How about the fact that those with the weakest credit history cost insurance companies nearly three times as many claim dollars as those with the strongest history?
About 80% of the people in the State of Michigan benefit from the use of credit in rating insurance policies. If credit weren’t a powerful and dependable tool, insurers would not be increasing their expenses by running credit checks.
My home state just gets friendlier and friendlier for business. The Governor has worked hard to punish one of the few successful industries left in the state. She is only good at pandering to her base constituancy. Two more years of her mishandling.
Dear underwriter your underwriting facts are all basically true, however, they are a marketing nightmare. You see, about 10 years ago we started crunching too many variables, and forgot to market our product. It really does not matter how right on accurate your rates are, if credit scoring (which it has)creates rating errors then take the snake out of the pool. We sell service, product, and goodwill and the insurance companies are spending too much time tinkering with rates. I have never had one client call and thank me for lowering there rates, so those people don’t care, but any movement up in rates and the phones are ringing off the hooks………
Is the lack of oversight of our credit reports. If your identity is stolen your credit report will take a hit. Getting it fixed is a whole other pain in butt. So say your home and auto come up for renewal and your credit is run. You will now owe more for your home and auto. Is there a substantial change in your life that warrants this increase? No, you are just an unfortunate victim of credit fraud.
To make matters worse, (it is my understanding) that there are three major credit bureaus. So when repairing your credit you have to deal with three different companies.
I can’t get on board with credit scoring until we centralize our credit reports to one main company that has strict federally enacted laws of what can go on your credit report.
So all of the studies and statistics that support insurance scoring are to be thrown out due to some feelings that the scores are invalid. This makes no sense. If what you are saying is true we should not allow any credit to be used in approving bank loans, credit cards or mortgages. Shut down the entire credit system. Why only insurance scoring, a statistically valid system as shown by independent studies?
The facts about credit scoring remain. As an MBA I can tell you about statistics. You can manipulate them any way you want to. As an insurance agent I can tell you that territory based rating combined with driving record and claims history are all the most accurate and fair ways of rating. You can’t take someone with no tickets, no accidents, and no claims who has been driving for 21 years and tell them that their credit makes them a higher risk because it just doesn’t.
And NONE of those tools have gone away with the advent of credit! But: >90% of the population has a clean driving record. >80% of the population has a clean claims history in the past few years. Territories are a crude tool at best.
Credit adds another level of accuracy on top of the traditional factors. One that cannot be matched by the standard factors. If it could, there would have been no need to implement credit at all.
My company writes a lot of auto in Michigan. The numbers on these policies reflect the credit score being a valid indicator of likelihood of loss. Not manipulation, just facts. I am well aware of the manipulation of numbers, but these are simple facts based experience. The issue here is whether the insurance adverse political climate in Michigan will allow for proper rating. What’s next, band rating? As long as the Governor can play up to the Detroit area for votes she is going to.
I’m not here to argue that credit scoring is a bad thing. Now, do I think that numbers can be manipulate and skewed, absolutely!!
My argument against credit scoring is the accuracy of the credit reports. As I stated earlier, with the rampant theft of our precious identities how can we be sure that our credit reports are fair and accurate? With three different credit bureaus out there, how can someone fix their credit quickly and fairly?
I would like to pose the question:
If I am a victim of credit fraud, and my credit score goes from 700 to 400. Does my credit low credit score due to identity theft accurately rate me?
Identity theft is very real and a HUGE problem and immediately affects your credit rating.
Did you know that nearly 95% of all criminal offenders ate food that contained carbohydrates? We must ban carbs!
This is my point. Credit is no more a factor than anything else. For those of you defending the practice, have you ever seen these numbers the industry uses? Most haven’t because they are “trade secret.”
The companies providing this information to the industry aren’t to be trusted, information cannot be proven to be accurate, and it’s not the customer’s job to prove it to be inaccurate.
When the company that I represented went to credit based rating, 2/3 of my book paid higher rates while the remaining 1/3 saw the same or a VERY slight decrease. Sounds like a lot of people who post here have bought into the industry’s manipulation.
I’ve been in the industry for 11 years and I’ve seen both sides of this coin. The better side for the insured was no credit based rating.
The company I work for have the majority of insureds getting the discounts. It’s probably different for each company. I have not seen a study on this factor.
So the credit scoring data just isn’t accurate and doesn’t help predict losses? Then why in the world would insurance companies pour so much time and expense into using & defending the use of this data. They want to be elitist or just over-complicate things at their own expense? It’s not likely.
And if you think this will make it harder on GEICO and PGR, think again. They’ll just buy prospect list of potential customers with higher credit scores and direct mail these people. Most agents won’t or can’t afford to do it.
By the way, let’s quit using MVR’s & CLUE. Their accuracy is questionable as well.
John, you are failing to see the forest for the trees. ID Theft is a crime that affects a victim far beyond insurance. That person will take a hit on their score, but it will also impact them negatively from borrowing money to renting an apartment. You can’t throw out an entire system that benefits millions because of a crime that can be perpetrated on a relative few.
Wow, that was a powerful case against credit scoring. I like how you ignored countless studies showing its validity and went straight to anecdotal guessing. Very persuasive.
Don’t throw the baby out with the bath water. If your argument is that Identity Theft would make credit score wrong, then advocate for a law that would freeze the credit score of an Identity Theft victem until their identity mess could be straightened out.
Those with higher credit scores by percentage are more responsible drivers, and better risks.
Want a lower insurance premium, pay your bills timely, follow traffic laws and clean up the vehicle related crime and poor driving in Detroit.
I am an independent insurance agent and represent several national and regional carriers. I use to support credit rating, but now have a different opinion. I have quoted the same risk with several different companies and received different financial tiers from each company. One risk was 40% less than another one, yet this was the same risk and same coverage. The problem with credit scoring is not all companies use the same credit information to rate the risk. If the credit scoring were the same and all companies used the same scoring as they do in the MVRs and CLUE reports, maybe I would go along with it, but when you rate the same risk, same coverage with different companies using different credit scoring, there should never be 40 to 50% difference.
Larry, the problem you’re ignoring is the insurance companies defense of the practice. Credit scoring is supposed to be revenue neutral compared to no credit scoring. They pay for the report and countless millions to defend the practice. Does that sound revenue neutral to you??
Companies rate differently for multiple reasons, not just credit scores. To say that you rate the same risk in different companies and recieved different rates and blame that all on their credit scores is just plain ignorance. Everyone company has their own rating structure with different base rates and characteristic factors. They target their rates towards those customers they feel are the better risks.
Now for why I think credit scores and a very valid reason to rate. Other than the fact that it has statistically been proven that those with a lower credit score have higher loss ratios. What happens when someone repeatedly doesnt pay their insurance bill on time. The insurance company has to send out notices, follow-up with the customers, and follow many regualtions which may result in a policy cancellation. These things cost money. The policyholder that does pay their bill on time doesnt incure these expenses for the company. Also, if you don’t pay your bills your not as likely to stay around as long. Anyone who has seen policy expenses knows that an insurance company doesnt really start making money on a policy until 4-5 years after it is sold. A higher rate for those that wont stay as long is justified. I wont even get into the higher chance of fraud with those customers who are having a hard time paying their bills and may just “lose” their car to get an insurance payout.
What about looking at the problem a different way… Is it the credit scoring that is the problem or the weighting of credit scoring that is the issue? Just how much should a credit score be allowed to impact rates? If used as one factor that is carefully balanced with driving history and location, is that easier to handle?
With respect to the accuracy of credit reports. I have to agree with the criticism that the credit reports are full of errors and it is difficult to get items corrected. Consumers should have the opportunity to review their credit report, notify the insurance company of any items that are disputed, and the company should make adjustments as appropriate. Wouldn’t that make things more fair?
I’m an independent agent, too, and I’ve seen dramatically different quotes between companies for the same risk. . .for the entire 25 years I’ve been in the business!! Insurance companies have different appetites for risk. It doesn’t matter whether the underwriting factor is the number of violations, the type of violation, the number of claims, the mix of violations/claims in the household, the age of the driver, the territory, the type of vehicles, or the credit score.
OK, I’ll bite. What percentage is a fair percentage? 10%, 20%, 30%? I can take someone with no tickets or accidents EVER and have rates that vary from $400 semi-annually to $2,100 semi-annually just based on credit. I’m sure that the person with bad credit is going to file 5 times more claims…especially considering they’ve never done it before…
Lower rates for some? Michigan Statute currently says that you can not surcharge a policy based on credit. So the companies that are using credit based insurance scores are providing discounts only. That being said, the worst case senerio is there are a handful of policyholders across the state that are not receiving any discount. What this means for the rest of us is that we will all be seing our rates go up (I personally know mine will go up over 30%) So how does that “lower premiums for many” if 90% of the population will see rates go up while the 10% not receiving any discount will not be affected at all.
Another point I would like to make is that banks have been basing how much we will pay for a loan for years using credit scores. When the bank loans money they take the risk that they may not get their investment back. “Statistics” show that if someone has been late making payments they are more likely not to repay their loan. Insurers are taking the same type of risk and the same “statistics” used in the banking industry have proven to be accurate for insurance loss. The banks have been doing the exact same thing for decades.
“So the companies that are using credit based insurance scores are providing discounts only.”
Analyst, why don’t you tell the whole truth? Why don’t you let them know that Michigan allowed companies to increase these base premiums to a point that they were unaffordable only to offer these so called discounts?
I don’t get it either (whatever the underwriting criteria), but I do know the company with the $2,100 quote isn’t going to get the business. That’s their problem.
Forest through the trees,mmm and relatively few affected, mmmm So the recent theft of some 40 MILLION credit card numbers from a east coast retailer is a small number. Our credit system is flawed, and insurance companies are taking advantage of this flaw by charging more for insurance.
At no time has any insurance company presented facts to us consumers that credit scoring works. It is just another way to put in a “rating factor” that can push rates up.
Bottom line…does poor credit MEAN you are a bad risk…no. With the market climate the way it is one will begin to see far more issues with credit rating as people, who are a “good risk,” begin to default on their homes, pay credit cards late etc. The point made in a comment before about credit being a predictor of a “bad risk” may play out on paper however it is another thing all together to say it should be used like driving record, driving characteristics, etc are.
Also…isn’t it reasonable to expect an insurance company to pay a claim…funny that one theory is those with a higher credit score will turn in fewer claims (even legitimate ones)…use loss history/frequency to adjust for that and driving characteristics for tiers not whether one had bad luck paying bills here and there…
On the contrary Mr. Solvent, given the softening of the insurance market over the last 3-4 years, many, if not the majority of Michigan companies have been taking base rate decreases. Even for those companies that have increased the base rate, these rates still have to be filed with the Office of Insurance Regulation and approved to be justifiable and actuarily sound. If they there were no experience to justify the rates, the state would not approve the filing. So, while yes it is possible that companies did increase the base to offset the new discount, the increase was far from arbitrary.
Anyone who chooses to believe Analyst can just call their good neighbor for a home insurance quote. It shows this “base rate” at the top of the quote. A $200,000 house for $3,000 per year (as an example). It’s only below that you see these so called “discounts.” As far as I know the good neighbor hasn’t used credit on property yet, but it demonstrates the model perfectly. Imagine being the poor sap paying the base rate.
Give it up Analyst. No facts will convince these posters that insurance companies aren’t a cheating bunch of liars. These posters have no clue how competitive this business is and want to buy into urban legends rather than fact. We will let the Michigan Supreme Court sort it all out in the end.
Yes, banks have been using credit scores for decades. BUT- when you’re sitting in front of a loan officer and they are showing you low credit scores due to a specific period in your life that you were late on a few payments, you actually have the opportunity to say
“My grandfather died suddenly and I had to pay $4000 of his funeral” or “We were hit by Hurricane Frances then Jeanne- we didn’t work for 6 weeks” (as I have had both over the last 4 years) or “that bill on TU is paid, check the Equifax report- it’s correct” or “that bill is the same one that appears three times on TU, twice on Equifax, and once on TRW- and is shown as paid on ONE of the Equifax reports – since the insurance finally paid it as they should have in the first place (that was a hospital bill for the birth of my son that was coded wrong and not paid for over a year)
If those few months are the only periods you’re showing as a risk, you still tend to get better rates then if they are strictly taking your score as a factor.
I agree with the posters on this board that feel if the credit scores are SO important, they should at least give you the chance to discuss their findings. Credit card companies decide based only on scores, but you don’t NEED credit cards. You have to have insurance and things that you have no control over shouldn’t penalize you.
Divorce, death or illness in the family, identity theft, health insurance being slow to pay, natural disaster, any number of reasons that you might fall behind for a short period of time can cause your credit score to drop. I actually transferred my high interest rate card to a low interest rate card and cancelled the high rate card. My credit score DROPPED for three months. Didn’t miss a payment. Didn’t ‘lose’ the card. I called and cancelled it because the interest rate was too high. I had to ‘miss’ a mortgage payment when my grandfather died. Needed the money for the funeral. My mortgage company allowed me to add $200 a month the subsequent payments until it was paid. No late fees, but my credit score took a massive hit, even though I paid every penny as agreed.
IF they would actually bother to find out the details behind a credit score, I’d be more inclined to agree with the posters that swear by credit score underwriting. I do agree that a HISTORY of late or no pays does indicate a high risk factor. But the whole “You’re score is bad, you’re going to pay more” without any recourse is just aimed at higher premiums.
You could have a credit rating of 850 for 5 years, then you miss payments for a month due to an emergency, your credit score drops to 600 even if you make double payments the next month and catch up. Does that mean you’re a bad risk? Does that mean you should be penalized for the next year?
If you are aware that your credit score has been affected due to identity theft, natural distster, and many of thr reasons you mentioned you can tell the insurance company and most will rate the policy with the credit neutral score, which is the same as if the credit had not been run. I understand that there are reasons out of someones control that may cause their score to drop and most companies provide a fair way of dealing with that. If the company that quotes you doesnt then get a rate from someone else who does. I don’t think that is a reason not to use credit scoring
Credit scoring is merely another tool to help companies splice and dice consumer risks. The point was made earlier in the thread about how someone who has no accidents and no tickets is suddenly a worse risk because he has poor credit. Statements like this miss the point entirely.
Credit is one rating factor – like the car you drive, your gender, marital status, driving record, and where you garage your car. Is someone with a clean driving record, a Honda Accord, and a nice suburban neighborhood (but with poor credit) a bad risk? No. But he is a worse risk than someone with a clean driving record, a Honda Accord, a nice suburban neihborhood, and great credit.
In the old days of insurance (a whopping 10 years ago), there was one price for insurance. The price was set in the middle of the driver pool – basically the “average” rate to establish profitability. The result is that good drivers paid more, subsidizing the not-so-good drivers. Poor drivers got to pay relatively less because the “average” price was less than their fair share of the losses.
In recent years, insurance companies have developed very sophistocated models that evaluate dozens of factors, alone and in combination with another factors. The result is that there are, literally, hundreds (and sometimes thousands) of pricing points. The average customer pays less per policy on average now than they did five years ago – all of the data show that average and above-average drivers benefit from having a variety of rating factors. By limiting a company’s ability to splice risks, the direct result is that good drivers have to subsidize the not-so-good drivers again.
I am also disturbed with the statements about discriminating against the poor with credit rating. That implies that people with low incomes are inherently incapable of managing their money. Poor credit is color blind, and it’s blind to socio-economic factors. If anything, people who roll the dice and try to start small businesses are more likely to be hit hard with credit issues.
I also understand people are concerned about identity theft showing up on a credit report – customers can always ask the insurance company not to use credit to score a policy. A simple phone call – potentially a copy of the fraud report from a credit bureau – and the situation can be resolved.
The end result for Michigan will be higher prices in a state that is already being squeezed economically.
I didn’t say it was a reason NOT to use credit scoring. I said that the underwriters should look at the whole history- ie if the score dropped suddenly at least give the client the opportunity to refute the findings.
If they are strictly going to look at the current score and make a decision based on that score that day, then NO, credit scoring shouldn’t be used. A few years ago, Geico was that way. I don’t know if they changed since, but it was based on the score that came up that day, and the actual history meant nothing.
If there is a problem with a credit report it really needs to be the responsibility of the individual to get it resolved. There are some items that can be subject to discussion such as divorces, medical bills and such, but if the report is wrong the individual has to get it sorted out. Companies can’t correct the reports. If you are just going to take the word of the individuals on all of the items on the report being wrong you might as well not get the report.
If it were that easy to fix your credit report, there’d be no problem. It’s NOT. It’s the responsibility of the individual to find the errors, but once you call attention to it, it’s out of your hands. It’s up to numerous other individuals that may or may not do their job correctly or in a timely fashion.
And like I said, the entire history. It’s not a matter of ‘taking someone’s word for it’ if the credit was good, then all of a sudden in a one or two month period, it dropped drastically.
If you know how to read a credit report, it would only take about an extra minute to scan the payment history of any individual. That alone should be enough to determine if the circumstances are a sudden event or a long history of non-pays.
I work with credit reports daily and most of the problems on reports are actual problems. There are a lot of errors I’m sure, but most of the problems I see in reports turn out to be real, not a mistake on the part of the credit agency. I agree also with a prior poster. There are problems in other reports we deal with, MVRs and CLUE reports. Do we stop counting on any outside reports? I’m not being sarcastic. These are genuine problems and I have no idea how to resolve them. I just don’t think it has to be the responsibility of the insurance company to verify this information.
I don’t live in Michigan but I still don’t see how credit scoring should have an impact on deciding two things, 1) whether or not to write the risk and 2) at what price. Is a credit score really that good of an indicator of who is a bad risk vs. a good one. I am a driver with a very clean record but because of my divorce and the amount of debt I have, my credit score is not good at all. Does this mean that I should have to pay higher premiums? Does this mean that I’m a bad risk? I don’t think so, again I may be biased on myself, but seriously how fair is that? And yes, I understand that someone with my record and good credit would be more attractive that just makes too much sense so it is a lude point, but in all honesty what really is the difference between us. Nothing, except maybe unfortunate circumstance. I’m not applying for a loan or a mortgage, I understand that my interest rate is directly affected by that so why should my auto policy be the same. Am I borrowing money from the insurance carrier? Also, if I don’t make a payment on my auto policy, they are going to cancel it which will show a lapse in my coverage. I’m in the WC industry and do not know how auto policies are underwritten. With that being said, do the insurance companies not look at past coverage history to see if a trend of lapses is present? That to me would be a better indicator of how likely the insured is going to pay their premium. Not to mention, if I don’t pay my auto policy it doesn’t affect my credit score. So seriously, how good of an indicator is it….really?
It is an excellent and quite accurate indicator. I Michigan it can’t be a reason to decline coverage, it’s only to determine credits. I don’t underwrite Auto, but I believe that debt due to divorce can’t be used to determine the credit. Companies have limitations in each state that allows credits.
If credit scoring is so successful, why are the states using CS rates higher. I am licensed in all the western states, how come California (not legal) has by comparison lower rates than Washington, Oregon, arizona, and Nevada. You can argue that it should work, but please show mw where it is working.
I’m not arrogant enought to speak for the industry, unlike some on this site, but it works for my company. We were selected against before we had it. We see the numbers that show our insureds have fewer losses when they have a better insurance score and this is over a period of time. If you don’t like it, fine, that’s your opinion and to my thinking your have zero facts on your side. These are all opinions here and you are entitled to yours just like I am entitled to the facts. (touch of humor)
Credit is an incredibly powerful predictor of the risk of loss an insured presents. However, the score an insurer uses for underwriting or rating is not the same as the score a bank uses to determine whether to issue a loan.
If your credit report is irregular due to a recent divorce or other life-changing circumstance, make sure the insurer knows it. In these cases, the insurer is supposed to override the score and issue a credit-neutral rate. For the score the insurer computes, they are less interested in the dollars of indebtedness and more in timely payments, etc.
Credit is not used as an indicator of whether or not the premium will be paid for just the reason you say – if the premium is not paid, the policy is going to be cancelled.
Insureds with weak credit histories file claims more often and file more expensive claims. No one is arguing that poor credit CAUSES one to be a bad risk, but it is very strongly CORRELATED with being a bad risk, to an extent that MVR’s, CLUE reports, and all the traditional factors do not predict.
The question here is who is benefiting, not whether your company is benefiting. American Family agents believe it is credit scoring that has created a sharp decline in business. Most all companies operate in states where CS is used and or illegal, what is the performance (retention rate) in those states. Again I only speak for 5 western states, and I see higher rates where credit scoting is used. It’s pretty sill when my client moves to Nevada or Arizona and the rate goes up.
I’m a challenged creditee. I’ve had numerous “life events” which unfortunately have affected my credit rating. However, I’m not a high risk driver as I have a clean driving record. I’ve only had to file a claim on my insurance 2 in the last 30 yrs. Yet my credit score is used to calculate my insurance rating. I feel using ones credit score very unfair; and may also apply to others like me who are also credit challenged.
This whole thing is a mess for agents. First we have to explain to our clients why we use it without ticking them off. Now it’s a part of our business. Now we will have to tell our clients that rates are going up on average due to not credit scoring. The market is already so soft. I am just trying to make a good living selling insurance. I didn’t like credit scoring when it started I would like to see it go away but I’m not happy about the fall out.
I just rewrote one of my clients from Nevada (credit-scoring), to California. smae company ,same coverage, same driver, the rate in Nevada 50% higher please explain how credit scoring is good. From my side if the desk it is only working for the companies, and it has all of you company employees claiming it’s a great predictor. Guys quit leyting your company pat you on the back for defending CS their laughing all the way to the bank.
“PCI supports the ability of insurers to use this tool because it has proven to be a very accurate predictor of the risk of loss.”
No, it isn’t ANY kind of predictor as to whether a person risks HAVING a loss…it is an average-to-above-average predictor of whether someone will FILE A CLAIM. That’s it. If the insurance industry would stop saying it predicts RISK OF LOSS they would find themselves in a much better position to argue this point. It does not, can not and will not predict whether or not a driver will have an accident but if they’re financial position is poor enough, it CAN predict whether or not they will file a claim after they HAVE a loss.
It isn’t just identity theft. I worked for a credit reporting bureau. Here’s a little bit of their “scoring model” to chew on.
Let’s say you have 2 credit cards, each with a 10k limit and you have one with 5000 on it because has a low interest rate and the other empty because you don’t feel like paying the 30% they’re asking for. Take that SAME 5000 in debt and put 2500 on EACH card and your credit score goes up by a MINIMUM of 100 points. Now how does this make any sense? Basically, the credit score rewards you for making a bad fiscal decision (paying more interest) because some random bean counter decided 50% card useage is a bad thing, no matter what. Ummm…here’s a tip genius using 50% of ALL your cards is bad…using 50% of ONE card is not an indicator of your credit risk in any way (maybe you only want to make 1 payment, maybe that card has a pretty picture on it, who knows why a consumer prefers to use that card – certainly not the guy making up the credit score). I could give you dozens more examples of the faulty, circular logic built into credit scores but I have to get to work.
How about the fact that those with the weakest credit history cost insurance companies nearly three times as many claim dollars as those with the strongest history?
About 80% of the people in the State of Michigan benefit from the use of credit in rating insurance policies. If credit weren’t a powerful and dependable tool, insurers would not be increasing their expenses by running credit checks.
My home state just gets friendlier and friendlier for business. The Governor has worked hard to punish one of the few successful industries left in the state. She is only good at pandering to her base constituancy. Two more years of her mishandling.
Dear underwriter your underwriting facts are all basically true, however, they are a marketing nightmare. You see, about 10 years ago we started crunching too many variables, and forgot to market our product. It really does not matter how right on accurate your rates are, if credit scoring (which it has)creates rating errors then take the snake out of the pool. We sell service, product, and goodwill and the insurance companies are spending too much time tinkering with rates. I have never had one client call and thank me for lowering there rates, so those people don’t care, but any movement up in rates and the phones are ringing off the hooks………
Is the lack of oversight of our credit reports. If your identity is stolen your credit report will take a hit. Getting it fixed is a whole other pain in butt. So say your home and auto come up for renewal and your credit is run. You will now owe more for your home and auto. Is there a substantial change in your life that warrants this increase? No, you are just an unfortunate victim of credit fraud.
To make matters worse, (it is my understanding) that there are three major credit bureaus. So when repairing your credit you have to deal with three different companies.
I can’t get on board with credit scoring until we centralize our credit reports to one main company that has strict federally enacted laws of what can go on your credit report.
It’s going to be more difficult for the GEICO’s than carriers represented by agents.
So all of the studies and statistics that support insurance scoring are to be thrown out due to some feelings that the scores are invalid. This makes no sense. If what you are saying is true we should not allow any credit to be used in approving bank loans, credit cards or mortgages. Shut down the entire credit system. Why only insurance scoring, a statistically valid system as shown by independent studies?
The facts about credit scoring remain. As an MBA I can tell you about statistics. You can manipulate them any way you want to. As an insurance agent I can tell you that territory based rating combined with driving record and claims history are all the most accurate and fair ways of rating. You can’t take someone with no tickets, no accidents, and no claims who has been driving for 21 years and tell them that their credit makes them a higher risk because it just doesn’t.
And NONE of those tools have gone away with the advent of credit! But: >90% of the population has a clean driving record. >80% of the population has a clean claims history in the past few years. Territories are a crude tool at best.
Credit adds another level of accuracy on top of the traditional factors. One that cannot be matched by the standard factors. If it could, there would have been no need to implement credit at all.
My company writes a lot of auto in Michigan. The numbers on these policies reflect the credit score being a valid indicator of likelihood of loss. Not manipulation, just facts. I am well aware of the manipulation of numbers, but these are simple facts based experience. The issue here is whether the insurance adverse political climate in Michigan will allow for proper rating. What’s next, band rating? As long as the Governor can play up to the Detroit area for votes she is going to.
The Gov. did not say anything about the higher rates many perple will be paying!
I’m not here to argue that credit scoring is a bad thing. Now, do I think that numbers can be manipulate and skewed, absolutely!!
My argument against credit scoring is the accuracy of the credit reports. As I stated earlier, with the rampant theft of our precious identities how can we be sure that our credit reports are fair and accurate? With three different credit bureaus out there, how can someone fix their credit quickly and fairly?
I would like to pose the question:
If I am a victim of credit fraud, and my credit score goes from 700 to 400. Does my credit low credit score due to identity theft accurately rate me?
Identity theft is very real and a HUGE problem and immediately affects your credit rating.
Did you know that nearly 95% of all criminal offenders ate food that contained carbohydrates? We must ban carbs!
This is my point. Credit is no more a factor than anything else. For those of you defending the practice, have you ever seen these numbers the industry uses? Most haven’t because they are “trade secret.”
The companies providing this information to the industry aren’t to be trusted, information cannot be proven to be accurate, and it’s not the customer’s job to prove it to be inaccurate.
When the company that I represented went to credit based rating, 2/3 of my book paid higher rates while the remaining 1/3 saw the same or a VERY slight decrease. Sounds like a lot of people who post here have bought into the industry’s manipulation.
I’ve been in the industry for 11 years and I’ve seen both sides of this coin. The better side for the insured was no credit based rating.
The company I work for have the majority of insureds getting the discounts. It’s probably different for each company. I have not seen a study on this factor.
I’ve unfortunately seen independent studies on this topic…
So the credit scoring data just isn’t accurate and doesn’t help predict losses? Then why in the world would insurance companies pour so much time and expense into using & defending the use of this data. They want to be elitist or just over-complicate things at their own expense? It’s not likely.
And if you think this will make it harder on GEICO and PGR, think again. They’ll just buy prospect list of potential customers with higher credit scores and direct mail these people. Most agents won’t or can’t afford to do it.
By the way, let’s quit using MVR’s & CLUE. Their accuracy is questionable as well.
John, you are failing to see the forest for the trees. ID Theft is a crime that affects a victim far beyond insurance. That person will take a hit on their score, but it will also impact them negatively from borrowing money to renting an apartment. You can’t throw out an entire system that benefits millions because of a crime that can be perpetrated on a relative few.
Wow, that was a powerful case against credit scoring. I like how you ignored countless studies showing its validity and went straight to anecdotal guessing. Very persuasive.
You are right on the number here. It’s arbitrary and discriminatory and that’s what the court said.
Don’t throw the baby out with the bath water. If your argument is that Identity Theft would make credit score wrong, then advocate for a law that would freeze the credit score of an Identity Theft victem until their identity mess could be straightened out.
Those with higher credit scores by percentage are more responsible drivers, and better risks.
Want a lower insurance premium, pay your bills timely, follow traffic laws and clean up the vehicle related crime and poor driving in Detroit.
I am an independent insurance agent and represent several national and regional carriers. I use to support credit rating, but now have a different opinion. I have quoted the same risk with several different companies and received different financial tiers from each company. One risk was 40% less than another one, yet this was the same risk and same coverage. The problem with credit scoring is not all companies use the same credit information to rate the risk. If the credit scoring were the same and all companies used the same scoring as they do in the MVRs and CLUE reports, maybe I would go along with it, but when you rate the same risk, same coverage with different companies using different credit scoring, there should never be 40 to 50% difference.
Larry, the problem you’re ignoring is the insurance companies defense of the practice. Credit scoring is supposed to be revenue neutral compared to no credit scoring. They pay for the report and countless millions to defend the practice. Does that sound revenue neutral to you??
Rad has it. No reason I should have a client go top tier with one company, middle market with another, and bottom of the barrel with still another.
Companies wouldn’t spend millions doing and defending this if it didn’t benefit them at the customer’s expense!
Companies rate differently for multiple reasons, not just credit scores. To say that you rate the same risk in different companies and recieved different rates and blame that all on their credit scores is just plain ignorance. Everyone company has their own rating structure with different base rates and characteristic factors. They target their rates towards those customers they feel are the better risks.
Now for why I think credit scores and a very valid reason to rate. Other than the fact that it has statistically been proven that those with a lower credit score have higher loss ratios. What happens when someone repeatedly doesnt pay their insurance bill on time. The insurance company has to send out notices, follow-up with the customers, and follow many regualtions which may result in a policy cancellation. These things cost money. The policyholder that does pay their bill on time doesnt incure these expenses for the company. Also, if you don’t pay your bills your not as likely to stay around as long. Anyone who has seen policy expenses knows that an insurance company doesnt really start making money on a policy until 4-5 years after it is sold. A higher rate for those that wont stay as long is justified. I wont even get into the higher chance of fraud with those customers who are having a hard time paying their bills and may just “lose” their car to get an insurance payout.
What about looking at the problem a different way… Is it the credit scoring that is the problem or the weighting of credit scoring that is the issue? Just how much should a credit score be allowed to impact rates? If used as one factor that is carefully balanced with driving history and location, is that easier to handle?
With respect to the accuracy of credit reports. I have to agree with the criticism that the credit reports are full of errors and it is difficult to get items corrected. Consumers should have the opportunity to review their credit report, notify the insurance company of any items that are disputed, and the company should make adjustments as appropriate. Wouldn’t that make things more fair?
I’m an independent agent, too, and I’ve seen dramatically different quotes between companies for the same risk. . .for the entire 25 years I’ve been in the business!! Insurance companies have different appetites for risk. It doesn’t matter whether the underwriting factor is the number of violations, the type of violation, the number of claims, the mix of violations/claims in the household, the age of the driver, the territory, the type of vehicles, or the credit score.
OK, I’ll bite. What percentage is a fair percentage? 10%, 20%, 30%? I can take someone with no tickets or accidents EVER and have rates that vary from $400 semi-annually to $2,100 semi-annually just based on credit. I’m sure that the person with bad credit is going to file 5 times more claims…especially considering they’ve never done it before…
Lower rates for some? Michigan Statute currently says that you can not surcharge a policy based on credit. So the companies that are using credit based insurance scores are providing discounts only. That being said, the worst case senerio is there are a handful of policyholders across the state that are not receiving any discount. What this means for the rest of us is that we will all be seing our rates go up (I personally know mine will go up over 30%) So how does that “lower premiums for many” if 90% of the population will see rates go up while the 10% not receiving any discount will not be affected at all.
Another point I would like to make is that banks have been basing how much we will pay for a loan for years using credit scores. When the bank loans money they take the risk that they may not get their investment back. “Statistics” show that if someone has been late making payments they are more likely not to repay their loan. Insurers are taking the same type of risk and the same “statistics” used in the banking industry have proven to be accurate for insurance loss. The banks have been doing the exact same thing for decades.
“So the companies that are using credit based insurance scores are providing discounts only.”
Analyst, why don’t you tell the whole truth? Why don’t you let them know that Michigan allowed companies to increase these base premiums to a point that they were unaffordable only to offer these so called discounts?
I don’t get it either (whatever the underwriting criteria), but I do know the company with the $2,100 quote isn’t going to get the business. That’s their problem.
No credit score is a victory for the agent and insured, not the carriers. It has produced rating nightmares….
Forest through the trees,mmm and relatively few affected, mmmm So the recent theft of some 40 MILLION credit card numbers from a east coast retailer is a small number. Our credit system is flawed, and insurance companies are taking advantage of this flaw by charging more for insurance.
At no time has any insurance company presented facts to us consumers that credit scoring works. It is just another way to put in a “rating factor” that can push rates up.
Bottom line…does poor credit MEAN you are a bad risk…no. With the market climate the way it is one will begin to see far more issues with credit rating as people, who are a “good risk,” begin to default on their homes, pay credit cards late etc. The point made in a comment before about credit being a predictor of a “bad risk” may play out on paper however it is another thing all together to say it should be used like driving record, driving characteristics, etc are.
Also…isn’t it reasonable to expect an insurance company to pay a claim…funny that one theory is those with a higher credit score will turn in fewer claims (even legitimate ones)…use loss history/frequency to adjust for that and driving characteristics for tiers not whether one had bad luck paying bills here and there…
On the contrary Mr. Solvent, given the softening of the insurance market over the last 3-4 years, many, if not the majority of Michigan companies have been taking base rate decreases. Even for those companies that have increased the base rate, these rates still have to be filed with the Office of Insurance Regulation and approved to be justifiable and actuarily sound. If they there were no experience to justify the rates, the state would not approve the filing. So, while yes it is possible that companies did increase the base to offset the new discount, the increase was far from arbitrary.
Anyone who chooses to believe Analyst can just call their good neighbor for a home insurance quote. It shows this “base rate” at the top of the quote. A $200,000 house for $3,000 per year (as an example). It’s only below that you see these so called “discounts.” As far as I know the good neighbor hasn’t used credit on property yet, but it demonstrates the model perfectly. Imagine being the poor sap paying the base rate.
Give it up Analyst. No facts will convince these posters that insurance companies aren’t a cheating bunch of liars. These posters have no clue how competitive this business is and want to buy into urban legends rather than fact. We will let the Michigan Supreme Court sort it all out in the end.
Yes, banks have been using credit scores for decades. BUT- when you’re sitting in front of a loan officer and they are showing you low credit scores due to a specific period in your life that you were late on a few payments, you actually have the opportunity to say
“My grandfather died suddenly and I had to pay $4000 of his funeral” or “We were hit by Hurricane Frances then Jeanne- we didn’t work for 6 weeks” (as I have had both over the last 4 years) or “that bill on TU is paid, check the Equifax report- it’s correct” or “that bill is the same one that appears three times on TU, twice on Equifax, and once on TRW- and is shown as paid on ONE of the Equifax reports – since the insurance finally paid it as they should have in the first place (that was a hospital bill for the birth of my son that was coded wrong and not paid for over a year)
If those few months are the only periods you’re showing as a risk, you still tend to get better rates then if they are strictly taking your score as a factor.
I agree with the posters on this board that feel if the credit scores are SO important, they should at least give you the chance to discuss their findings. Credit card companies decide based only on scores, but you don’t NEED credit cards. You have to have insurance and things that you have no control over shouldn’t penalize you.
Divorce, death or illness in the family, identity theft, health insurance being slow to pay, natural disaster, any number of reasons that you might fall behind for a short period of time can cause your credit score to drop. I actually transferred my high interest rate card to a low interest rate card and cancelled the high rate card. My credit score DROPPED for three months. Didn’t miss a payment. Didn’t ‘lose’ the card. I called and cancelled it because the interest rate was too high. I had to ‘miss’ a mortgage payment when my grandfather died. Needed the money for the funeral. My mortgage company allowed me to add $200 a month the subsequent payments until it was paid. No late fees, but my credit score took a massive hit, even though I paid every penny as agreed.
IF they would actually bother to find out the details behind a credit score, I’d be more inclined to agree with the posters that swear by credit score underwriting. I do agree that a HISTORY of late or no pays does indicate a high risk factor. But the whole “You’re score is bad, you’re going to pay more” without any recourse is just aimed at higher premiums.
You could have a credit rating of 850 for 5 years, then you miss payments for a month due to an emergency, your credit score drops to 600 even if you make double payments the next month and catch up. Does that mean you’re a bad risk? Does that mean you should be penalized for the next year?
If you are aware that your credit score has been affected due to identity theft, natural distster, and many of thr reasons you mentioned you can tell the insurance company and most will rate the policy with the credit neutral score, which is the same as if the credit had not been run. I understand that there are reasons out of someones control that may cause their score to drop and most companies provide a fair way of dealing with that. If the company that quotes you doesnt then get a rate from someone else who does. I don’t think that is a reason not to use credit scoring
Credit scoring is merely another tool to help companies splice and dice consumer risks. The point was made earlier in the thread about how someone who has no accidents and no tickets is suddenly a worse risk because he has poor credit. Statements like this miss the point entirely.
Credit is one rating factor – like the car you drive, your gender, marital status, driving record, and where you garage your car. Is someone with a clean driving record, a Honda Accord, and a nice suburban neighborhood (but with poor credit) a bad risk? No. But he is a worse risk than someone with a clean driving record, a Honda Accord, a nice suburban neihborhood, and great credit.
In the old days of insurance (a whopping 10 years ago), there was one price for insurance. The price was set in the middle of the driver pool – basically the “average” rate to establish profitability. The result is that good drivers paid more, subsidizing the not-so-good drivers. Poor drivers got to pay relatively less because the “average” price was less than their fair share of the losses.
In recent years, insurance companies have developed very sophistocated models that evaluate dozens of factors, alone and in combination with another factors. The result is that there are, literally, hundreds (and sometimes thousands) of pricing points. The average customer pays less per policy on average now than they did five years ago – all of the data show that average and above-average drivers benefit from having a variety of rating factors. By limiting a company’s ability to splice risks, the direct result is that good drivers have to subsidize the not-so-good drivers again.
I am also disturbed with the statements about discriminating against the poor with credit rating. That implies that people with low incomes are inherently incapable of managing their money. Poor credit is color blind, and it’s blind to socio-economic factors. If anything, people who roll the dice and try to start small businesses are more likely to be hit hard with credit issues.
I also understand people are concerned about identity theft showing up on a credit report – customers can always ask the insurance company not to use credit to score a policy. A simple phone call – potentially a copy of the fraud report from a credit bureau – and the situation can be resolved.
The end result for Michigan will be higher prices in a state that is already being squeezed economically.
I didn’t say it was a reason NOT to use credit scoring. I said that the underwriters should look at the whole history- ie if the score dropped suddenly at least give the client the opportunity to refute the findings.
If they are strictly going to look at the current score and make a decision based on that score that day, then NO, credit scoring shouldn’t be used. A few years ago, Geico was that way. I don’t know if they changed since, but it was based on the score that came up that day, and the actual history meant nothing.
If there is a problem with a credit report it really needs to be the responsibility of the individual to get it resolved. There are some items that can be subject to discussion such as divorces, medical bills and such, but if the report is wrong the individual has to get it sorted out. Companies can’t correct the reports. If you are just going to take the word of the individuals on all of the items on the report being wrong you might as well not get the report.
If it were that easy to fix your credit report, there’d be no problem. It’s NOT. It’s the responsibility of the individual to find the errors, but once you call attention to it, it’s out of your hands. It’s up to numerous other individuals that may or may not do their job correctly or in a timely fashion.
And like I said, the entire history. It’s not a matter of ‘taking someone’s word for it’ if the credit was good, then all of a sudden in a one or two month period, it dropped drastically.
If you know how to read a credit report, it would only take about an extra minute to scan the payment history of any individual. That alone should be enough to determine if the circumstances are a sudden event or a long history of non-pays.
I work with credit reports daily and most of the problems on reports are actual problems. There are a lot of errors I’m sure, but most of the problems I see in reports turn out to be real, not a mistake on the part of the credit agency. I agree also with a prior poster. There are problems in other reports we deal with, MVRs and CLUE reports. Do we stop counting on any outside reports? I’m not being sarcastic. These are genuine problems and I have no idea how to resolve them. I just don’t think it has to be the responsibility of the insurance company to verify this information.
I don’t live in Michigan but I still don’t see how credit scoring should have an impact on deciding two things, 1) whether or not to write the risk and 2) at what price. Is a credit score really that good of an indicator of who is a bad risk vs. a good one. I am a driver with a very clean record but because of my divorce and the amount of debt I have, my credit score is not good at all. Does this mean that I should have to pay higher premiums? Does this mean that I’m a bad risk? I don’t think so, again I may be biased on myself, but seriously how fair is that? And yes, I understand that someone with my record and good credit would be more attractive that just makes too much sense so it is a lude point, but in all honesty what really is the difference between us. Nothing, except maybe unfortunate circumstance. I’m not applying for a loan or a mortgage, I understand that my interest rate is directly affected by that so why should my auto policy be the same. Am I borrowing money from the insurance carrier? Also, if I don’t make a payment on my auto policy, they are going to cancel it which will show a lapse in my coverage. I’m in the WC industry and do not know how auto policies are underwritten. With that being said, do the insurance companies not look at past coverage history to see if a trend of lapses is present? That to me would be a better indicator of how likely the insured is going to pay their premium. Not to mention, if I don’t pay my auto policy it doesn’t affect my credit score. So seriously, how good of an indicator is it….really?
It is an excellent and quite accurate indicator. I Michigan it can’t be a reason to decline coverage, it’s only to determine credits. I don’t underwrite Auto, but I believe that debt due to divorce can’t be used to determine the credit. Companies have limitations in each state that allows credits.
If credit scoring is so successful, why are the states using CS rates higher. I am licensed in all the western states, how come California (not legal) has by comparison lower rates than Washington, Oregon, arizona, and Nevada. You can argue that it should work, but please show mw where it is working.
I’m not arrogant enought to speak for the industry, unlike some on this site, but it works for my company. We were selected against before we had it. We see the numbers that show our insureds have fewer losses when they have a better insurance score and this is over a period of time. If you don’t like it, fine, that’s your opinion and to my thinking your have zero facts on your side. These are all opinions here and you are entitled to yours just like I am entitled to the facts. (touch of humor)
Credit is an incredibly powerful predictor of the risk of loss an insured presents. However, the score an insurer uses for underwriting or rating is not the same as the score a bank uses to determine whether to issue a loan.
If your credit report is irregular due to a recent divorce or other life-changing circumstance, make sure the insurer knows it. In these cases, the insurer is supposed to override the score and issue a credit-neutral rate. For the score the insurer computes, they are less interested in the dollars of indebtedness and more in timely payments, etc.
Credit is not used as an indicator of whether or not the premium will be paid for just the reason you say – if the premium is not paid, the policy is going to be cancelled.
Insureds with weak credit histories file claims more often and file more expensive claims. No one is arguing that poor credit CAUSES one to be a bad risk, but it is very strongly CORRELATED with being a bad risk, to an extent that MVR’s, CLUE reports, and all the traditional factors do not predict.
Why are California’s rates lower than the surrounding states?
Proposition 103 and a business-unfriendly DOI.
The question here is who is benefiting, not whether your company is benefiting. American Family agents believe it is credit scoring that has created a sharp decline in business. Most all companies operate in states where CS is used and or illegal, what is the performance (retention rate) in those states. Again I only speak for 5 western states, and I see higher rates where credit scoting is used. It’s pretty sill when my client moves to Nevada or Arizona and the rate goes up.
I’m a challenged creditee. I’ve had numerous “life events” which unfortunately have affected my credit rating. However, I’m not a high risk driver as I have a clean driving record. I’ve only had to file a claim on my insurance 2 in the last 30 yrs. Yet my credit score is used to calculate my insurance rating. I feel using ones credit score very unfair; and may also apply to others like me who are also credit challenged.
This whole thing is a mess for agents. First we have to explain to our clients why we use it without ticking them off. Now it’s a part of our business. Now we will have to tell our clients that rates are going up on average due to not credit scoring. The market is already so soft. I am just trying to make a good living selling insurance. I didn’t like credit scoring when it started I would like to see it go away but I’m not happy about the fall out.
I just rewrote one of my clients from Nevada (credit-scoring), to California. smae company ,same coverage, same driver, the rate in Nevada 50% higher please explain how credit scoring is good. From my side if the desk it is only working for the companies, and it has all of you company employees claiming it’s a great predictor. Guys quit leyting your company pat you on the back for defending CS their laughing all the way to the bank.
“PCI supports the ability of insurers to use this tool because it has proven to be a very accurate predictor of the risk of loss.”
No, it isn’t ANY kind of predictor as to whether a person risks HAVING a loss…it is an average-to-above-average predictor of whether someone will FILE A CLAIM. That’s it. If the insurance industry would stop saying it predicts RISK OF LOSS they would find themselves in a much better position to argue this point. It does not, can not and will not predict whether or not a driver will have an accident but if they’re financial position is poor enough, it CAN predict whether or not they will file a claim after they HAVE a loss.
It isn’t just identity theft. I worked for a credit reporting bureau. Here’s a little bit of their “scoring model” to chew on.
Let’s say you have 2 credit cards, each with a 10k limit and you have one with 5000 on it because has a low interest rate and the other empty because you don’t feel like paying the 30% they’re asking for. Take that SAME 5000 in debt and put 2500 on EACH card and your credit score goes up by a MINIMUM of 100 points. Now how does this make any sense? Basically, the credit score rewards you for making a bad fiscal decision (paying more interest) because some random bean counter decided 50% card useage is a bad thing, no matter what. Ummm…here’s a tip genius using 50% of ALL your cards is bad…using 50% of ONE card is not an indicator of your credit risk in any way (maybe you only want to make 1 payment, maybe that card has a pretty picture on it, who knows why a consumer prefers to use that card – certainly not the guy making up the credit score). I could give you dozens more examples of the faulty, circular logic built into credit scores but I have to get to work.