I am 43 yrs old and have a clean driving record. I have not checked my credit score. I do not have credit cards or own a house, so I am probably considered a bad credit score. If I am charged more for my auto insurance because of this, I will drop the insurance, and will consider leaving this great money sucking state of Michigan once and for all.
If anything, you are probably considered a “thin file,” meaning that there is not enough information in your credit history to establish a reasonable score. “Thin Files” and “No Hits” are generally given a rate around the average insurance score value.
If your insurer can compute a score on you, it’s probably a good score. Most insurance scores penalize “credit seeking behavior,” so inquiries, new accounts, etc. are what dings your insurance score. It sounds like you don’t have any of these, so you’re good there. If you’ve had car loans or other “closed-end” loans that were paid off successfully, that will help too.
…and insurers have been using credit in Michigan for the entire time that this case was in dispute. You should not see any change to your insurance rates because of this decision. If the Supreme Court had upheld the ban, you might have seen your rates change — probably upward.
There is a lot of economic turmoil going on in this country. High unemployment is creating stress with credit scores and when they decline, insurance companies use the opportunity to move insureds into higher rating tiers. Some prudent people who don’t have debt and pay their bills also don’t have high credit scores and therefore receive higher rates. This is one of the fallacies of credit scoring to price Homeowners & Auto policies. It should be geared more to claims filed, driving violations etc. Amazing the industry survived all those years prior to credit scoring.
people who filed bank r for unpaid med bills beyond their control should get a break I heard progressive already does this?
as an agent I see some correlation, but lots of mistakes as well — e.g., people with low scores who don’t have claims also, people with high scores can have lots of claims as well, esp since this is a no-fault state
You’re talking without knowing what you’re talking about. Actually, INSURANCE scores (which use the same credit information but weight it differently) have generally remained stable or improved in the recession.
People aren’t looking for new credit, and when they are, they often aren’t getting it. So, the credit data that insurers pay most attention to — # of accounts, average length of account history, # of credit inquiries — are IMPROVING for most people.
We’re still in a pretty soft market. Insurers are looking for ways to keep the policies they have, not chase them off with more restrictive rates.
re: medical bankruptcy
Insurers are generally required to give a “neutral” rate (roughly the same as the average insurance score) to those with an unusual credit report due to extreme circumstances, including death of a spouse, recent unemployment, severe illness, and divorce.
re: “mistakes”
Like any rating variable, insurance scores work on the Law of Large Numbers. There will be people out there for whom any rating plan misses their true risk.
For example, consider driver’s age There are 16-year-olds who are incredibly safe drivers. There are fifty-somethings that shouldn’t be allowed to drive a skateboard, much less a car. There’s correlation, but there are also people who don’t fit it. On average, across a lot of people, it works. Insurance score works the same way.
I would give up this arguement Ratemaker. The people against insurance scoring will never agree no matter what logic, study or statistic proves the point. We can only hope that sound thinking like this decision wins in the end.
“Ratemaker” attempts to point out a key distinction that I beleive most of the general public does not understand:
CREDIT scores are built to predict the likelihood that you will repay your credit card, loans, etc.. and are used for financial services lending.
INSURANCE scores are built to predict the likelihood that you will file an insurance claim. They measure “risky behaviors” that cannot be explained by other parts of insurer’s rating plans (e.g. Age, Geography, and Vehicle type.)
They are both built using the same underlying credit attributes available on a credit report, however they contribute differently to the distinct algorithm variables and coefficients (factors).
It is thus possible that someone with little or no current credit history might have a good INSURANCE score, but a poor CREDIT score. The two are somewhat related, but not always the same.
ok, there are reason on both sides… but when you look at the overall picture – did he or she commit an accident? did he/she commit a violation? we all have at one time or another had credit issues and sometimes they were even wrong (been there!)… but any statistic can be made to read anything you want, goes back to the classic argument is that glass 1/2 empty or 1/2 full….
your driving record is the risk that the company is truly looking at primarily. in today’s society and recession of economics times, many folks might not have enough money of their own to fix their car, which means they will file a claim to get it fixed. some folks are rich and get many accidents, but pay them out. granted our credit hits are soft, but in reality is it fair? personally i don’t agree. a driving record is a driving record. this shows that a person is more likely to cause an accident and it will be paid out. just because i have great credit does not allow me as a lousy driver to get better rates just because i have an outstanding credit. again, goes back to understanding of how i want the stats to read. i could have bad credit and outstanding driving record and not get the best rates possible! never had a violation or ticket but yet, you are likely to say i will ask for you to pay for a claim. what happens if i had been with you and qualify for an accident forgiveness but yet, have a low credit score? you are next going to say, sorry! moving you down or out? i think this will not be the end of this story.
Property insurer’s typically provide loss payable benefits to lienholders and mortgage clause extension to home lenders at no additional premium. Legitimate argument could be made that those with higher credit scores would have less propensity to be involved in arson for profit losses.
homeowner’s is one area where scoring has a higher, more accurate statistical correlation/moral hazards issues etc…
obviously, this decision was not a slam dunk – it was 4-3
I’m not really against it, I get a discount myself — my basic complaint on the auto side is if there’s no claims/mvr history then give a higher discount for that — to counter their lower insurance score
Using credit scores discriminates against the poor that struggle to pay their bills. I hope everyone contacts the MI Department of Insurance to make sure credit scores do not get used.
California does not use credit scores in use with premium rates.
The use of credit scores does not discriminate against the poor. If you are paying your bills ontime and are not overextended there is no reason to not have a decent credit score.
You go Barb — maybe you better repeat that mantra loud & often to all of those folks who think the poor have to have a bad credit score. Credit score has to do 100% with paying on time and living within your means. If you cannot pay on time in most cases it is because someone is trying to live beyond their means.
Sure you can say – statistics show that those people with low credit ratings are more likely to file fraudulent claims and therefore should be put into a high risk category. But that exception person out there with poor credit but otherwise an outstanding citizen with no intention of defrauding their insurance company is charged at a higher rate, even with no accidents or traffic violations. They may even be declined coverage because of their credit score. What happened to innocent until proven guilty?
Wudchuck, here is the flaw in your argument re: rich people payimg their own claims. Most data that I have reviewed re: the correlation between credit score and coverage line shows that each coverage line (UM,BI,PIP, etc) shows higher losses as the score deteriorates. While I might agree that some rich people will pay a small collision or comp claim, they certainly aren’t offering to pay someone’s BI claim. I don’t care how a company “cooks” the credit data, the fact is that in states where credit is used, the ‘non-credit’ carriers often have higher rates. If some non-credit based carrier could figure out how to price for the masses (like Prog, Geico, etc) and make money, then they could promote/advertise it and could dominate. Especially since the average person hates the use of credit. But they can’t Why is that?
We all know insurers offer combo policies and adjust rates for people with multiple cars, high-priced homes, boats, etc. or who mean additional business, even if they have lousy credit scores. Poor people don’t get a break if they have a low credit score. Pricing is not all about predicting losses.
Arguments can be made either way for or against the use of credit score. Logic can always be used to support either side. At the end of the day, insurance is a social tool. We can argue all we want that it isn’t, but it is. Society needs insurance and couldn’t function without it. A person should have insurance regardless of their ability to pay their bills on time. When I’m the innocent party and sustain property damage or injury… I don’t want the person who hit me to argue they have a bad score and could therefore not afford the insurance. Remove the excuse.
How I read this article is that if you have a good insurance score, you get a lower rate. Its not that they are charging more for people with bad credit scores, its that they are giving the ones with a good insurance score a discount.
I heard out in Cali not too long ago people were up in arms because the insurers wanted to increase their rates, but not really, all they were doing is giving people with prior insurance a better percentage discount rate. Many Cali people saw that as “charging the people without prior insurance more money” but in reality they just lowered the rates for people with prior. Its all about perception. Why shouldn’t people that do what they are supposed to do (keep their insurance current or pay their bills on time) get a better rate then those who do not?
Ratemaker also made an excellet point on the difference between credit score and insurance score. When I talk about it with my clients, I do my best to always call it an insurance score instead of credit score.
No one is accusing people with low credit scores as having a higher propensity to file fraudulent claims. It could be as simple as: “I don’t give a crap about the promissory notes I’ve signed or the condition of my vehicle or any other drivers on the road and I certainly don’t care about my insurance company”.
I would love to hear from an acuary. Do people with lower insurance scores tend to have more “questionable” claims? Are they more prone to moral and morale hazards as SWFL states?
Right now, I see insurance scores as benificial for reasons in my prior post. Its all about perception.
You seem to think that all “poor” people have low scores; that is not the case. We have in our agency a number of so called “poor” that have very good scores.
This is because they pay their bills, are responsible and don’t spend all their money or the governments’s dole on alcohol, cigarettes and drugs. Once again, you expect the majority to support the minority. Must be an Obama supporter.
I view the use of financial scoring beneficial as well. And it’s obvious most actuaries do since the use is so wide spread among companies and so strongly defended. Let’s face it, companies have spent a lot of money integrating credit into pricing models and into software. And then pay for every credit score that’s ordered.
Nerd, I believe you hit the nail on the head when you question exactly how the relationship of poor credit drives loss results. That’s the real rub with insureds and politicians. Some of us believe there is a correlation between poor credit and higher losses but the reasons aren’t clearly defined and that’s what frustrates insureds and makes politician’s mouth water. Maybe it’s as simple as when someone’s life (and credit) is in a shambles, it overlaps into poor driving behavior, lack of responsibility with their auto, etc. But that’s not concrete and thus we have the ongoing debate.
Why does everyone assume that insurance scores automatically penalize a low-income household? That seems to be painting every low-income household with a very broad brush. Just because you don’t make a lot doesn’t mean you don’t pay your bills. In many cases I’ve dealt with, the opposite holds true. Some very high income households have a lower insurance score than a low-income household. Just because you have a high income it does not mean you actually pay your bills on time.
Discounts for having multiple products is actuarially justified. In the case of owning multiple autos, its a matter of consumption. You can’t drive all your cars at once, so the cost per unit has a diminishing returns effect, since the extra cars sit in the garage/driveway the majority of the time.
In the case of cross-products, these correlate with responsibility levels. A homeowner with two cars and a motorcycle is more often than not more responsible than a renter with one car.
Marketing does put a spin on this to seem to want to attract the bundled customer, but its because they can offer them a lower price due to cost savings, not because they are rich.
If insurance companies were allowed to price according to affluence and elasticity demands, they would actually surcharge the rich because they can afford to pay more and don’t care, allowing them to subsidize the poor, and thus write more policies.
Discounting rates for good insurance scores has an offseting effect to the bad scores, thus their rates do go up.
Using credit for rating has no bearing on the actual amount of aggregrate losses an insurer pays out. They remain constant, thus they must collect the same amount of aggregate premium.
For marketing reasons they call it a discount plan, but its really just a reallocation of total premiums paid in between good and bad risk drivers. Those that don’t get the “discount” see an increase in their overall base rate.
A true discount plan is one that encourages a decrease in overall consumption or risky behavior. For example, a miles-based rating plan rather than cost of ownership-plan would encourage people to drive less overall, thus decreasing aggregate losses. This system would cause everyone’s rates to go down, but especially for the low-mileage drivers.
AGAINST CREDIT SCORES fundamentally fails to understand that there is NO link between wealth/poverty/income and credit making behavior. Wealthy people are as likely if not more likely to have bad credit than someone of modest means who is scrupulous about his affairs. That insurance scoring discriminates against the poor is an old and THOROUGHLY discredited fable.
It isn’t how much you have, it is what you do with what you have.
While it is technically correct that an insurance score is distinct from a credit score, most insurance score models give so much weight to the credit score that there is very little practical difference.
wudchuck – for the record, location is allowed in California auto rate making, it’s only its relative weight that’s restricted.
But, if the people with the good credit scores file a claim, supposlily their rate should increase upon renewal if they were at fault and if their company doesnt have a “accident forgivness” plan. They then get moved into a higher risk teir, and get charged more.
What you state is just common sense (that is seems many people fail to grasp). It boils down to “If there are less claims, or the cost of claims are lowered signifigantly, the insurance company will then lower rates accordingly in order to win more business”. It seems like many insureds fail to understand that the inverse is true as well. If the insurer has to pay out more claims, regardless if that perticular insured had any claims, they have to increase their rates to stay solvent.
@wudchuck
If you want to express your opinion that credit based insurance scores (CBIS) are unfair, go for it. If your position is they don’t accurately predict future losses you couldn’t be more naive or mistaken. CBIS do exactly what they say they are suppose to do. Those groups of risks with lower scores do have higher losses. Is CBIS a fair way to rate? In my opinion it is as it means those most likely to cause higher claim payouts will pay more in premium. But that is just my opinion. Some individuals in society do not believe that the irresponsible should pay for their irresponsible behavior. Time will tell. I love the debate on CBIS as it reveals the diversity of opinion and how people think their opinion is reality. And the way the pols use that mistaken assumption to manipulate the masses. Very cool and great entertainment.
@R2
Good points. Those opposed to CBIS (ala Robert Hunter and crew) use the high error ratio of credit bureau records as an argument. As stated by the MI supreme court, most of those “errors” are mispelled addresses etc. and have no impact on CBIS. And Hunter knows better.
From my experience, MVRS are not very accurate.
I was somewhat of a Doubting Thomas on CBIS predictive abilities until I had the opportunity to lead two different projects involving CBIS in auto and HO rating. I was blown away by the predictive power.
I agree that your credit score says nothing about about your probability to file a claim. However, your credit-based insurance score (CBIS) does. CBIS HAS NOTHING TO DO WITH YOUR CREDIT SCORE! They are two separate things.
I’m beginning to think you just aren’t going to accept this works no matter what proven evidence exists contrary to what you believe. But, you can’t argue with ignorance with data, can you?
The variables that most CBIS models use have more to do with what types of credit accounts you have and how long you’ve had them, and not whether or not you pay on time.
For example, a higher ratio of mortgage accounts compared to total accounts gives you a higher CBIS score. This demonstates responsible credit-seeking behavior, and responsibility is correlated with accident propensity.
I agree with your point on people circumventing the system, but that has to do with fraud and misrepresentation, and has nothing to do with the predictive power of CBIS. To counter this issue, most insurers require proof of proper identification in the cases where people that know they have a poor score give a false SSN to get a no-hit and an average score. If they can prove they are truly a no-hit they will get the benefit of the doubt. If not, they will get the worst score.
Agree Sue. Unfortunately for most people this comes down to an emotional, subjective issue regardless of the data and some people will never buy into the validity of the predictive nature of the scores. It’s not intuitive like driving record and age of driver so if people don’t understand it then they won’t try to understand it. I continue to go back to the fact that companies spend a great deal of time & money using credit (as one pricing variable) and they wouldn’t if it had no merit. It’s not perfect but then neither is marital status or gender.
Just a couple things I would like pointed out to people.
1) Just because a company uses credit, that does not mean they don’t use the driving record. Most companies use both. Therefore, a driver with a poor score and good driving is still priced better than poor/bad.
2) From everything I have read, Motor Vehicle Records are more likely to have mistakes and contain errors. At least you can check your credit. It is much more difficult to check your official MVR.
ok, many of you may not know, in most cases many states you can refuse credit and it will give you a standard score. i have seen that based on credit you can go up or down for risk. this is what scares me because, if the consumer knew that and knew they had a bad score, they would want to refuse. and why not, it is there perogitive. i have seen some that have bad driving habits, but because of the credit score, it placed them higher than they should have been. so, don’t tell me that it is a good factor because if someone has a low score they are more likely to file a claim. the comment earlier where someone state, if that other party hits me – well, you should have um coverage, if they are at-fault. our society tries to fanthom everything with statistics and think that it solves everything. folks, reality is, if you have a bad driving record you are more likely to have an incident requiring claims to be paid. it does not matter on credit. i paid for insurance to indemnify my loss. so long as i pay my premiums, i shall be covered. again, it should not matter whether i have a great credit or not, if i need to be indemnified, i should and will be.
here’s a good example, and what is funny it’s dealing with insurance but not from the auto. a person file for insurance so that FRANCE could be ousted from the soccer cup by South America. if france would have won, 30 million would have been paid. now, did they do a credit check for that? probably not! so what odds did we use to understand why the insurance?
It would have been really nice for the author to discuss the dissent in the case, in addition to the majority opinion. Or at least have a link to the minority opinions. It was a far from unanimous decision (4-3), and I would like to see how the court was divided.
I am 43 yrs old and have a clean driving record. I have not checked my credit score. I do not have credit cards or own a house, so I am probably considered a bad credit score. If I am charged more for my auto insurance because of this, I will drop the insurance, and will consider leaving this great money sucking state of Michigan once and for all.
If anything, you are probably considered a “thin file,” meaning that there is not enough information in your credit history to establish a reasonable score. “Thin Files” and “No Hits” are generally given a rate around the average insurance score value.
If your insurer can compute a score on you, it’s probably a good score. Most insurance scores penalize “credit seeking behavior,” so inquiries, new accounts, etc. are what dings your insurance score. It sounds like you don’t have any of these, so you’re good there. If you’ve had car loans or other “closed-end” loans that were paid off successfully, that will help too.
…and insurers have been using credit in Michigan for the entire time that this case was in dispute. You should not see any change to your insurance rates because of this decision. If the Supreme Court had upheld the ban, you might have seen your rates change — probably upward.
There are many states using credit score to determine rates. Check out the state you are moving to before you pack your things.
There is a lot of economic turmoil going on in this country. High unemployment is creating stress with credit scores and when they decline, insurance companies use the opportunity to move insureds into higher rating tiers. Some prudent people who don’t have debt and pay their bills also don’t have high credit scores and therefore receive higher rates. This is one of the fallacies of credit scoring to price Homeowners & Auto policies. It should be geared more to claims filed, driving violations etc. Amazing the industry survived all those years prior to credit scoring.
people who filed bank r for unpaid med bills beyond their control should get a break I heard progressive already does this?
as an agent I see some correlation, but lots of mistakes as well — e.g., people with low scores who don’t have claims also, people with high scores can have lots of claims as well, esp since this is a no-fault state
You’re talking without knowing what you’re talking about. Actually, INSURANCE scores (which use the same credit information but weight it differently) have generally remained stable or improved in the recession.
People aren’t looking for new credit, and when they are, they often aren’t getting it. So, the credit data that insurers pay most attention to — # of accounts, average length of account history, # of credit inquiries — are IMPROVING for most people.
We’re still in a pretty soft market. Insurers are looking for ways to keep the policies they have, not chase them off with more restrictive rates.
re: medical bankruptcy
Insurers are generally required to give a “neutral” rate (roughly the same as the average insurance score) to those with an unusual credit report due to extreme circumstances, including death of a spouse, recent unemployment, severe illness, and divorce.
re: “mistakes”
Like any rating variable, insurance scores work on the Law of Large Numbers. There will be people out there for whom any rating plan misses their true risk.
For example, consider driver’s age There are 16-year-olds who are incredibly safe drivers. There are fifty-somethings that shouldn’t be allowed to drive a skateboard, much less a car. There’s correlation, but there are also people who don’t fit it. On average, across a lot of people, it works. Insurance score works the same way.
I would give up this arguement Ratemaker. The people against insurance scoring will never agree no matter what logic, study or statistic proves the point. We can only hope that sound thinking like this decision wins in the end.
“Ratemaker” attempts to point out a key distinction that I beleive most of the general public does not understand:
CREDIT scores are built to predict the likelihood that you will repay your credit card, loans, etc.. and are used for financial services lending.
INSURANCE scores are built to predict the likelihood that you will file an insurance claim. They measure “risky behaviors” that cannot be explained by other parts of insurer’s rating plans (e.g. Age, Geography, and Vehicle type.)
They are both built using the same underlying credit attributes available on a credit report, however they contribute differently to the distinct algorithm variables and coefficients (factors).
It is thus possible that someone with little or no current credit history might have a good INSURANCE score, but a poor CREDIT score. The two are somewhat related, but not always the same.
ok, there are reason on both sides… but when you look at the overall picture – did he or she commit an accident? did he/she commit a violation? we all have at one time or another had credit issues and sometimes they were even wrong (been there!)… but any statistic can be made to read anything you want, goes back to the classic argument is that glass 1/2 empty or 1/2 full….
your driving record is the risk that the company is truly looking at primarily. in today’s society and recession of economics times, many folks might not have enough money of their own to fix their car, which means they will file a claim to get it fixed. some folks are rich and get many accidents, but pay them out. granted our credit hits are soft, but in reality is it fair? personally i don’t agree. a driving record is a driving record. this shows that a person is more likely to cause an accident and it will be paid out. just because i have great credit does not allow me as a lousy driver to get better rates just because i have an outstanding credit. again, goes back to understanding of how i want the stats to read. i could have bad credit and outstanding driving record and not get the best rates possible! never had a violation or ticket but yet, you are likely to say i will ask for you to pay for a claim. what happens if i had been with you and qualify for an accident forgiveness but yet, have a low credit score? you are next going to say, sorry! moving you down or out? i think this will not be the end of this story.
Property insurer’s typically provide loss payable benefits to lienholders and mortgage clause extension to home lenders at no additional premium. Legitimate argument could be made that those with higher credit scores would have less propensity to be involved in arson for profit losses.
homeowner’s is one area where scoring has a higher, more accurate statistical correlation/moral hazards issues etc…
obviously, this decision was not a slam dunk – it was 4-3
I’m not really against it, I get a discount myself — my basic complaint on the auto side is if there’s no claims/mvr history then give a higher discount for that — to counter their lower insurance score
Using credit scores discriminates against the poor that struggle to pay their bills. I hope everyone contacts the MI Department of Insurance to make sure credit scores do not get used.
California does not use credit scores in use with premium rates.
ca also does not use rated location for insurance as well, which it should since driving in a city can be more costly than a rural place….
Finally
The use of credit scores does not discriminate against the poor. If you are paying your bills ontime and are not overextended there is no reason to not have a decent credit score.
You go Barb — maybe you better repeat that mantra loud & often to all of those folks who think the poor have to have a bad credit score. Credit score has to do 100% with paying on time and living within your means. If you cannot pay on time in most cases it is because someone is trying to live beyond their means.
Sure you can say – statistics show that those people with low credit ratings are more likely to file fraudulent claims and therefore should be put into a high risk category. But that exception person out there with poor credit but otherwise an outstanding citizen with no intention of defrauding their insurance company is charged at a higher rate, even with no accidents or traffic violations. They may even be declined coverage because of their credit score. What happened to innocent until proven guilty?
Wudchuck, here is the flaw in your argument re: rich people payimg their own claims. Most data that I have reviewed re: the correlation between credit score and coverage line shows that each coverage line (UM,BI,PIP, etc) shows higher losses as the score deteriorates. While I might agree that some rich people will pay a small collision or comp claim, they certainly aren’t offering to pay someone’s BI claim. I don’t care how a company “cooks” the credit data, the fact is that in states where credit is used, the ‘non-credit’ carriers often have higher rates. If some non-credit based carrier could figure out how to price for the masses (like Prog, Geico, etc) and make money, then they could promote/advertise it and could dominate. Especially since the average person hates the use of credit. But they can’t Why is that?
We all know insurers offer combo policies and adjust rates for people with multiple cars, high-priced homes, boats, etc. or who mean additional business, even if they have lousy credit scores. Poor people don’t get a break if they have a low credit score. Pricing is not all about predicting losses.
Arguments can be made either way for or against the use of credit score. Logic can always be used to support either side. At the end of the day, insurance is a social tool. We can argue all we want that it isn’t, but it is. Society needs insurance and couldn’t function without it. A person should have insurance regardless of their ability to pay their bills on time. When I’m the innocent party and sustain property damage or injury… I don’t want the person who hit me to argue they have a bad score and could therefore not afford the insurance. Remove the excuse.
How I read this article is that if you have a good insurance score, you get a lower rate. Its not that they are charging more for people with bad credit scores, its that they are giving the ones with a good insurance score a discount.
I heard out in Cali not too long ago people were up in arms because the insurers wanted to increase their rates, but not really, all they were doing is giving people with prior insurance a better percentage discount rate. Many Cali people saw that as “charging the people without prior insurance more money” but in reality they just lowered the rates for people with prior. Its all about perception. Why shouldn’t people that do what they are supposed to do (keep their insurance current or pay their bills on time) get a better rate then those who do not?
Ratemaker also made an excellet point on the difference between credit score and insurance score. When I talk about it with my clients, I do my best to always call it an insurance score instead of credit score.
No one is accusing people with low credit scores as having a higher propensity to file fraudulent claims. It could be as simple as: “I don’t give a crap about the promissory notes I’ve signed or the condition of my vehicle or any other drivers on the road and I certainly don’t care about my insurance company”.
I would love to hear from an acuary. Do people with lower insurance scores tend to have more “questionable” claims? Are they more prone to moral and morale hazards as SWFL states?
Right now, I see insurance scores as benificial for reasons in my prior post. Its all about perception.
You seem to think that all “poor” people have low scores; that is not the case. We have in our agency a number of so called “poor” that have very good scores.
This is because they pay their bills, are responsible and don’t spend all their money or the governments’s dole on alcohol, cigarettes and drugs. Once again, you expect the majority to support the minority. Must be an Obama supporter.
I view the use of financial scoring beneficial as well. And it’s obvious most actuaries do since the use is so wide spread among companies and so strongly defended. Let’s face it, companies have spent a lot of money integrating credit into pricing models and into software. And then pay for every credit score that’s ordered.
Nerd, I believe you hit the nail on the head when you question exactly how the relationship of poor credit drives loss results. That’s the real rub with insureds and politicians. Some of us believe there is a correlation between poor credit and higher losses but the reasons aren’t clearly defined and that’s what frustrates insureds and makes politician’s mouth water. Maybe it’s as simple as when someone’s life (and credit) is in a shambles, it overlaps into poor driving behavior, lack of responsibility with their auto, etc. But that’s not concrete and thus we have the ongoing debate.
It’s more difficult to sort out fraudulent claims than you think.
We do pay out more claims, and larger claims, to those with lower insurance scores than to those with high ones.
Why does everyone assume that insurance scores automatically penalize a low-income household? That seems to be painting every low-income household with a very broad brush. Just because you don’t make a lot doesn’t mean you don’t pay your bills. In many cases I’ve dealt with, the opposite holds true. Some very high income households have a lower insurance score than a low-income household. Just because you have a high income it does not mean you actually pay your bills on time.
Arnie,
Discounts for having multiple products is actuarially justified. In the case of owning multiple autos, its a matter of consumption. You can’t drive all your cars at once, so the cost per unit has a diminishing returns effect, since the extra cars sit in the garage/driveway the majority of the time.
In the case of cross-products, these correlate with responsibility levels. A homeowner with two cars and a motorcycle is more often than not more responsible than a renter with one car.
Marketing does put a spin on this to seem to want to attract the bundled customer, but its because they can offer them a lower price due to cost savings, not because they are rich.
If insurance companies were allowed to price according to affluence and elasticity demands, they would actually surcharge the rich because they can afford to pay more and don’t care, allowing them to subsidize the poor, and thus write more policies.
Regulators won’t allow this however.
Nerd,
Discounting rates for good insurance scores has an offseting effect to the bad scores, thus their rates do go up.
Using credit for rating has no bearing on the actual amount of aggregrate losses an insurer pays out. They remain constant, thus they must collect the same amount of aggregate premium.
For marketing reasons they call it a discount plan, but its really just a reallocation of total premiums paid in between good and bad risk drivers. Those that don’t get the “discount” see an increase in their overall base rate.
A true discount plan is one that encourages a decrease in overall consumption or risky behavior. For example, a miles-based rating plan rather than cost of ownership-plan would encourage people to drive less overall, thus decreasing aggregate losses. This system would cause everyone’s rates to go down, but especially for the low-mileage drivers.
AGAINST CREDIT SCORES fundamentally fails to understand that there is NO link between wealth/poverty/income and credit making behavior. Wealthy people are as likely if not more likely to have bad credit than someone of modest means who is scrupulous about his affairs. That insurance scoring discriminates against the poor is an old and THOROUGHLY discredited fable.
It isn’t how much you have, it is what you do with what you have.
While it is technically correct that an insurance score is distinct from a credit score, most insurance score models give so much weight to the credit score that there is very little practical difference.
wudchuck – for the record, location is allowed in California auto rate making, it’s only its relative weight that’s restricted.
But, if the people with the good credit scores file a claim, supposlily their rate should increase upon renewal if they were at fault and if their company doesnt have a “accident forgivness” plan. They then get moved into a higher risk teir, and get charged more.
What you state is just common sense (that is seems many people fail to grasp). It boils down to “If there are less claims, or the cost of claims are lowered signifigantly, the insurance company will then lower rates accordingly in order to win more business”. It seems like many insureds fail to understand that the inverse is true as well. If the insurer has to pay out more claims, regardless if that perticular insured had any claims, they have to increase their rates to stay solvent.
@wudchuck
If you want to express your opinion that credit based insurance scores (CBIS) are unfair, go for it. If your position is they don’t accurately predict future losses you couldn’t be more naive or mistaken. CBIS do exactly what they say they are suppose to do. Those groups of risks with lower scores do have higher losses. Is CBIS a fair way to rate? In my opinion it is as it means those most likely to cause higher claim payouts will pay more in premium. But that is just my opinion. Some individuals in society do not believe that the irresponsible should pay for their irresponsible behavior. Time will tell. I love the debate on CBIS as it reveals the diversity of opinion and how people think their opinion is reality. And the way the pols use that mistaken assumption to manipulate the masses. Very cool and great entertainment.
@R2
Good points. Those opposed to CBIS (ala Robert Hunter and crew) use the high error ratio of credit bureau records as an argument. As stated by the MI supreme court, most of those “errors” are mispelled addresses etc. and have no impact on CBIS. And Hunter knows better.
From my experience, MVRS are not very accurate.
I was somewhat of a Doubting Thomas on CBIS predictive abilities until I had the opportunity to lead two different projects involving CBIS in auto and HO rating. I was blown away by the predictive power.
wudchuk,
I agree that your credit score says nothing about about your probability to file a claim. However, your credit-based insurance score (CBIS) does. CBIS HAS NOTHING TO DO WITH YOUR CREDIT SCORE! They are two separate things.
I’m beginning to think you just aren’t going to accept this works no matter what proven evidence exists contrary to what you believe. But, you can’t argue with ignorance with data, can you?
The variables that most CBIS models use have more to do with what types of credit accounts you have and how long you’ve had them, and not whether or not you pay on time.
For example, a higher ratio of mortgage accounts compared to total accounts gives you a higher CBIS score. This demonstates responsible credit-seeking behavior, and responsibility is correlated with accident propensity.
I agree with your point on people circumventing the system, but that has to do with fraud and misrepresentation, and has nothing to do with the predictive power of CBIS. To counter this issue, most insurers require proof of proper identification in the cases where people that know they have a poor score give a false SSN to get a no-hit and an average score. If they can prove they are truly a no-hit they will get the benefit of the doubt. If not, they will get the worst score.
Agree Sue. Unfortunately for most people this comes down to an emotional, subjective issue regardless of the data and some people will never buy into the validity of the predictive nature of the scores. It’s not intuitive like driving record and age of driver so if people don’t understand it then they won’t try to understand it. I continue to go back to the fact that companies spend a great deal of time & money using credit (as one pricing variable) and they wouldn’t if it had no merit. It’s not perfect but then neither is marital status or gender.
Just a couple things I would like pointed out to people.
1) Just because a company uses credit, that does not mean they don’t use the driving record. Most companies use both. Therefore, a driver with a poor score and good driving is still priced better than poor/bad.
2) From everything I have read, Motor Vehicle Records are more likely to have mistakes and contain errors. At least you can check your credit. It is much more difficult to check your official MVR.
ok, many of you may not know, in most cases many states you can refuse credit and it will give you a standard score. i have seen that based on credit you can go up or down for risk. this is what scares me because, if the consumer knew that and knew they had a bad score, they would want to refuse. and why not, it is there perogitive. i have seen some that have bad driving habits, but because of the credit score, it placed them higher than they should have been. so, don’t tell me that it is a good factor because if someone has a low score they are more likely to file a claim. the comment earlier where someone state, if that other party hits me – well, you should have um coverage, if they are at-fault. our society tries to fanthom everything with statistics and think that it solves everything. folks, reality is, if you have a bad driving record you are more likely to have an incident requiring claims to be paid. it does not matter on credit. i paid for insurance to indemnify my loss. so long as i pay my premiums, i shall be covered. again, it should not matter whether i have a great credit or not, if i need to be indemnified, i should and will be.
here’s a good example, and what is funny it’s dealing with insurance but not from the auto. a person file for insurance so that FRANCE could be ousted from the soccer cup by South America. if france would have won, 30 million would have been paid. now, did they do a credit check for that? probably not! so what odds did we use to understand why the insurance?
It would have been really nice for the author to discuss the dissent in the case, in addition to the majority opinion. Or at least have a link to the minority opinions. It was a far from unanimous decision (4-3), and I would like to see how the court was divided.
oh well
Text of the decision, including the dissent.
http://www.courts.michigan.gov/supremecourt/Clerk/10-09/137400-137407/137407-Opinion.pdf