  • January 29, 2008 at 2:36 am
    SWFL Mark says:
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    Wudchuck, your logic makes sense however there is more to it than “rich guy fixes own car and doesn’t turn in claim”. Every meaningful study on credit scoring shows that the loss ratio deteriorates on each “line item” (med pay, PD, BI, PIP, UM, etc) as the credit score deteriorates. The data is consistent and predictive. While there may be some truth to the fact that people with means can afford to pay their own claims, they certainly are offering to pay their own BI and UM claims.

    Yes there are exceptions in every “data pool”, but insurance isn’t about exceptions, it’s about large, similar groups being treated the same way.

  • January 29, 2008 at 3:23 am
    Ratemaker says:
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    Insurance pricing is not about “fairness” in that sense – It’s about actuarial equity. If you filed a claim last year, you’re more likely to file a claim this year. If you have a lot of speeding tickets, you’re more likely to file a claim. If you have lousy credit, you are more likely to file a claim. If insurers do NOT use the data elements that are available to them that have been shown, in the aggregate, to predict losses, that’s not “fair” to someone.

    Also, credit ain’t wealth. Credit scores as used in insurance are based on debt/limit ratios, number of inquiries, late or missed payments, etc. The overall credit limit and income do NOT enter the score. Low-income people can have good credit ratings. High-income people can have lousy ones.

    Third, even if credit were just “rich guy pays collision costs out of his own pocket,” SO WHAT!? The insurer is trying to predict the claims dollars it will pay, not the overall loss that will occur. There’s a subtle difference, but it’s an important one.

  • January 29, 2008 at 3:41 am
    Dustin says:
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    I was thinking the same thing Ratemaker. Wealth does not equal good credit as the credit score (we called it insurance score) is more than how much money they have. Wudchuck, you say why punish the guy who files the claim by using credit. Why punish the guy who pays out of pocket? Doesn’t he deserve a break as well?

  • January 29, 2008 at 4:11 am
    wudchuck says:
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    ok, obviously each state looks at things differently….

    michigan uses salary to help with rate…as far as filing a claim, not true….if you have an accident or ticket, we can see and propose a history base on that you will have an accident. how many of you have seen accidents listed on a an mvr and not listed for payout on a claim report. most companies signify that as a accident and will use that for rating. so again, it’s not a matter of filing a claim. see you are so headed in the wrong direction when using credit. i could have a bad credit because i have been late on a payment. i cud have just recently filed bankruptcy and now my credit is great, but then my driving skills (tickets or accidents) could be horendous or could be good. so we can truthfully say we are using the number correctly. i don’t think so. show me that person filed a claim and he filed because he had bad credit — i don’t think so… no show me a fraudlent claim, and see credit – i bet it is a bad credit. so truthfully we go back to the value of numbers

    glass 1/2 empty or 1/2 full??!!!

  • January 29, 2008 at 4:26 am
    lastbat says:
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    wudchuck, I see where you’re coming from and quite frankly on a lot of levels I tend to agree with you. Mind you I’m not an actuarial or an underwriter, just a consumer of insurance products who also hase a great credit score. I don’t feel I am qualified to gainsay those who conducted the studies into credit scores and risk. I haven’t seen the studies and quite frankly those subjects (statistics and research) always bored me in school. If there is a correlation I am more than happy to take advantage of it with my good credit score. I do feel that credit scores should not be a major determining factor in rates – merely a supporting factor.

  • January 29, 2008 at 6:12 am
    einstein says:
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    The problem is how we derive credit scores. This credit scoring is working well for the home loan market? You should have thought a good credit score would mean a good loan. My point is the ridiculous credit scoring is flawed at best. Just think go out and shop for a car on Friday and your credit score goes down on Monday and your insurance rates go up, and you just lost the rate on your new home. WOW, this is just a small example of why this is a bad tool for rating.

  • January 30, 2008 at 7:32 am
    SWFL Mark says:
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    Several insurance carriers actually use their own credit scoring method and address the “inquiry” issue by removing it in their calculation.

    I don’t believe any of the people posting comments on this site would disagree that there must be some correlation between company losses and credit. If there wasn’t, companies wouldn’t be spending the time and resources to develop the rating methods and defend it’s use. They’re not using it for the sake of publicity are they? The overwhelming objection seems to be the “fairness” issue. What makes the use of credit anymore unfair than gender and marital status? Is it because we’ve always used these underwriting variables so they’re okay? I rather gender & marital status go away because I can’t control them like I can my credit and driving record.

    While there are exceptions to the rule, just like the guy who has 4 speeding tickets but never has a wreck, people who have used credit wrecklessly & don’t care about personal responsibilty, are more likely to have driving habits that parallel their personal behavior.

  • January 30, 2008 at 7:41 am
    Ratemaker says:
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    Wudchuck, if you can find ONE insurer in Michigan who is actually using salary to rate, I invite you to sue them. Salary is not included in any of the “off-the-shelf” major credit models insurers use. A credit model has to be approved by the regulators in any state that it’s used in, and I guarantee Michigan’s Commissioner wouldn’t have let that bombshell through.

    As for “cud have just recently filed bankruptcy and now my credit is great,’ in most models, a recent bankruptcy destroys your credit rating, both for insurance purposes and for obtaining a new loan.

    As for the common misconception of “credit vs. driving history,” it’s not a choice to use one or the other. Both tools supplement each other. Over 90% of the market has a clean driving history. Scoring helps predict FUTURE PERFORMANCE among this group.

    As for accidents showing up on the MVR, Comp claims don’t. Out of state accidents don’t. There are all sorts of things that don’t show up on the MVR. Both tools have problems, but are the best that are available.

    And no one is arguing that bad credit CAUSES someone to file a claim. Do a little research on causation vs. correlation before you spout off about rating tools. A powerful, consistent correlation is all that’s needed to use data as a rating variable.

  • January 30, 2008 at 10:15 am
    wudchuck says:
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    well, yes michigan is because it is a no-fault state – the only true no fault state and rates are based partly on your salary, which are approved by the mich insurance commish..it is the only state that uses salary…

  • January 30, 2008 at 11:09 am
    beast says:
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    how can we allow this as it’s just another way of keeping people that have run into hard times down a longer time.
    It creates another way of insurance companies to raise rates without having to file anything with the state.

  • January 30, 2008 at 11:12 am
    Dustin says:
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    Didn’t you know? The insurance industry is full of cold hearted rich people.

  • January 30, 2008 at 11:57 am
    Ratemaker says:
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    Okay, so salary is used to that extent – to give a discount on PIP benefits to extremely low wage-earners. However, that’s NOT part of the credit algorithm and is not used to “rate up” the poor, which is what you were implying.

  • January 30, 2008 at 12:05 pm
    Ratemaker says:
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    “It creates another way of insurance companies to raise rates without having to file anything with the state.”

    bzzzz… Thanks for playing! Insurers have to file both the model that they are using and the rate adjustments based on it with the states. The models have seen intense regulatory scrutiny.

    The answer to “how can we allow this” is that it works. Rates are lower for most people when insurers are allowed to use credit. Allowing the use of tools that improve the prediction of losses leads to fairer pricing, better financial stability, and increased availability of insurance.

  • January 30, 2008 at 12:28 pm
    wudchuck says:
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    we keep always putting things in perspective of law of large numbers…but can we say that sometimes large numbers are flawed? after the needs of the one, sometimes outweigh the needs of the few or many! i work for a company and can see that we do look at it, but is it fair. no! remember the key issue everyone brings up is likely to file a claim — likely ?! that is again like saying the cupe is 1/2 full and therefore we are not going to allow anyone else into the fold — or we cud say 1/2 empty and there is plenty of room for others to join into the pool. how many folks now days have 1 – 4 thousand much less more than that if a larger claim, in the bank! truthfully, i think we are barking up a tree and getting everyone to fall down from the limbs to agree but in reality — this really shud be looked into if claim is filed and poss low credit due to a false claim. but not for their driving skills. i know i keep saying the same thing, i think that credit is truthfully a poor example of someone’s DRIVING Skills is where we try to judge a risk.

  • January 30, 2008 at 12:32 pm
    Dustin says:
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    You have to realize that credit is only PART of the equation. It also indicates if someone is willing to take risks as well. The logic is that one who will take risks with their money, credit, might also take a risk on the road. If should not be(and is not) the sole determining factor of premium. By using credit it helps to give an overall picture of someone. Why is that so hard to understand?

  • January 30, 2008 at 12:34 pm
    wudchuck says:
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    that wud be like your willing to take risks at the gambling table and you know where your limit is at. yet, how wud your personal feeling of craps or roulette evaluate into the driving habits! it DOES NOT! this is why it’s not a valid factor.

  • January 30, 2008 at 2:10 am
    lastbat says:
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    Actually, wudchuck, your analogy is perfect for Dustin’s point. Risk takers generally do not confine their risk-taking behaviors to one defined and discrete portion of their lives. So someone with a gambling problem would be more likely to be a danger on the road. People who take risks with their money are more likely to take risks elsewhere. Either they have poor decision making skills, or the rush they get needs bigger risks to satisfy their craving, or they fall into despair; there are many reasons why risky behavior spans areas of one’s life. I am sure that there will be some people who were not risk-takers at all, but simply fell into a stretch of terrible luck, that will be penalized by using their credit score as a factor in their insurance rates – but the question would then be how many have to be truly harmed (not risk-takers, just unlucky) to knock out the balance of all those benefiting from it? To take away the future benefit the unlucky would receive once they get their credit score back up?



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