Man I wish they would get rid of credit scoring for insurance in my state. The auto premiums are way too low. They estimate premiums could go up 20% if they stopped using insurance scores. With this market we could all use help in increasing premiums. Let all work to get rid of insurance scoring and increase our income.
“During hearings on OFIR’s proposed rule to ban insurance credit scoring, more than one insurance company acknowledged that credit scoring is a redistribution of costs, and not a net reduction…”
I’ve said this for years. As an agent who worked in Michigan and Florida both before and after these rules came into play, 80% of the book pays the same or more, 20% pays less. I always get push back here either because agents are too young to have seen it both ways, or because they believe everything the carriers feed them.
Credit scoring is nothing more than a back door rate increase. It’s no accident that more customers on multiple books pay more with credit scoring than without.
. . . just like sales tax for the vehicle you purchase, a drivers license to operate the vehicle, and the annual fees to tag said vehicle yet none of these state-mandated requirements are based upon credit score. My credit score is assessed if and when I finance my vehicle and that should be the only time my credit is assessed. Like it or not insurers, an inusrance policy is NOT a line of credit and to treat it like one is a blatant and unethical foul.
Mr. Solvent – your comment about a back door increase is misleading – the total dollars needed are the same – they are just redistributed – is that an overall rate increase? Not by my definition.
Your quoted comment from the OFIR hearings basically says that companies are saying that if a company needs $X to pay for Y insureds in a total book, that with and without credit scoring you still need $X – the $X is just allocated differently amongst the Y insureds with and without credit scoring.
How does that imply a back door increase when the total dollars needed is the same? Some people pay more, some people pay less and some people pay the same. You could call this a reallocation, but I would not call this a rate increase for the book.
Maybe the reason that more insureds (by number) pay more with credit scoring is that they are, on average, higher risks and they should share more of the risk premium? Maybe this is more of a removal of a subsidy for some…
They claim it’s a redistribution but that’s misleading. On paper it may be a redistribution. It might show that rates overall don’t change. In reality it’s not a redistribution. Where are the most “high risk” credit individuals? Why in territories that already have higher rates…by accident? I don’t think so.
You’re talking to a guy who wrote his Master’s thesis on the practice and I’ve sifted through more data than you have I promise you. The problem with using these statistics that the companies give is that they’re manipulated to give an inaccurate picture. For example, the higher credit risk exhibits more comprehensive claims. Perhaps that’s more territory driven than it is credit driven. The higher credit risk in no model I’ve seen presents a higher collision risk. Why do you suppose that is? Comprehensive and medical/pip is where the greatest correlation is. Can we assume also that they don’t have coordinating medical benefits if they have poor credit? What else might cause that?
Let me ask you a question – why would companies do risk rating based on insurance scores if they were not in some way reflecting the actual risks?
If companies have it wrong, why would would other competition not capitalize on this misjudgment? The insurance scoring companies would get all of the risks that get the credit from the insurance score (thus lower average premium) and the new non insurance scoring company would get all of the “overcharged” customers that have a higher premium because they get no discount and we need the same total. If there is no difference in risk profile, the credit scoring companies would be in trouble – why is that not happening? Maybe there is an opportunity for you to start a company and make a lot of money…
It seems like you are in the camp that thinks that the insurance score has nothing to do with the actual risk of the insured. I may not be 100% sold that insurance score has predictive power in risk assessment, but I feel pretty good that it does from the studies I have seen.
Back to my first post, at the end of the day a company will need $X to pay for Y insureds. The rate filing typically is heavily scrutinized (internally and externally) to figure out the appropriate $X. After you figure out the $X needed, you have to figure out the appropriate allocation. I contend that companies who win get it the closest to the actual risk, and I contend that insurance score can factor into that equation for certain lines of business when you look at the data.
Companies have tons of data. I find it hard to believe they are doing things (on purpose) that would put them in a bad competitive position relative to the risks in their book. Why would companies “give away” premium to the good insurance score risks if they were really not better risks?
Just because you wrote your Master’s thesis on something does not imply that you are correct.
I admit I do not know everything about this, but I do fully understand the fundamentals of setting rates, and I invite you to point me to some compelling evidence that demonstrates that companies should NOT be using insurance scoring in setting rates.
Mr. Solvent
You stated: “For example, the higher credit risk exhibits more comprehensive claims. Perhaps that’s more territory driven than it is credit driven. The higher credit risk in no model I’ve seen presents a higher collision risk.”…”Comprehensive and medical/pip is where the greatest correlation is.” Thank you for providing information that supports insurance scoring. Since most states do not allow companies to surcharge and/or factor these types of losses in their rating, how else can companies adjust to their increased loss exposures compared to lower credit risks who exhibit lower loss costs? It has been proven that people in any given territory have a range of insurance scores, so how can you make the assumption that increased comp and med claims are territory drivem more so that credit driven?
I have to also point out the fact that not every ‘newly-discovered’ rating factor will be beneficial to the customer. Let’s say, for instance, that actuaries discover the amount of french fries you each correlates to the number of accidents you’ll be involved in. Maybe 80% of the book will stay the same or see an increase, while 20% sees a decrease. So what? If credit is predictive of risk, there is nothing to say that most people SHOULDN’T see an increase in their rates because of it.
Michigan is the only state (where the use of credit is allowed) in which the practice has to be ‘spun’ as a discount, due to the laws they’ve chosen to enact.
…and no one is treating your insurance policy like a line of credit. Your insurance company has a duty to its policyholders, its stockholders, and society as a whole to make premiums match costs as closely as possible, both on an aggregate and on an individual basis.
Bluntly put, the purpose of credit information in insurance rating is NOT to assess the risk that the insured will not pay the premium. If that occurs, the policy gets cancelled anyways.
The purpose of credit information is to assess risk. There is a powerful and consistent correlation between a person’s credit history and the costs they incur for an insurer. Persons with poor credit history file MORE claims and more EXPENSIVE claims than persons with strong credit history. This pattern persists even when controlled for differences in age, territory, prior claims history, driver violations, and all the other “traditional” rating variables.
This pattern is strong enough that, if ordered by the insurance department that I could only use EITHER driver age or credit — I’d pick credit.
Insurance scoring and driving record are NOT correlated. What IS correlated is insurance score and the probability of FUTURE losses. Insurance companies, especially for new customers, are not concerned with past losses because premiums are paid for future coverage. Therefore, rates need to be based on what the FUTURE claim costs will be. Study after study has shown that credit-based insurance scores are the most highly correlated factor used in rate making and that 65-70% of insureds’ rates are either postiviely or unaffected by their insurance score.
For those of you who state that credit reports are not always accurate, driving records (MVR and CLUE) are not always accurate either. If a conviction or accident is not listed on your report, do you contact the DMV or CLUE in order to have those reports corrected? (that was a rhetorical question since we all know the answer) Hwever, if your rate is adversly affected by your insurance score, you are given the option to contact the credit agency(ies) to correct them and insurance companies are required to re-rate your policy based on the new information.
If credit-based insurance scoring is banned, you explain to the responsible policyholders why their rate went up in order to allow the less reponsible to pay less even if though they file more claims.
Mr. Solvent, also by your logic, a 16 year old driver should have the best rates.
Ron, it is wrong to assume that those of us who have a higher rate due to credit are not responsible policy holders as well. How do you explain to a responsible policy holder that their rate was increased due to a credit score, and I assure you the hikes are substantial.
I’ll accept higher interest rates in exchange for a poor credit score, they’re issuing me credit and therefore have a real risk. But a higher insurance rate is the insurance companies way of making profit off of those of us who don’t have anymore to give.
Man I wish they would get rid of credit scoring for insurance in my state. The auto premiums are way too low. They estimate premiums could go up 20% if they stopped using insurance scores. With this market we could all use help in increasing premiums. Let all work to get rid of insurance scoring and increase our income.
“During hearings on OFIR’s proposed rule to ban insurance credit scoring, more than one insurance company acknowledged that credit scoring is a redistribution of costs, and not a net reduction…”
I’ve said this for years. As an agent who worked in Michigan and Florida both before and after these rules came into play, 80% of the book pays the same or more, 20% pays less. I always get push back here either because agents are too young to have seen it both ways, or because they believe everything the carriers feed them.
Credit scoring is nothing more than a back door rate increase. It’s no accident that more customers on multiple books pay more with credit scoring than without.
. . . just like sales tax for the vehicle you purchase, a drivers license to operate the vehicle, and the annual fees to tag said vehicle yet none of these state-mandated requirements are based upon credit score. My credit score is assessed if and when I finance my vehicle and that should be the only time my credit is assessed. Like it or not insurers, an inusrance policy is NOT a line of credit and to treat it like one is a blatant and unethical foul.
Mr. Solvent – your comment about a back door increase is misleading – the total dollars needed are the same – they are just redistributed – is that an overall rate increase? Not by my definition.
Your quoted comment from the OFIR hearings basically says that companies are saying that if a company needs $X to pay for Y insureds in a total book, that with and without credit scoring you still need $X – the $X is just allocated differently amongst the Y insureds with and without credit scoring.
How does that imply a back door increase when the total dollars needed is the same? Some people pay more, some people pay less and some people pay the same. You could call this a reallocation, but I would not call this a rate increase for the book.
Maybe the reason that more insureds (by number) pay more with credit scoring is that they are, on average, higher risks and they should share more of the risk premium? Maybe this is more of a removal of a subsidy for some…
They claim it’s a redistribution but that’s misleading. On paper it may be a redistribution. It might show that rates overall don’t change. In reality it’s not a redistribution. Where are the most “high risk” credit individuals? Why in territories that already have higher rates…by accident? I don’t think so.
You’re talking to a guy who wrote his Master’s thesis on the practice and I’ve sifted through more data than you have I promise you. The problem with using these statistics that the companies give is that they’re manipulated to give an inaccurate picture. For example, the higher credit risk exhibits more comprehensive claims. Perhaps that’s more territory driven than it is credit driven. The higher credit risk in no model I’ve seen presents a higher collision risk. Why do you suppose that is? Comprehensive and medical/pip is where the greatest correlation is. Can we assume also that they don’t have coordinating medical benefits if they have poor credit? What else might cause that?
Let me ask you a question – why would companies do risk rating based on insurance scores if they were not in some way reflecting the actual risks?
If companies have it wrong, why would would other competition not capitalize on this misjudgment? The insurance scoring companies would get all of the risks that get the credit from the insurance score (thus lower average premium) and the new non insurance scoring company would get all of the “overcharged” customers that have a higher premium because they get no discount and we need the same total. If there is no difference in risk profile, the credit scoring companies would be in trouble – why is that not happening? Maybe there is an opportunity for you to start a company and make a lot of money…
It seems like you are in the camp that thinks that the insurance score has nothing to do with the actual risk of the insured. I may not be 100% sold that insurance score has predictive power in risk assessment, but I feel pretty good that it does from the studies I have seen.
Back to my first post, at the end of the day a company will need $X to pay for Y insureds. The rate filing typically is heavily scrutinized (internally and externally) to figure out the appropriate $X. After you figure out the $X needed, you have to figure out the appropriate allocation. I contend that companies who win get it the closest to the actual risk, and I contend that insurance score can factor into that equation for certain lines of business when you look at the data.
Companies have tons of data. I find it hard to believe they are doing things (on purpose) that would put them in a bad competitive position relative to the risks in their book. Why would companies “give away” premium to the good insurance score risks if they were really not better risks?
Just because you wrote your Master’s thesis on something does not imply that you are correct.
I admit I do not know everything about this, but I do fully understand the fundamentals of setting rates, and I invite you to point me to some compelling evidence that demonstrates that companies should NOT be using insurance scoring in setting rates.
Mr. Solvent
You stated: “For example, the higher credit risk exhibits more comprehensive claims. Perhaps that’s more territory driven than it is credit driven. The higher credit risk in no model I’ve seen presents a higher collision risk.”…”Comprehensive and medical/pip is where the greatest correlation is.” Thank you for providing information that supports insurance scoring. Since most states do not allow companies to surcharge and/or factor these types of losses in their rating, how else can companies adjust to their increased loss exposures compared to lower credit risks who exhibit lower loss costs? It has been proven that people in any given territory have a range of insurance scores, so how can you make the assumption that increased comp and med claims are territory drivem more so that credit driven?
I have to also point out the fact that not every ‘newly-discovered’ rating factor will be beneficial to the customer. Let’s say, for instance, that actuaries discover the amount of french fries you each correlates to the number of accidents you’ll be involved in. Maybe 80% of the book will stay the same or see an increase, while 20% sees a decrease. So what? If credit is predictive of risk, there is nothing to say that most people SHOULDN’T see an increase in their rates because of it.
Michigan is the only state (where the use of credit is allowed) in which the practice has to be ‘spun’ as a discount, due to the laws they’ve chosen to enact.
“Thank you for providing information that supports insurance scoring.”
How did my information support this outrageous practice? Territory and claims history already take this this. Credit is just another gotcha.
If the coorelation between driving record and credit risk is so strong, driving record alone should be substantial enough to determine my rate.
…and no one is treating your insurance policy like a line of credit. Your insurance company has a duty to its policyholders, its stockholders, and society as a whole to make premiums match costs as closely as possible, both on an aggregate and on an individual basis.
Bluntly put, the purpose of credit information in insurance rating is NOT to assess the risk that the insured will not pay the premium. If that occurs, the policy gets cancelled anyways.
The purpose of credit information is to assess risk. There is a powerful and consistent correlation between a person’s credit history and the costs they incur for an insurer. Persons with poor credit history file MORE claims and more EXPENSIVE claims than persons with strong credit history. This pattern persists even when controlled for differences in age, territory, prior claims history, driver violations, and all the other “traditional” rating variables.
This pattern is strong enough that, if ordered by the insurance department that I could only use EITHER driver age or credit — I’d pick credit.
Insurance scoring and driving record are NOT correlated. What IS correlated is insurance score and the probability of FUTURE losses. Insurance companies, especially for new customers, are not concerned with past losses because premiums are paid for future coverage. Therefore, rates need to be based on what the FUTURE claim costs will be. Study after study has shown that credit-based insurance scores are the most highly correlated factor used in rate making and that 65-70% of insureds’ rates are either postiviely or unaffected by their insurance score.
For those of you who state that credit reports are not always accurate, driving records (MVR and CLUE) are not always accurate either. If a conviction or accident is not listed on your report, do you contact the DMV or CLUE in order to have those reports corrected? (that was a rhetorical question since we all know the answer) Hwever, if your rate is adversly affected by your insurance score, you are given the option to contact the credit agency(ies) to correct them and insurance companies are required to re-rate your policy based on the new information.
If credit-based insurance scoring is banned, you explain to the responsible policyholders why their rate went up in order to allow the less reponsible to pay less even if though they file more claims.
Mr. Solvent, also by your logic, a 16 year old driver should have the best rates.
Ron, it is wrong to assume that those of us who have a higher rate due to credit are not responsible policy holders as well. How do you explain to a responsible policy holder that their rate was increased due to a credit score, and I assure you the hikes are substantial.
I’ll accept higher interest rates in exchange for a poor credit score, they’re issuing me credit and therefore have a real risk. But a higher insurance rate is the insurance companies way of making profit off of those of us who don’t have anymore to give.