I\’m not attacking- I\’m seriously wondering- is it the credit scoring process that\’s biased, or are insurers manipulating credit scores in order to deny insurance?
Why would they do that? Why would insurance companies make up a way to underwrite against business that they can make money on??? Oh maybe that is it maybe they are trying to charge the right rate for the person…..
Think about it the more people that a company can write they can then make more money….. but they are in business to make money…
Credit scoring is a biased way of determining risk not insuring \”credit exposures.\” I personally know of one carrier with supposed good hands that will give a rating score of 8 or 9 in a suburban area but a 12 to 16 in a city area. What gives? That\’s credit scoring or REDLINING based on where a risk lives. Don\’t want to write poor or high crime neighborhoods? Just up their credit scores so that they are either rejected or priced out and then tell regulators its a proven underwriting system.
Wait a minute. Don\’t confuse the facts. Credit scoring is an underwriting and risk assessment tool. A tool not used properly is not the tool\’s fault. Is it any surprise you\’d have operator error in the hands of the Good Hands People?
State DOI\’s already have the ability to punish the improper use of underwriting tools.
We don\’t need more regulations and restrictions, we need intelligent moralists that follow the ones we already have. Regulations and restrictions, while sometimes necessary, mask the true problems and hamper effective long-term solutions.
You have got to be kidding me right? You people could not possibly be in the insurance business. Credit Scoring is the best predictor of future loss that we have ever had. Yes people with bad credit have more losses. Thats a fact just like people with many moving violations. Do we stop using driving records in underwriting also. Thats what underwriting is for petes sake. You dicrimate against the bad risk. Credit scoring has helped a lot more people than is has harmed. You can improve your credit score just like you can improve your driving record but it takes time. Wake up. The states without credit scoring will have the highest rates. Thats also a fact.
I don\’t have the greatest of credit history because of bad judgement (mostly in women or wives, of the ex variety).
Does my poor choice in women affect my driving ability. I have NO speeding tickets, NO accidents and not so much as a parking ticket on my driving record which extends back some 20 years.
How is my bad credit an idicator of my driving ability given the factors above?
What you\’ve got to understand is that insurance scoring does not surcharge (punish) those with poor scores. It is a tool used to give a discount (reward) to good risks.
I have offered opinions on InsuranceJournal.com\’s various articles on credit scoring.
When will people realize that a method of underwriting is a generality, a likelihood, a predictor. Just because PersonX has bad credit, and has never filed a claim or gotten into an accident, that is not indicative of the whole sample.
A predictor is not 100%. Just like not all drivers with many speeding tickets cost an insurance company money in claims payouts. However, credit scoring, like a previous poster has said, is the one of the best predictors we have of future loss.
Please note, I said the word LOSS, not ACCIDENT or DRIVING RECORD or something else. The insurance company is in the business of minimizing risk, i.e. minimizing the payments it pays out.
As such, credit risk is one of the best predictors of such that we have.
I am an Insurance agent. One of my customers was rated because of credit. It was due to so many credit cards being open. She had less then $1500 outstanding and had over $50,000 in the bank, her car and house were paid off. So, she canceled several of her unused credit cards. Now, she is rated lower again since she has canceled so many credit cards. Where is the increased risk to the insurance company for this person. It seems the increased risk is to her for increased premium cost.
That\’s specious nonsense. I transported the elderly for years and the absolute worst drivers on the road were driving rather large and EXPENSIVE trucks.
Furtheremore, that issue just came up here in Oregon, and when I asked the insurance industry for the data, there was none.
I\’ve had cancer with no medical insurance. Please, do explain to me how suddenly that made my perfect driving record imperfect. Please, do explain how cancer made me a greater risk. I would love to hear, so talk.
When I was driving, the most road rage, the most reckless, and the most inconsiderate drivers were middle aged white men in large pick ups. Dodge Rams, Ford F250\’s and up, and oddly, in order to own one of these, one must have excellent credit. My son-in-law sells cars and he assures me that they are not giving them away, so excellent credit is a must.
Credit scoring is a parasitical practice designed to keep the lowest income bracket low.
Credit scoring is one more effective weapon in the class war that this country is engaged in.
Credit scoring is another way to keep a low wage labor pool.
Remember Enron? Bet they all had good credit. How about MCI Worldcom? Bet they had great credit, and let\’s not forget the Tyco debacle. Good credit there, too.
So how about someone tells the victims of these corporations that since they were wiped out by these thieves, that now their insurance rates must rise. Why? Because they\’re credit is now bad.
And also, let\’s not forget the insurance industry was next to no help in the aftermath of Hurricane Katrina.
In general, if someone has poor credit/financial problems they are more likely to file a claim even if it is just above the deductible because they are having financial issues. Not to mention property mysteriously disappearing in order to score quick cash and get out of a financial jam. It is controversial, but dealing with large number it works. It comes down to how responsible you manage money and pay your bills.
It is more likely that a person with bad credit will cost the insurer money. It\’s actuarial statistical fact.
Similary, having a lot of speeding tickets is also a predictive tool. Not all people who get tickets will cost the insurance company claims payouts, but it\’s an excellent predictor. If you show me an example of a driver with a lot of tickets with no accidents, does that invalidate the predictive power of traffic tickets? No!
Smoking is the biggest predictor in life insurance, yet I personally know of a lifetime smoker who lived to be in his 90s. Does this invalidate smoking as a predictive tool?? NO!
The point: Individual examples are not enough to denounce a predictive process. You have to understand, literally millions and millions of drivers are used in these credit studies. The statistical correlations are extremely high.
C. Williams, that was a great post – primarily because it reminded me that underwriters DO have the flexibility to use their judgment as I did recently with a sucky credit report due to the Katrina aftermath – an isolated incident, I\’m sure, and I\’m talking about a specialized line of business, but understanding the circumstances goes a long way toward allowances. Thanks for your post.
I know people who would be considered low-income, who have good credit score ratings because they pay their bills on time and don\’t over-extend themselves for things they can live without. I also know middle and upper income people who spend more than they make and score badly.
Seems to me insurance crdit scoring is more about living responsibly and not making bad decisions, which would also seem indicative of being a good or poor insurance risk.
I love it. Since it\’s inception my auto insurance premiums have gone down considerably, and as an insurance agent most of my customers have benefited greatly from it\’s use.
The whiners and \”share the wealth\” folks like C. Williams don\’t like it, but for the vast majority of reponsible people it is in their best interest. Is a \”good predictor\” of claims? I frankly doubt it. But it makes the deadbeats pay more, and reasponsible people pay less, which is jsut the way life is.
What if I told you I had a huge study that said black people had more claims, so therefore all the big companies are now going to use race based rating? Now, what about religion?
We have already decided that we do not want to descriminate based on race or religion, so companies cant do this. ITs politically incorrect to even conduct the study.
That brings us to discriminating against the poor. As a country we are in the process of deciding if we think this is ok.
But the truth is, I bet if you showed people that blacks had more claims, most white people would say its ok to discriminate against blacks and charge them higher rates. As a country we really havnt come that far.
One more thing, you may be saying, the companies want to charge higher rates to folks who are irresponcible with money and ahve bad scores, not poor people.
OK, but I have to ask, what is the average ins score of someone with an income of 15,000 to 20,000k? What is the average ins score of someone who has a score of someone who makes 20 to 30k? How bout 50 to 60k?
When will my marketing rep deliver that information? Never? Do you folks have it? Please post it!
I believe logically that it is easier to pay your bills and thus establish a responcible credit history if you have a higher income.
If you make 15 to 20k and are part of the working poor, lets see you pay those bills and avoid running up a little credit card debt when your junk car goes dead on the way to work. Want to splurge on some new cloths for little Jimmy this Xmas?
Statistically speaking I believe someone making less will more often have a poorer score.
Its posible to have a good score making under 20,000, I did it for years (recently), but I was lucky, and its not easy. I find it much easier to maintain my excellent ins score now that I make more money.
Oh, gimme a break! It\’s an insult to those people with lower incomes to immediately equate them with low credit scores. I have been in this business for many years, and have never been able to determine that people with low incomes have low credit scores. I have seen a lot of people with good incomes have low scores; it is not a function of income. It reveals responsible management of your affairs.
Yea great post by Danny P. We live in a materialistic society where no one wants to be the odd man out who is poor.
Everyone wants new shoes and cabel TV and the new video game. Folks making 19,000 will have those things. They will also have credit card debt and a worse credit score.
The person making 30,000 will have all of those things too, but they will have less debt and a better score, its just a fact of life in our consumer society.
Also I agree, can anyone find what the average insuracne score is for someone making 20,000? Id LOVE TO KNOW. IT SOUNDS LIKE AN IMPORTANT PART OF THE ARGUMENT
Then prove it bob, show me the DATA. If it were out there wouldnt your marketing rep have brought it to you already? If you can show that credit score and income are not related show it to me.
I will shut up, and print it out and show it to my next client that complains. I hope im wrong, cause I think credit scoring is here to stay and I dont want to be the bad guy.
One more thing, Ive been doing this for many years too, but only running credit scores for 5 years, and many of my \”poorer\” folks with older cars and Mcjobs have crap scores! Sorry thats just my reality.
Show me a guy with a nice car, good job, and a family, and many times the score gets better, not always, but ALMOST ALWAYS.
No one is going to show you the data, rating algorithms and studies are proprietary. Even when actuaries file rate filings with the state, they don\’t file all the nitty-gritty.
MC:
You made Bob\’s point for him. We live in a \”keeping up with the joneses\” society. People want these things. People always want things they can\’t afford. However, it is responsibility that will restrain these purchases, and thereby reducing credit card debt.
Danny P:
Your argument that allowing credit scoring allows race based underwriting in the back door is in itself a racist argument, since you yourself are making some racial assumptions about income and race. This is even worse than saying underwriting by zip code is race-based.
I am not making racial assuptions, read my post more carefully please. I said \”What if\” in order to make an analogy.
You get analogies right? They are on the SAT. As far as your \”no one is going to show you the data\” argument is concerned, credit scores are compiled by credit agencies like Choicepoint, not insurance companies.
Also, the credit agencies are interlinked with the governement, thats how they legally controll all our personal info remember?
So the statistic im looking for should be public record, maybe its out there somewhere, maybe its hidden for a reason, imagine that.
Back in 2003 a company named EPIC Actuaries, LLC put together their study -\”The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity\”. It\’s not exactly light reading. If you are a numbers person, you will love it, if you are not – your going to give yourself a headache. You can probably find this study by doing a simple google search.
I deduct by some of these responses, some of you have not seen this study or any other studies that have to do with this correlation. As a professional, I believe it is \”our duty\” as Agents/Brokers/Producers to fully understand this correlation so that we may pass the knowledge onto our clients – the insured. They ARE our assets and we need to look after them in that light. The only way to win the game is to know how it\’s played. Happy Holidays, enjoy the reading.
Wow, looks like Commissioner Denn has touched a nerve. Does not anyone wonder why 13 states have joined an amicus on this issue. Could it be the old “where there is smoke, there is fire” adage suggesting that something is not what it should be?
As a former underwriter (8 yrs), former broker (2 yrs), former regulator (27 yrs), former chair of the NAIC Credit History Working Group, and current regulatory consultant (8 yrs), my view is that these Commissioners are doing their job in the public interest. Had the insurance industry been a bit more forthcoming with data early in the process, this issue would not be the persistent morass that it is today. The mere fact that the underlying algorithms used in credit history use are secret tends to support the continuing suspicions surrounding this issue. Suspicions that the Companies are in a position to manipulate the data to accomplish a de facto redlining. A suspicion that I share.
The fact that many companies have incorporated credit history into the rating process rather than rely on its “predictive” value for underwriting, further confuses the issue. This leads to the issue addressed by the amicus, the failure to comply with the FCRA when credit history use results in higher rates or an adverse action.
Is there a place in the underwriting of risks for credit history use? Probably, and for some lines of business, likely. I am not convinced however, that automobile and homeowners insurance underwriting is that place. I am even less convinced that rates which rely on credit score for those two lines is appropriate.
Thanks, but I think EVERYONE in the industry knows about that study.
What we are looking for is data that says LOW INCOME PEOPLE HAVE CREDIT SCORES THAT ARE JUST AS GOOD AS RICH PEOPLE.
IF that aint true, then poor people are paying more for insurance casue they are poor. Is that ok? Maybe it is, thats what we are arguing about as a Nation right now. Thats all im saying. Ive got a good score so I dont really care, but some of my clients take out their anger on me so its not much fun.
I wish our insurance commissisioners would spend more time and resources fighting real problems in the insurance industry. Besides, anyone who really understands the insurance scoring method knows that credit is only one factor used in the overall rating of a client. In addition, each company uses different ratios to determine their own company insurance ratings. Choicepoint (a private for profit company) creates the insurance scores which allows the insurance companies to fairly apply rates based on their key indicators that are proven with \”empirical data\” to indicate the potential risk to the carrier. Last time I checked, most insurance contracts are unilateral agreements and if the consumer doesn\’t like CREDIT SCORING, then perhaps they should shop somewhere else. Finally, if credit or insurance scoring didn\’t work then most companies would have abandon this practice years ago. For the record, I believe most companies have converted to this method of underwriting for auto and home p&c.
Remember the old saying \”numbers don\’t lie but liars use numbers\”. You can say what you will about the studies but in truth this is nothing more than another form of redlining. It\’s not a big reach to suggest that the credit scores in any big city with a low income area (say Detriot)will be less than the more affluent areas (say Auburn Hills). Add in the fact that roughly 30% of credit reports have errors and I\’d say you are using junk science. If you agree with credit based underwriting, do you also feel that your education level should be allowed? Many companies are using that now also. Add it up, credit scores and education levels….hmmm Do you see the patern here?
Credit scores should be used in underwriting property risks due to the risk of fraud but in no way should it be used for auto insurance.
Interesting you should bring up Choicepoint. Weren\’t they hacked by someone pretending to be Ford Motor Credit? Some 50,000 identities were stolen. And Choicepoint didn\’t reveal it until the courts forced them to. CYA all the way! So then Choicepoint turns around and reports lower scores for the people who had their identity stolen from THEIR computers?
I just know there is too much fraud and too easy to manipulate a score. Drops 30 pts if you open a new charge account. Can drop if you shop your mortgage- the mortgage companies adjust for this, but do insurance companies?
In theory, I could end up paying $500 more in insurance premium because I went to 5 different banks for the best rate to finance my home?
Or because I didn\’t work for 2 months and fell behind on credit cards? (caught up in 2 months, but the numbers still dropped)
I think if they\’re going to use your credit report, they should at least give a chance to refute it.
Have these people who claim to have \’perfect credit\’ ever been sick, divorced, or have some major event happen that put them in a bind? Let\’s see how happy they are to pay higher interest rates and premiums after they do.
Yea verily, I remember the good old days
before credit scoring. That\’s when I made
5-10% more auto commission. Lets get back to that quickly (in the name of anti- discriminaton, or whatever).
And, of course, low-income people do NOT have credit scores that are \”just as good\” as rich people, even if they\’ve managed their money well, because you have to have a significant credit history in order to build solid credit scores, and the percentage of available credit in use is a significant factor in credit scoring.
Please note the venue of this case, \”U.S. Supreme Court\”. Do we really want federal vs state regulation of the industry? I think we may be in a slippery slope and we may not be able to wiggle out.
The dumbing down of underwriting by the use of credit scores has paved the way for \”pay-at-the-pump\” auto insurance. No agents and an assignment of risk by percent of state book for $.714 per gallon based on 700 gallons per year.
Get ready isnurance guru\’s you have created your own demise… one policy for all and one price for all with no arguement about underwriting criteria because agents think a credit score is a better indicator than age, sex, experience, location, etc.
Geez there are a lot of dumb sheep in the world. Still think credit scores rock?
Ain\’t it amazing! This was an article about the legal question of sending out legal notices, and it has disolved into an argument about the merits of credit scoring. That wasn\’t the original topic, but that always happens when this subject comes up.
It seems you have the pro and con factions that, like politics, aren\’t going to change their opinions. You have one side that believes in the free enterprise system, and allow business to have a free market, and then you have the warm and fuzzy philophy of keeping the poor downtrodden consumer from being victimized.Big government types vs. private enterprise. Pick a side.
I have watched with amusement on the issues of credit scoring. I have been an agent/broker in Calif for over 26 yrs. My belief in this whole mess you folks deal with is that credit or no credit, the agency knows its client better than any numbers can factor as predictors of loss. Calif no longer has credit scoring of any type with regards to personal lines. I have seen all of those issues that have been posted and have listened to the carriers use their song and dance schpiel about credit. The carriers doing business in Calif are making lots of money, rates have come down and are continuing to come down. I also serve on a Nat\’l Agency Council where there are these god awful things called 48 tiered pricing models elsewhere. We don\’t have to deal with that here and with the continuing profitability of the carriers, they treat Calif a whole lot differently….more like a hands off approach. We have 2 rating bands….good driver and non good driver as it regards auto. 1 rating band as it results with any other line of business. Many carriers use a \”merit rating\” tool to surcharge property policies with claims issues. My belief in the system stems that the agency knows its clients and where to place them where they should be placed. For my agency group, it has worked very well come contingency time and with commissions being at or near 15% on all lines. These statistics may well work in theory, but real world numbers over a period of several years now, are proof in the pudding.
I recently moved from Ca to Colorado. I was amazed at how much my premiums went up due to credit scoring. We bought a new house, shopped mortgages, and whamoo my home and auto insurance is way more here.
Ca\’s system works, plain and simple.
I don\’t sell personal lines, but work in an office that does. They really hammer you in Co if your credit is bad or credit score low. How is a person making 20-25K per year suppose to have a high credit rating??
My opinion is rate based upon claims,driving record, zip code and number of miles driven per year.
You know what I like? The fact that everybody is so busy taking stands that no one will answer my question. Not being a numbers guy, I couldn\’t hack my way through the study, so I\’m sadly ignorant.
Let me take a stab at answering my question using the positions staked out by other posters.
Position 1: There is a published, peer-reviewed study that shows a statistically defensible correlation between good credit scores and low claims.
Position 2: Credit scores are being misused by companies in order to promote racist and \”class\” (whatever the hell that is) agendas.
Position 3: Any sort of rating scheme that relies on individual characteristics is bad, and everyone should pay the same amount regardless of past history, current status, or predicted behavior.
Did I miss something?
Would somebody answer my question, or are we going to continue chest-beating and castle building?
I\’ll give it a shot Mjolnir. I do not believe insurers use credit scoring in an inappropriate manner AND credit scores in and of themselves are NOT biased…however, due to the number, frequency and severity of errors in the scores themselves and in the formulations used to create the scores those things may seem to be true.
I have a great score, a great claims record and a great insurance rate and I like it that way but unless we can make SCORING companies (NOT CREDITORS) accountable for errors in scores (and when I say accountable I\’m talking do-re-mi) nothing in them will change and nothing will become more fair. Credit scores on a large scale predict the likelihood of loss and numbers don\’t lie but the scores themselves sure do.
Did I get it or did I miss your question altogether?
Peace people.
Anyone who believes credit scoring is a great underwriting tool has never been in an agency. You see we insure people not statistics, with proper field underwriting my agency has been profitable 30 out of 32 years. Insurance companies want there employees to buy into blind and statistical underwriting, and you have! Why because you are easier to manipulate. Credit scoring in California for example is illegal, and our rates over the past 10 years have improved. We also write in Nevada, Oregon, Washington, and Arizona, all of which use credit scoring. All have lower repair costs, less dense population, and fewer attorneys. So why are my rates in Northern California lower than all those states. CALIFORNIA DOES NOT USE CREDIT SCORING, THATS WHY. All of you company people that buy into your companies virtue wake up! You only know what the industry tells you, and they tell you that agency owners are complainers. We complain because your bosses and CEO\’s are afraid of the truth. Please the only thing that credit scoring is marginally accurate at determining is the insured\’s ability to pay, and that is biased.
Credit scoring is a tool that works in the right hands. Need we not forget the law of large numbers. This tool works for the masses and may not be a perfect fit for every individual case, but it does work. This is not something that is going away either, so use it to your advantage. Learn the system and play the game, because just about anyone can raise their insurance score and lower their rates. A site that I, as an agent, find helpful is insurancescore.net. This may be a shameful plug, but they have helped several of my clients lower their premiums. Just keep in mind this is not a regular \”credit score\” that the industry is using, it is calculated differently and is referred to as an \”insurance score.\”
Thank you so much for your reasoned responses. I\’m relatively new to the game and I\’m sure I\’ll have clients asking me about this, so I\’m grateful for something besides \”Allstate is run by the Klan!!!\” to give them.
Thanks all, and good luck.
My experience is as an insurance agent in MA for 25 years. Last year our primary carrier started using credit scores. The first 5 clients we put into the system came back as unacceptable. Three of them had been long time, claim free policyholders (6+ years)with the same carrier now rejecting them. Each had purchased a new home and wanted to purchase insurance from their existing company. When I complained to the marketing rep… voila.. a new (Choicepoint)system was implemented and suddenly one of the companies in their group because acceptable for the same people who had been denied; unfortunately we lost several of them due to the distasteful experience with the carrier. I don\’t agree with credit scoring as I also feel the agent has a better perspective on their client…resulting in 5 figure contingency check! That is why we are called Professional Insurance Agents…we are professional! Happy New Year to all!
QUOTE: \”It is more likely that a person with bad credit will cost the insurer money. It\’s actuarial statistical fact.\”
I am not saying this is true or not true. If it is true, why haven\’t figures been realeased to show this? Why haven\’t the companies or the regulators or anyone else released the studies with the hard numbers?
Does this even exist? If so, please tell me where to access this information.
1. Credit algorithms are not secret in some states such as Texas. I myself have copies of TransUnion, Choicepoint, Progressive, etc algorithms obtained from the TDI.
2. Using credit for underwriting alone relegates poor scoring folks to non-standard carriers. Allowing credit to be used for rating, allows standard carriers to write high risks.
3. Credit scoring works. I know one company that reduced its fire claims 60% in a year by implementing credit underwriting/rating! The head of the company personally told me this.
4. The issue here is not whether credit works, but that companies using credit are alleged not to have followed the rules!
As an insurance agent in the State of NY for over 30 years, the use of credit score, or insurance score as the insurance companies would like us to name it, is an insult to any intelligent human being. Anyone who agrees with it use only see it from a selfish prespective and that\’s usually the insurance company. There is no correlation between a credit score and driving. There is no correlation between credit scores and owning a house. This is just a way for the insurance comapnies to charge more based on a tool call \”segmentation\”. Instead of one table rate, segmentation delivers many and it is driven by credit and other factors. There are no hard evidence to support it but the insurance companies are doing their best to make our politicans believe it is true. Only the smart politicans, like the new Governor-elect of the State of New York, Elliot Spitzer, will recognize it for what it is. It is a system of greed based on contrived data to drive the product up for people who don\’t always pay on time. The system is discriminating against low income people which are usually minorities. I see it everyday and it is a crying shame that for people who can earn big money, they are the ones who usually pay more. The use of credit score should be ban throughout the entire 50 States because it also drive Identity Theft. The hackers are getting right into the companies that supply the \”insurance scores\” and now the consumer is victimized once again. That is the only correlation that credit scores provide, possible theft of your social security number and all your other personal data. So let your State Senator know that you object to it and maybe there will be more than 13 States seeking a ban on its use.
Enough is enough. State regulated insurance with rates based on historical risk factors that are directly related to the insured risk. Only allow a 10% max profit to those underwriting / administering the program. Thus, no more profit motive, no more need to look for biased ways to redline and make irrationally exhuberant profits. JUSTICE FOR ALL – REASONABLE PREMIUMS FOR ALL.
That is our experience. Aisus.com builds online rating for insurance companies. We have seen companies \’open\’ up to more difficult risks using our technology to rate/underwrite online with scoring.
When I hear agents complaining about scoring, I believe they don\’t know their own markets. Captive and leading independent carriers like Progressive are taking better risks out of the independent agency. The business walking into the independent agency is of higher risk on average than 5-10 years ago because of this. The companies we represent have noticed a decline in \’good\’ scoring new business as that business migrates. More and more business is business that has had rates significantly increased or dropped due to scoring with captive companies.
Scoring is good for independent agents because the companies they write for will be able to implement the same policies as State Farm, Progressive, etc making them competitive.
First and foremost, there is no such thing as walk-in business. The professional independent recieves over 90% of their business by referral. Your numbers are significant because the independent agency today is burning and churning for survival. The older established agancies are still field underwriting new business at a high profit rate of return. Statistics are good tools, however, it takes knowlege and experience to understand how the results were actually derived. Progressive has taken a huge market share, however, in the next five years the multi-line carriers will take back those lost policies where multi-policy discounts will beat their mono-line rate. Further more, Progressive has always cut the agents commissions so the independent agent will be glad to rewrite Progressive autos along with their homes, and umbrella\’s. Only time will tell.
The real topic for the insurance industry is demonstrating the complex metrics of the \”insurance score\” of which credit is only one of many complex factors. Since the introduction of insurance scoring and predictive credit modeling in Connecticut, we have seen incredible decreases in the vas majority of our client\’s premiums being paid for auto and homeowner\’s insurance.
At the very same time, insurance companies have begun offering more choice and broader markets for more difficult risks. The Connecticut Assigned Risk plan is at an all time low participation rate, (based on the last posted numbers) indicating that the voluntary market is working extremely efficiently to provide affordable insurance to the marketplace.
You want me to pay higher premiums so that folks that make poor decisions can get insurance cheaper???
This is what insurance is about, measuring risk and insuring it as accurately as possible, and that is why companies like Progressive are winners in this game. They are a whole level above any other player in the game when it comes to know and pricing auto risks.
Tell me truthfully, should you pay the same rate as a driver with a CNI and a couple of DWIs, and three AFAs? Should you pay the same rate as a homeowner with two complete fire losses, multiple minor non-wind claims, on the coast, and in a flood zone? If you say yes, then I can only say that you are not responding to logical arguments.
Governments and courts decide what are \”fair\” risk criteria. Any company that does not use these criteria to the fullest extent of the law is endangering the company.
What you are proposing is that we get rid of insurance agents and companies and all submit to a government pool so that we get the same rate for insurance….I think thats called communism or some kind of ism, but not America. This is a land of choices and repercussions and insurance rates are a free market form of repercussion.
einstein—- are you listening…or reading… what you just wrote? College grads will have fewer losses becuase they make more money?!?!?! What the heck are you talking about? That isn\’t what this is all about. People who behave a certain way have more losses. You just made one of the dumbest statements about this I have seen yet!
So there should just be one rate for everyone based on what you are saying. The same rate for people in Brooklyn as in Iowa. The same rate for the married 40 year old woman as the 17 year old single male…. the same rate for the person with 5 DWIs as for the person who has never had a ticket or an accident… That is what your logic would give us. How is that fair? It isn\’t it just makes your life easier.
What I will explain in very very simple words, a good credit score is a characteristic of a good driver. I never implied that driving records should not be an underwriting guideline. I also think that the professional agent can field underwrite better than any federal guidelines or company guidelines. Progressive has a very strong niche in the monoline market, and in many cases by paying the agent less commissions. In closing, wealth, education, and credit scores are all characteristics of a good driver. The only difference is that we have allowed corporate america to convince some of you since it is used to underwrite loans, that it should be used to underwrite insurance. In reality, it is just a common characteristic of a driver who had NO CITES,or ACCIDENTS. Also with credit scoring reaching an all time high in identity theft, and inaccurate credit scores, please tell me how you tell your client (a real person) that sorry we have increased your insurance rate. Tell them that it is good that they pay more so that you ( a new client) will pay less, oh and this client has been claim free with the same carrier for 20 years. If you believe this to be right and good for business than please talk to my clients for me, because in my world this really happens all the time.
Very interesting but St……. Who said the rate factors of liltgations frequency, labor costs, and state laws would not effect the price of insurance. Wow now that would be dumb. Back to the point 13 states ( Insurance commissioners) do not feel that this should be rating factor. They are right, it means that more good drivers ( accident and cite free)have higher credit scores, but conversely it does not mean that people with higher credit scores are all better drivers. It really is that simple and I know from years of experience that is unfair. As they say good night and good luck
So the concern is that poor people are paying more for insurance because they are poor. This is the same argument made for rating by zip code. We can\’t rate by zip code because certain races will pay more based on where they live. Maybe they will maybe they won\’t. The fact is that insurance companies (I know you won\’t believe this but it is true) don\’t look at race or income when using these rating tools. They look at….wait for it….. LOSSES!!!! The cost of doing business. Like it or not the companies are in business to make a profit. They also all want to grow their auto business very very much! Look at PRG they were the most sophisticated users of credit and they are growing like a weed. They want to write everyone they can at the right price. Almost all insurance companies are that way when it comes to auto. There are some very repsonsible 17 year olds out there and very few of them have any money to speak of but they sure do pay the highest rates for insurance. Let\’s have an argument about that? We don\’t becuase the facts back up the price.
Why do they need to take a loss on a category of business they can price properly? Why should I pay more for car insurance because others don\’t want to pay what it should really cost for them? Driving is not a right it is a privilege.
You didn\’t need to say how long you have been in the business… your statement-
\”The fact that many companies have incorporated credit history into the rating process rather than rely on its \”predictive\” value for underwriting, further confuses the issue.\”
It is clear you have no clue about predictive modeling and rating based on risk of future losses. Glad you are not a regulator any longer. Sophisticated companies don\’t use \”predictive\” values for underwriting they use them for rating. In your world of using it for underwriting these people wouldn\’t be able to get insurance at all. Is that a better solution? Decline the risk?
Thanks for a sensible post! This is like the problems we have now with supplemental commissions or whatever you want to call them. Some companies don\’t follow the rules and everyone pays!
This issue that the 13 states have joined on is providing proper notice and that needs to be done.
This leads us to the bottom-line, is right or wrong a business decision. Corporate america will rationalze wrong to improve their profit, however, if it is not right then we are letting corporate america make decisions for us by telling us we will save money. Insurance was designed to pool money for the good of all, not just a percentage who can get a better deal. Look at how americans can not afford medical insurance, guess what corporate america is making a profit only insuring the healthy, and we get reduced premiums, but we are paying it out in taxes. The analogy that we reduce auto insurance for good drivers has nothing to do with credit scores being an equal underwriting value. I will bet that college grads have fewer losses, why because they make more money and will then have higher credit scores. The final no brainer is how about discounts for golfers. I bet if we studied golfers we could reduce their risk especially compared to bowlers. Why because we know that golfers make more money because of its high participation cost, and of course, bowlers drink beer. Sorry, I could go on and on with this elitist arguement, but the bottom-line we should as an industry provide insurance for ALL at the lowest possible rate. We need to quit trying to outsmart the system with stats, because if we the will gett smaller and smaller.
If 13 commissioners think it\’s bad, that means that 37 either think it\’s fine or are neutral. Are you arguing that the 13 are somehow smarter or better informed than the 37? Or since they agree with your omniscient opinion, they must be right and the others are, prima facie, wrong? ********. Just because 13 comissioners support a lawsuit does not mean it is draped in unsullied, shining cloth of gold. All 13 of those states could have corrupt or political reasons for demanding a change, so cease trumpeting that number as though it stops all discussion as to the legitimacy of credit scoring.
As far as your statement \”…it does not mean that people with higher credit scores are all better drivers.\” No ****. What it means is there is a statistical correlation between credit scores and claims. Not accidents- claims. And not all credit scores are right? Good point… except where you forgot to realize that A) the majority are and 2) victims of credit fraud file claims for losses under homeowners. How about that- a bad credit score leading to losses. I\’m sure your favorite carrier is just aching to have loss ratios over 1. Because we all know that the way to profitability and continued policy service is year after year of financial losses.
Here\’s a radical idea- companies want to take money in, and keep it. God Damn those heartless corporations- how dare they make a profit- it\’s downright un-Venezuelan. They don\’t want to take it in and give it back out. Loss is a function of insurance, but underwriters and actuaries are rewarded for identifying potential losses and guarding against them.
In all the rants against \”excessive premiums\” and \”the tragedy of uninsured citizens\” I have yet to hear one of you rant against the root causes of expensive insurance. How about a big cheer for tort reform, lower medical costs, and getting senile, immature, and drunk drivers off the road- permanently? If credit scoring is leading to higher premiums for a particular customer of yours, why don\’t you earn your fee by contacting the carrier and getting an adjustment? If all we do is submit apps and collect premium checks we might as well show all our customers how to use Geico or e-surance and go into a different line of work.
Do you really believe that the government should be in charge of nationalized insurance? After their stellar record on social security, veterans benefits, and military spending? Yeah- good plan genius. Let\’s turn auto insurance over to the hard working legislators responsible for the up-armored humvee program. Remember that debacle on the nightly news?
I\’ll meet you halfway- you prove that insurance companies are doing anything more than pursuing profit, and I\’ll agree they should be closed down. If they are discriminating on anything other than potential loss, they should be hammered into extinction. However, if all they\’re doing is attempting to identify (and charge for) potential losses, what\’s the problem?
um no Einstein… maybe you should read the article. 13 states have concern about notice. That is what this is all about adverse action notice. Everyone has just turned it into a conversation about if it should be used at all.
You obviously don\’t understand how insurance is priced… you want to go back to the days of one rate sheet you could turn to in a book. Go back to your microfiche this internet thing isn\’t going to work out either.
Wow guess I have hit a nerve. You are right about corporate america they are profit driven by there shareholders. That in itself is not bad deriving by not doing the right thing is. Why do you believe we sent out millions of opt-out letters? They got caught selling data, now you are justifying that unauthorized data. It really is quite simple they gathered this data and found there were fewer claims with people with higher credit scores. That did not prove that those who were claims free whether they had higher credit scores were better drivers than those with lower scores, this would not be fair to those who did not have a claim. All good drivers should pay the same rate based on sound underwriting (experience driving,cites, and claims, and valid insurance costs (attorney penetration, hospitol costs,labor rates). Please quit trying to insult me, no matter how you slice it insured\’s who have no losses or claims ( same cost factors) should pay the same rate. I am sure if the characteristic that people with higher credit scores had more claims that would not even have an issue. So please get real because I have heard for years its a business decision live with it.
Once again Einstein you show you don\’t understand the word \”predective\”. Higher rates aren\’t charged for people who have losses because of the loss they had it is because they are more likely to have future losses. That can also be predicted based on where you live, your age, your gender, the car you drive and yes…. your credit score.
Once again your logic falls apart. So since the newly licensed 16 year old has no accidents he should pay the same as the 40 year old married male with no accidents….. doesn\’t work.
You have no idea how to price the product… just stick to selling.
Driving experience regardless of age states that you have no track record of good driving, therefore, you pay more. Please explain why claims free and cite free drivers (20 years no losses) should pay more money than someone with a higher credit score and has only been claims and accident free for 3 years. The issue here is not that credit tracking works, its just unfair to use this to determine a rate based on driving, experience, and claims. When you get favorable results by using unfair methods, regardless you are obligated to do the right thing. I have a philosphy \” when you ignore experience and knowledge you become arrogently ignorant\”. Credit scoring in the next 5 years will go down in flames, because its wrong. My family has been selling insurance for over 50 years and over 90% of those years profitable and I have no clue how to write profitable insurance WOW.
I didn\’t say you don\’t know how to write profitable insurance I said you don\’t know how to price it. There is a big difference!
I am sure you are a good agent. You just can\’t price based on predicting future losses. Yes someone with no losses and bad credit should pay more because they fit into a group that we can predict will have more losses that is exactly what pricing based on future loss potential is all about. What about the clean driver that lives in Brooklyn for 30 years with no losses? Why do they pay more than the clean driver that lives in rural NY State that has been clean for 30 years? Or better yet. Why do they pay more than the driver with 1 or maybe even 2 accidents in the past 5 years? Because they live in Brooklyn and even though they have been clean for 30 years they are in an area that is more likely to cost more and have more losses. It is the same thing. You just don\’t like that you can\’t hold it in your hand and look at it. Credit works! It may go away but we will be worse off for it.
Look at PRG they don\’t just do it by paying low commissions. Their ability to grow isn\’t because they pay 10% and everyone else pays 15% it is a variety of things but first and foremost it is because of their sophisticated pricing model. They must be able to offer more people lower prices by using credit or they wouldn\’t do it.
Sorry you are so resistant to progress and change.
We have many city (large), suburban, and rural clients. Theft is much higher in the city (higher comp), repair costs, and attorney penetration. That is why it is fair to charge identical drivers in these two settings different rates. Crystal ball forecasting using stastistics should be used for marketing strategy not rating. Progressive\’s challenge will be to keep there clients. They have very little agent/broker loyalty as a result of cutting commissions and spending that savings on advertising. As their client matures, buys more vehicles, and a home they will save money by switching to a more traditional carrier. As I wrote earlier only time will tell, but history in the industry tells us good news travel fast, and bad news even faster
Again only time will tell regarding Proressive. I still believe credit scoring is rewarded indirectly by other means of discounting. Progressive is growing in part because the the major companies like Farmers. Allstate, and Farmers have lost touch with the real world. I think we see the same results (Progressive) we differ on who to credit. The question is will the brokers, agents, and customers stay loyal, I believe that as fast as they grew they have a tough job on their hands.
I see historical value, and track record you value predicting. Twenty years ago i would probable agree with predicting, but I have learned many lessons from the past, and I still believe that predicting is an edcucated guess. Underwriting is a very complex formula, however, I still believe in right and wrong. Maybe it is true in the short term that Clue is not as good as credit scoring, but you see credit scoring still does not reward you for good driving and Clue does. Simple right and wrong.
Insurance scoring may work in a perfect world but it sure does make life difficult for an Agency Principal trying to explain to a long term customer who has no previous claims, a credit score of of 780+,and pays his premium in full yearly why his premium went up $200 REAL DOLLARS and then to find after talking to choicepoint and experian that the reason his score changed is because he purchased a RV.For goodness sake the guy is retired and has a six figure income!
Is this Fair?
What happened to good ol common sense?
Bt the way I have a customer who always pays late(most of the tome after receiving a cancellation notice )whose yearly rate dropped over $300.00 because guess what,He has a great Insurance Score!!
This is a complex issue; generally, credit scoring follows loss ratios, and that works for the majority of carrier. However, while it works for most, it does not work for all. I\’d hate to be in a position where I ran into credit problems, and then paid higher premiums as a result, even though I had a sparkling driving record.
There needs to be a genuine appeal process available for credit scoring to be used and accepted; it may get it right 80% of the time, but that is no excuse to shortchange, or even undercharge, the remaining 20%. I know from personal experience, as a physician billing that should have been covered by my health carrier was turned in to a collection agency 3 years after the fact; my rates went up 20% overnite. Once we found out why, we contested the collection, but the original insurer wouldn\’t budge, so we switched companies and were fortunate to find a rate much lower than the first company. Not everyone gets lucky with finding a second carrier.
Since people are being charged rates that in some cases are not connected to their driving or loss records, look for this practice to be changed by the courts. Carriers are letting credit records do their underwriting; it may work well for them, but it doesn\’t set a fair playing field for all policyholders.
I don\’t believe I disagreed that credit was a \’predictor\’; however, simply because something is a predictor, does not imply it is correct in 100% of cases. Credit is not foolproof and results in both overcharges and undercharges. I know of companies who will give you a good rate, even if you have multiple tickets and a DUI, so long as you have good credit. Where do you think they are balancing that undercharge?
All I stated is there should be a valid appeal process, so someone who is an excellent/good risk has the opportunity to prove that and not be penalized by making a prior poor financial decisions.
Should there be an appeals process for the driver with a lot of traffic tickets but with no accidents?
What about for a driver who is male, single, and under 25?
If you have an appeals process for one component in a rating model, why not for all of them? Why is credit more special?
If you agree that credit is a predictor, how can you advocate an appeals process? I\’m not trying to be condescending, but you don\’t understand the concept of predictor, if you\’re advocating an appeals process.
You\’re not going to make a case that simply because something generally predicts an outcome that it should be looked at as the same as the outcome.
I\’m well aware of the credit role and what it means to the majority of insurers, however, you have not answered why it is ok to overcharge the driver with no losses and poor credit while it\’s ok to undercharge the driver with good credit and a poor DRIVING record. Sorry, but a DRIVING record is a much more reliable indicator than credit.
Credit is a great measure, but it cannot be the only measure, and and it cannot be absolute. Sorry, you and I will not agree here. If you want to add appeals for what color of car, etc, that\’s fine with me, but credit is not an absolute measure of risk. Yes, it\’s a measure that many carriers have used to become more profitable, but that does not make it an ethical measure for a regulated business.
Public policy determines whether race based underwriting/rating can be used if it was statiscally valid. Gender based rating is generally considered statiscally valid, but some states don\’t allow it. Age based rating is generally considered statiscally valid, but some states don\’t allow it (allowing similar years driving experience).
Credit based rating is generally considered statiscally valid by those who have looked at the numbers, but society and public policy must decide whether that is a factor that can be used.
And for those who say that having bad credit doesn\’t mean that they\’re a better driver, there are a ton of rating variables that have nothing to do with driving… homeownership, paying the premium in full, having prior insurance, quoting the new business more than x days in advance, being a good student, et al, but all of those have discounts related to them that are statiscally supported.
Technically even the car you drive may not indicate what kind of driver I am. If I drive a Ford Taurus, am I a safer driver than if I drive a Corvette? No one knows, but even without looking at the statistics do you assume that a Corvette driver and a Taurus driver have the same driving habits? They may, but statistics for the general population would reflect otherwise. Should I charge the same liability rate for both vehicles? In the past, many companies did.
Einstein I think we just disagree on how things should work. You want these predictive things to be used for underwriting and marketing. That would mean that those people who have \”negative\” predictive characteristics would not get insurance. No one would sell it to them or they would be denied insurance for underwriting reasons. So your solution is one rate or at least a limited rating plan with coverage available for the few. The theory of the \”progressive\” pricers is coverage for all but at the right price. That sure sounds less discriminatory than your way of pricing \”fairly\” but only providing coverage to the limtited few.
I remember when PRG was at $2 billion and everyone at the \”big companies\” said \”it is easy to grow by 20% when you are so small\” and then they got to $4 billion and they said the same thing. They are now, like it or not, a dominant force. The agents complain about commission all day and talk about how they are not loyal but they still put business with them and now they are growing direct. Trust me I have spent much of my career in the IA channel and want and need it to be successful but you can\’t deny that the PRG model keeps working.
Ok Ray you and Einstein seem to think certain things can be used as predictors and others can\’t. Which are they? It seems clear that credit is not. More because you don\’t understand the science behind predictive models than anything else. Zip seems ok, age seems ok. You say that credit isn\’t 100% but then you dispute when LLCJ and I say what about young drivers what about those with violations but no accidents. That is all about predicting losses but it isn\’t 100%. So how is it different? No rating variable is 100%
You say that driving record is much more reliable but that only shows how little you understand about rating and segmentation. In fact I would give up CLUE reports and MVRs long before I gave up credit reports. @80% of the market is clean but over 90% have a credit report. It is much more predictive and reliable.
What about model year on liability? Your argument would say it doesn\’t matter the year of the car for liability right? But it does! Model year is a predictor of future losses even for liability.
There are hundreds of competitors in this market place more than for any other product I can think of. Here is the bottom line bare bones facts. If someone can sell insurance for less they will. So why would companies choose to over price customers if someone else would just come in and write them for less and make money?
The answer is that the companies that don\’t use credit are losing their shirts from adverse selection. I have seen it over and over again.
But you and I do agree! I agree that Credit is not absolute. But I also agree that traffic tickets are not absolute, nor is age, nor is marital status, nor is zip code.
Not one of these things is absolute. They are all predictors. Why, then, is credit singled out as being unfair? All the factors listed above are predictors, yet credit is the one being harped upon.
No one is being overcharged here. That\’s the point. Driving record is only one component in the formula. credit is only one component.
Remember, insurance companies are in the business of minimizing risk. Risk here is defined as payouts. Credit is a huge factor correlated to claims payouts. So if they surcharge a bad credit risk with good driving record, so be it! They\’re minimizing claims payout risk! No one is being over charged!
Everyone is being charged according to the risk they present to the insurer. This risk is a claims payout.
Some folks take this banter a little too seriously; I\’m not out to insult anyone, but I don\’t see the need to insult me; I have a pretty good understanding of the importance of credit scores.
I\’m not advocating them to be disallowed.
But I do have concern that we are using credit, which is a non driving factor, as the \’big factor\’ when setting rates. Sorry, I realize carriers can lump most of their customers by that factor, but we\’re talking about a regulated business. When a business is regulated, it has duties beyond simply making profit. If a person has a dui, traffic tickets, prior losses, or buys a vehicle with a high rate of incident, then those are statistical DRIVING factors.
Credit is not a driving factor. Perhaps we\’ll find out that folks who eat at buffet\’s are 30% more likely to have losses than those who are vegetarian; the argument can be make that should be allowed as a rating factor it there was a reliable way to measure it. It could work, however, that is not a driving factor, it is a diet factor that is correlating to driving losses. That is the simple reason I believe there should be an review/appeal process when insurance is denied, or rates increased, simply due to credit factors.
I\’m not rooting for the court to overturn credit scoring, it benefits the insurance industry, which in turn benefits me. But the fact that we\’re using something that is not driving related leaves me to believe the court will not leave the practice untouched. Maybe I\’m wrong, but we\’ll have to see how the folks in the robes rule.
I have found all the postings very interesting and thank you for all your insight. First, when did we consider 80% results anything but barely average ( barely will get you into a community college). Predicting snow does not mean do not go to work. Just because it has worked and made money for one company, does not mean it is right, (look at stock options).Lastly, is it right to use unrelated data to predict an unrelated outcome, even if it works 80% and makes profit, no, its not. Let me give you a very basic comparison. Two students are applying for scholarships in science. Student A has an A GPA, won science awards,all the clubs and scored a 680 on the math part of his SAT. Student B has a B GPA, no science awards or clubs, and 700 on his math SAT. Which student deserves a reward (scholarship)in this field? It is a stastical fact that those students above 700 in math are predicted to do better in science. If you honestly believe that predicting success is better than rewarding merit, than I give up. An 80% successful prediction because it makes money is not right. The End
credit has nothing to do with future claims and geico knows this.It only affects the ability to pay overpriced ins. premiums.I currently work for a company that only uses driving history for underwriting and is very profitable.Geico uses credit history to place drivers into less favorable catergories to make a profit if that person cannot maintain the payment structure.At least thats what they told us in training.
According to the CAS study, I am getting screwed because I have zero revolving credit. Evidently I need to have a bunch of credit cards, just never use them.
You are using less credit than other folks therefore you have less to be evaluated on.
Insurance score and Credit score are slightly different but there are some similarities. Some of the things I seem to remember from the Progressive model and other models were:
1. It is better to have 50% (not 0,25, or 90%) of the available balance on credit cards used.
2. You should not have in excess of $10K on credit cards.
3. You get good points for every month a checking/savings account has open.
4. You get neg points for late payments.
5. Bankruptcies, collections, etc are very bad.
6. Excessive store cards are bad.
7. Long histories of timely mortgages and car payments are good.
This is why cash paying folks get a \’No Score\’ as opposed to a \’No Hit\’ or a low score.
Also, the data used in models vary from provider to provider. Some providers may use data that another provider will classify as \’unvalidated\’ and not use. That means that scores can vary between providers.
someone who has no credit receives a poor credit premium under these plans, even though they technically have no credit rating to base it on. Know personally.
I know I promised, my final posting…..but. All of this credit scoring is interesting, but whar does it have to do with rewarding insure\’s for claims-free and cite-free driving NOTHING. Its really scarey that we can use unrelated data to determine insurance rates. What if we used height on drivers license (can\’t use weight everyone lies)and we predicted anyone under 5\’4\” has more losses (which might have some correlation)would we use that to basically surcharge short people. Please play with you #\’s have fun, but it really does not belong on the real world.
Inaccurate credit reports are difficult to correct and once corrected the inaccuracies may resurface the following year.
Don, an earlier poster, states “The fact that many companies have incorporated credit history into the rating process rather than rely on its \”predictive\” value for underwriting, further confuses the issue.”
In other words, an underwriter does not evaluate the credit score; the process is automated and extenuating or mitigating circumstances are not considered.
Some may see this as a more sophisticated approach that eliminates the need for underwriting, and others may disagree.
I have read the entire study from the C.A.S. and find it very hard to believe that you are referring someone to a study with statistics that are over a decade old! Gain some up to date knowledge regarding this subject many changes in reporting, lifestyles and numerous other things have changed and your sources are very out dated.
1. As a former GEICO agent, underwriter, and supervisor the point of using credit scoring isn\’t to penalize by putting poor people in the high risk company to make extra money. The poster who wrote that should go back to watching the History Channel Conspiracy marathon. It is to grow profitably in the most profitable segments in the most accurate and cost efficient way possible while ensuring high levels of insured retention. It isn\’t a conspiracy and this isn\’t a commune or kabutz (sp?). It is free enterprise capitalism at it\’s best. Any doubts compare the rate structures for auto in States that allow competition against those in highly regulated, particularly no-fault, states. Competition wins.
2. GEICO underwrites using occupation (as one of many, many variables) in most states because it is a legal discriminator (insurance by it\’s nature is discriminatory)which like other factors has a relevance to future claims likelihood. Like it or not sometimes stereotypes are accurate in life. I\’ll write 10,000 mechanical engineers at a lower rate that 10,000 roofers (because the engineers exhibit a higher level of responsibilty than the roofers as a group) or 10,000 police officers because as a group they are greater risk takers. You may not like it but being right is it\’s own defense.
3. Credit scoring in repeated studies over the last fifteen years has shown a greater correlation to claims filing than any other indicator to date including driving record. Don\’t like it, too bad. Insurance isn\’t about equality, see discriminatory above. Insurance uses legal, proven facts regarding large groups of similar risks to determine which groups are most likely to cost the most money. These groups are charged the most. If there is a problem with that then you should use hard work and education to improve your situation. Everyday homogeneous groups of McDonald\’s employees go to work. Some buy cars and treats and get into debt. Others buckle down, get an education or skill, and make something of their lives. Having come from nothing no one will ever convince me that anyone is stuck with the life they start with. Ok off that soapbox and back to the insurance one.
4. Credit scoring bias – Credit scoring isn\’t based on how much credit you have, possible minor debate on those models that include the number of credit accounts, but how well you pay your bills. Another poster commented on the impact of an emergency car repair or buying Johnny new xmas clothes: Generally these purchases would help your score and would only hurt if you didn\’t make your payments on time and/or used up more than a safe portion of your credit ratio to income. Live in Central LA and pay your bills on time (and don\’t tell me in the land of Captial one et al that everyone in this country isn\’t getting credit card offers)your credit will be ok. Live above your means in Beverly Hills and your credit won\’t be ok.
4. Lastly, yes there are exceptions. But folks, this is 2007, and if you haven\’t learned yet you can\’t manage by exception like in the 1920\’s and be a large company. Progressive started this in insurance and all they really did was take some of the manufacturing logic to the service industry. If you want service by exception you might be better served by some Independent Agents but for the majority who are buying a commodity, auto insurance, a company that can accurately rate 95%+ of the risks presented is going to be good enough. And at the end of day good enough has to be good enough.
In your response regarding the 13 commissioners, I think you missed the biggest point: Insurance Commissioners are typically either elected or appointed. In many cases that doesn\’t mean they know anything insurance other than they know how to raise money, elected, or raise money for someone else, appointed. They might as well be ambassadors or a cabinet level appointee to the white house for all their subject matter accumen.
Unfortunately you are right and whats wrong with our industry. Yes its 2007, and I know no one cares, and its all about the money. Getting away with discrimination does not make it right, it just means when we sell our soul it takes on a life of its own. Insurance companies could make a profit by charging a rate based on real factors, driving record, losses, mileage, cost factors, experience, useage etc. Then we started stasically grouping insureds, occupations for example. This is a true predictor, but in reality unfair and discriminating. The industry got away with it, and now there is no limit or conscious in making a profit. We insure people, and our industry has well protected themselves, but the fact is why not scharge roofers more to ride the bus than an engineer. The reasoning is that it costs more to clean the seats of the bus for a roofer. If a bus driver tried it he would get his clock cleaned, and no one would ride the bus. Insurance only get away with it because they have never sat been held personally accountable.
I disagree with your logic. Any factor that accurately identifies risks that are likely to cost more more fairly proportions the costs across the spectrum of risks. Look at it from the perspective of the consumer who pays the lower premium because they represent, regardless of reason, a lower risk of claim. Isn\’t unfairly discrimintory to not charge them the lower rate it has been proven they deserve?
As far as the bus example, it isn\’t an applicable analogy. Bus service is generally a government subsidized benefit for the population. Insurance isn\’t and shouldn\’t be due to the morale and moral hazards that would be incurred. I suggest better examples would be:
Taxi – Charges by the distance segment, risk, based on costs to get there plus a reasonable profit.
Landlord – Charges a higher rent and security deposit based on the assumed greater risk of a tenent with a pet.
If you were to privatize the bus service and have that service have certain buses carry engineers and others carry (assumed)dirty roofers, all other being the same or otherwise mitigated, over time the bus company would charge a higher rate for the roofers in order to compensate for its higher costs.
Auto Insurance is a funny product: A promise to pay for a loss that is at least partially controllable by the insureds actions. You can\’t socialize it for the reasons mentioned above, Massachusetts and NJ proof positive, but if you make it completely objective (fairly discriminatory)someone -class is going to suffer, pay more. The leftover question is are the risks paying the premium for the risk the represent? Regardless of anything subjective a yes answer to that can be the only acceptable solution…
1. It\’s not monopolize…Regulate into the ground perhaps. Monopolize would mean one company would write all the business. Ask the folks in NJ how well that went.
2. Every insurer in the US would love a 10% underwriting profit.
3. How would you calculate the up to 10%? On a year that I run a 150% loss due to the next Katrina do I get several years of extra profit?
4. Massachusetts and Michigan have something similar and they have some of the highest rates in the US.
5. Where is the encouragement for competition? We basically would end up with a cost plus business model and we\’ve seen how well that does in the defense industry.
6. Dictator Chavez stick to screwing up investment in your energy infrastructure.
Everyone wants low rates, higher than value payouts, no rate increases, all the discounts and none of the surcharges. You can have one or two of them but it will be at the expense of the others.
I seel insuracne and teach insurance classes. My experience has been that people who have access to large amounts of unsecured debt are also adversely inpacted by credit/insurance scores. Case in point; I had a household with two surgeons aquire insurance in my agency and the received a slightly below average score. The same day I insured a employee at a cabinet shop earning $10 and hour with a stay at home spouse and 1 child. He got the best score available. Neither party used their credit irresponsibly but the former had access to large amounts of unsecured debt. So there my be an INVERSE relationship to income and credit scores.
In the end I would prefer to see those who don\’t believe in the use of credit scores to acquire their insurance with companies who don\’t use them. I suspect however, that they like many others consider insurance an expense and make an attempt to keep these costs as low as you can by shopping around and buying the least expensive.
I guess I will continue to subsidize people making poor choices by paying more for health insurers due to smokers, more for credit cards due to identity theives and bankrupcy filers, more for my clothes due to shoplifters ….. and the list goes on.
I\’m not attacking- I\’m seriously wondering- is it the credit scoring process that\’s biased, or are insurers manipulating credit scores in order to deny insurance?
Why would they do that? Why would insurance companies make up a way to underwrite against business that they can make money on??? Oh maybe that is it maybe they are trying to charge the right rate for the person…..
Think about it the more people that a company can write they can then make more money….. but they are in business to make money…
Credit scoring is a biased way of determining risk not insuring \”credit exposures.\” I personally know of one carrier with supposed good hands that will give a rating score of 8 or 9 in a suburban area but a 12 to 16 in a city area. What gives? That\’s credit scoring or REDLINING based on where a risk lives. Don\’t want to write poor or high crime neighborhoods? Just up their credit scores so that they are either rejected or priced out and then tell regulators its a proven underwriting system.
Wait a minute. Don\’t confuse the facts. Credit scoring is an underwriting and risk assessment tool. A tool not used properly is not the tool\’s fault. Is it any surprise you\’d have operator error in the hands of the Good Hands People?
State DOI\’s already have the ability to punish the improper use of underwriting tools.
We don\’t need more regulations and restrictions, we need intelligent moralists that follow the ones we already have. Regulations and restrictions, while sometimes necessary, mask the true problems and hamper effective long-term solutions.
You have got to be kidding me right? You people could not possibly be in the insurance business. Credit Scoring is the best predictor of future loss that we have ever had. Yes people with bad credit have more losses. Thats a fact just like people with many moving violations. Do we stop using driving records in underwriting also. Thats what underwriting is for petes sake. You dicrimate against the bad risk. Credit scoring has helped a lot more people than is has harmed. You can improve your credit score just like you can improve your driving record but it takes time. Wake up. The states without credit scoring will have the highest rates. Thats also a fact.
I don\’t have the greatest of credit history because of bad judgement (mostly in women or wives, of the ex variety).
Does my poor choice in women affect my driving ability. I have NO speeding tickets, NO accidents and not so much as a parking ticket on my driving record which extends back some 20 years.
How is my bad credit an idicator of my driving ability given the factors above?
What you\’ve got to understand is that insurance scoring does not surcharge (punish) those with poor scores. It is a tool used to give a discount (reward) to good risks.
I have offered opinions on InsuranceJournal.com\’s various articles on credit scoring.
When will people realize that a method of underwriting is a generality, a likelihood, a predictor. Just because PersonX has bad credit, and has never filed a claim or gotten into an accident, that is not indicative of the whole sample.
A predictor is not 100%. Just like not all drivers with many speeding tickets cost an insurance company money in claims payouts. However, credit scoring, like a previous poster has said, is the one of the best predictors we have of future loss.
Please note, I said the word LOSS, not ACCIDENT or DRIVING RECORD or something else. The insurance company is in the business of minimizing risk, i.e. minimizing the payments it pays out.
As such, credit risk is one of the best predictors of such that we have.
I am an Insurance agent. One of my customers was rated because of credit. It was due to so many credit cards being open. She had less then $1500 outstanding and had over $50,000 in the bank, her car and house were paid off. So, she canceled several of her unused credit cards. Now, she is rated lower again since she has canceled so many credit cards. Where is the increased risk to the insurance company for this person. It seems the increased risk is to her for increased premium cost.
That\’s specious nonsense. I transported the elderly for years and the absolute worst drivers on the road were driving rather large and EXPENSIVE trucks.
Furtheremore, that issue just came up here in Oregon, and when I asked the insurance industry for the data, there was none.
I\’ve had cancer with no medical insurance. Please, do explain to me how suddenly that made my perfect driving record imperfect. Please, do explain how cancer made me a greater risk. I would love to hear, so talk.
When I was driving, the most road rage, the most reckless, and the most inconsiderate drivers were middle aged white men in large pick ups. Dodge Rams, Ford F250\’s and up, and oddly, in order to own one of these, one must have excellent credit. My son-in-law sells cars and he assures me that they are not giving them away, so excellent credit is a must.
Credit scoring is a parasitical practice designed to keep the lowest income bracket low.
Credit scoring is one more effective weapon in the class war that this country is engaged in.
Credit scoring is another way to keep a low wage labor pool.
Remember Enron? Bet they all had good credit. How about MCI Worldcom? Bet they had great credit, and let\’s not forget the Tyco debacle. Good credit there, too.
So how about someone tells the victims of these corporations that since they were wiped out by these thieves, that now their insurance rates must rise. Why? Because they\’re credit is now bad.
And also, let\’s not forget the insurance industry was next to no help in the aftermath of Hurricane Katrina.
In general, if someone has poor credit/financial problems they are more likely to file a claim even if it is just above the deductible because they are having financial issues. Not to mention property mysteriously disappearing in order to score quick cash and get out of a financial jam. It is controversial, but dealing with large number it works. It comes down to how responsible you manage money and pay your bills.
One more time, let me repeat,
credit scoring is a predictive tool.
It is more likely that a person with bad credit will cost the insurer money. It\’s actuarial statistical fact.
Similary, having a lot of speeding tickets is also a predictive tool. Not all people who get tickets will cost the insurance company claims payouts, but it\’s an excellent predictor. If you show me an example of a driver with a lot of tickets with no accidents, does that invalidate the predictive power of traffic tickets? No!
Smoking is the biggest predictor in life insurance, yet I personally know of a lifetime smoker who lived to be in his 90s. Does this invalidate smoking as a predictive tool?? NO!
The point: Individual examples are not enough to denounce a predictive process. You have to understand, literally millions and millions of drivers are used in these credit studies. The statistical correlations are extremely high.
C. Williams, that was a great post – primarily because it reminded me that underwriters DO have the flexibility to use their judgment as I did recently with a sucky credit report due to the Katrina aftermath – an isolated incident, I\’m sure, and I\’m talking about a specialized line of business, but understanding the circumstances goes a long way toward allowances. Thanks for your post.
I know people who would be considered low-income, who have good credit score ratings because they pay their bills on time and don\’t over-extend themselves for things they can live without. I also know middle and upper income people who spend more than they make and score badly.
Seems to me insurance crdit scoring is more about living responsibly and not making bad decisions, which would also seem indicative of being a good or poor insurance risk.
I love it. Since it\’s inception my auto insurance premiums have gone down considerably, and as an insurance agent most of my customers have benefited greatly from it\’s use.
The whiners and \”share the wealth\” folks like C. Williams don\’t like it, but for the vast majority of reponsible people it is in their best interest. Is a \”good predictor\” of claims? I frankly doubt it. But it makes the deadbeats pay more, and reasponsible people pay less, which is jsut the way life is.
What if I told you I had a huge study that said black people had more claims, so therefore all the big companies are now going to use race based rating? Now, what about religion?
We have already decided that we do not want to descriminate based on race or religion, so companies cant do this. ITs politically incorrect to even conduct the study.
That brings us to discriminating against the poor. As a country we are in the process of deciding if we think this is ok.
But the truth is, I bet if you showed people that blacks had more claims, most white people would say its ok to discriminate against blacks and charge them higher rates. As a country we really havnt come that far.
One more thing, you may be saying, the companies want to charge higher rates to folks who are irresponcible with money and ahve bad scores, not poor people.
OK, but I have to ask, what is the average ins score of someone with an income of 15,000 to 20,000k? What is the average ins score of someone who has a score of someone who makes 20 to 30k? How bout 50 to 60k?
When will my marketing rep deliver that information? Never? Do you folks have it? Please post it!
I believe logically that it is easier to pay your bills and thus establish a responcible credit history if you have a higher income.
If you make 15 to 20k and are part of the working poor, lets see you pay those bills and avoid running up a little credit card debt when your junk car goes dead on the way to work. Want to splurge on some new cloths for little Jimmy this Xmas?
Statistically speaking I believe someone making less will more often have a poorer score.
Its posible to have a good score making under 20,000, I did it for years (recently), but I was lucky, and its not easy. I find it much easier to maintain my excellent ins score now that I make more money.
But doesnt that just make common sense??
Oh, gimme a break! It\’s an insult to those people with lower incomes to immediately equate them with low credit scores. I have been in this business for many years, and have never been able to determine that people with low incomes have low credit scores. I have seen a lot of people with good incomes have low scores; it is not a function of income. It reveals responsible management of your affairs.
Yea great post by Danny P. We live in a materialistic society where no one wants to be the odd man out who is poor.
Everyone wants new shoes and cabel TV and the new video game. Folks making 19,000 will have those things. They will also have credit card debt and a worse credit score.
The person making 30,000 will have all of those things too, but they will have less debt and a better score, its just a fact of life in our consumer society.
Also I agree, can anyone find what the average insuracne score is for someone making 20,000? Id LOVE TO KNOW. IT SOUNDS LIKE AN IMPORTANT PART OF THE ARGUMENT
Then prove it bob, show me the DATA. If it were out there wouldnt your marketing rep have brought it to you already? If you can show that credit score and income are not related show it to me.
I will shut up, and print it out and show it to my next client that complains. I hope im wrong, cause I think credit scoring is here to stay and I dont want to be the bad guy.
One more thing, Ive been doing this for many years too, but only running credit scores for 5 years, and many of my \”poorer\” folks with older cars and Mcjobs have crap scores! Sorry thats just my reality.
Show me a guy with a nice car, good job, and a family, and many times the score gets better, not always, but ALMOST ALWAYS.
Abe:
No one is going to show you the data, rating algorithms and studies are proprietary. Even when actuaries file rate filings with the state, they don\’t file all the nitty-gritty.
MC:
You made Bob\’s point for him. We live in a \”keeping up with the joneses\” society. People want these things. People always want things they can\’t afford. However, it is responsibility that will restrain these purchases, and thereby reducing credit card debt.
Danny P:
Your argument that allowing credit scoring allows race based underwriting in the back door is in itself a racist argument, since you yourself are making some racial assumptions about income and race. This is even worse than saying underwriting by zip code is race-based.
I am not making racial assuptions, read my post more carefully please. I said \”What if\” in order to make an analogy.
You get analogies right? They are on the SAT. As far as your \”no one is going to show you the data\” argument is concerned, credit scores are compiled by credit agencies like Choicepoint, not insurance companies.
Also, the credit agencies are interlinked with the governement, thats how they legally controll all our personal info remember?
So the statistic im looking for should be public record, maybe its out there somewhere, maybe its hidden for a reason, imagine that.
Back in 2003 a company named EPIC Actuaries, LLC put together their study -\”The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity\”. It\’s not exactly light reading. If you are a numbers person, you will love it, if you are not – your going to give yourself a headache. You can probably find this study by doing a simple google search.
I deduct by some of these responses, some of you have not seen this study or any other studies that have to do with this correlation. As a professional, I believe it is \”our duty\” as Agents/Brokers/Producers to fully understand this correlation so that we may pass the knowledge onto our clients – the insured. They ARE our assets and we need to look after them in that light. The only way to win the game is to know how it\’s played. Happy Holidays, enjoy the reading.
Wow, looks like Commissioner Denn has touched a nerve. Does not anyone wonder why 13 states have joined an amicus on this issue. Could it be the old “where there is smoke, there is fire” adage suggesting that something is not what it should be?
As a former underwriter (8 yrs), former broker (2 yrs), former regulator (27 yrs), former chair of the NAIC Credit History Working Group, and current regulatory consultant (8 yrs), my view is that these Commissioners are doing their job in the public interest. Had the insurance industry been a bit more forthcoming with data early in the process, this issue would not be the persistent morass that it is today. The mere fact that the underlying algorithms used in credit history use are secret tends to support the continuing suspicions surrounding this issue. Suspicions that the Companies are in a position to manipulate the data to accomplish a de facto redlining. A suspicion that I share.
The fact that many companies have incorporated credit history into the rating process rather than rely on its “predictive” value for underwriting, further confuses the issue. This leads to the issue addressed by the amicus, the failure to comply with the FCRA when credit history use results in higher rates or an adverse action.
Is there a place in the underwriting of risks for credit history use? Probably, and for some lines of business, likely. I am not convinced however, that automobile and homeowners insurance underwriting is that place. I am even less convinced that rates which rely on credit score for those two lines is appropriate.
Thanks, but I think EVERYONE in the industry knows about that study.
What we are looking for is data that says LOW INCOME PEOPLE HAVE CREDIT SCORES THAT ARE JUST AS GOOD AS RICH PEOPLE.
IF that aint true, then poor people are paying more for insurance casue they are poor. Is that ok? Maybe it is, thats what we are arguing about as a Nation right now. Thats all im saying. Ive got a good score so I dont really care, but some of my clients take out their anger on me so its not much fun.
I wish our insurance commissisioners would spend more time and resources fighting real problems in the insurance industry. Besides, anyone who really understands the insurance scoring method knows that credit is only one factor used in the overall rating of a client. In addition, each company uses different ratios to determine their own company insurance ratings. Choicepoint (a private for profit company) creates the insurance scores which allows the insurance companies to fairly apply rates based on their key indicators that are proven with \”empirical data\” to indicate the potential risk to the carrier. Last time I checked, most insurance contracts are unilateral agreements and if the consumer doesn\’t like CREDIT SCORING, then perhaps they should shop somewhere else. Finally, if credit or insurance scoring didn\’t work then most companies would have abandon this practice years ago. For the record, I believe most companies have converted to this method of underwriting for auto and home p&c.
Remember the old saying \”numbers don\’t lie but liars use numbers\”. You can say what you will about the studies but in truth this is nothing more than another form of redlining. It\’s not a big reach to suggest that the credit scores in any big city with a low income area (say Detriot)will be less than the more affluent areas (say Auburn Hills). Add in the fact that roughly 30% of credit reports have errors and I\’d say you are using junk science. If you agree with credit based underwriting, do you also feel that your education level should be allowed? Many companies are using that now also. Add it up, credit scores and education levels….hmmm Do you see the patern here?
Credit scores should be used in underwriting property risks due to the risk of fraud but in no way should it be used for auto insurance.
Yea in New Jersey Geico changes rates based on your job. Next they will have a discount if you own a Gecko.
Interesting you should bring up Choicepoint. Weren\’t they hacked by someone pretending to be Ford Motor Credit? Some 50,000 identities were stolen. And Choicepoint didn\’t reveal it until the courts forced them to. CYA all the way! So then Choicepoint turns around and reports lower scores for the people who had their identity stolen from THEIR computers?
I just know there is too much fraud and too easy to manipulate a score. Drops 30 pts if you open a new charge account. Can drop if you shop your mortgage- the mortgage companies adjust for this, but do insurance companies?
In theory, I could end up paying $500 more in insurance premium because I went to 5 different banks for the best rate to finance my home?
Or because I didn\’t work for 2 months and fell behind on credit cards? (caught up in 2 months, but the numbers still dropped)
I think if they\’re going to use your credit report, they should at least give a chance to refute it.
Have these people who claim to have \’perfect credit\’ ever been sick, divorced, or have some major event happen that put them in a bind? Let\’s see how happy they are to pay higher interest rates and premiums after they do.
Yea verily, I remember the good old days
before credit scoring. That\’s when I made
5-10% more auto commission. Lets get back to that quickly (in the name of anti- discriminaton, or whatever).
And, of course, low-income people do NOT have credit scores that are \”just as good\” as rich people, even if they\’ve managed their money well, because you have to have a significant credit history in order to build solid credit scores, and the percentage of available credit in use is a significant factor in credit scoring.
Please note the venue of this case, \”U.S. Supreme Court\”. Do we really want federal vs state regulation of the industry? I think we may be in a slippery slope and we may not be able to wiggle out.
The dumbing down of underwriting by the use of credit scores has paved the way for \”pay-at-the-pump\” auto insurance. No agents and an assignment of risk by percent of state book for $.714 per gallon based on 700 gallons per year.
Get ready isnurance guru\’s you have created your own demise… one policy for all and one price for all with no arguement about underwriting criteria because agents think a credit score is a better indicator than age, sex, experience, location, etc.
Geez there are a lot of dumb sheep in the world. Still think credit scores rock?
Ain\’t it amazing! This was an article about the legal question of sending out legal notices, and it has disolved into an argument about the merits of credit scoring. That wasn\’t the original topic, but that always happens when this subject comes up.
It seems you have the pro and con factions that, like politics, aren\’t going to change their opinions. You have one side that believes in the free enterprise system, and allow business to have a free market, and then you have the warm and fuzzy philophy of keeping the poor downtrodden consumer from being victimized.Big government types vs. private enterprise. Pick a side.
I have watched with amusement on the issues of credit scoring. I have been an agent/broker in Calif for over 26 yrs. My belief in this whole mess you folks deal with is that credit or no credit, the agency knows its client better than any numbers can factor as predictors of loss. Calif no longer has credit scoring of any type with regards to personal lines. I have seen all of those issues that have been posted and have listened to the carriers use their song and dance schpiel about credit. The carriers doing business in Calif are making lots of money, rates have come down and are continuing to come down. I also serve on a Nat\’l Agency Council where there are these god awful things called 48 tiered pricing models elsewhere. We don\’t have to deal with that here and with the continuing profitability of the carriers, they treat Calif a whole lot differently….more like a hands off approach. We have 2 rating bands….good driver and non good driver as it regards auto. 1 rating band as it results with any other line of business. Many carriers use a \”merit rating\” tool to surcharge property policies with claims issues. My belief in the system stems that the agency knows its clients and where to place them where they should be placed. For my agency group, it has worked very well come contingency time and with commissions being at or near 15% on all lines. These statistics may well work in theory, but real world numbers over a period of several years now, are proof in the pudding.
I recently moved from Ca to Colorado. I was amazed at how much my premiums went up due to credit scoring. We bought a new house, shopped mortgages, and whamoo my home and auto insurance is way more here.
Ca\’s system works, plain and simple.
I don\’t sell personal lines, but work in an office that does. They really hammer you in Co if your credit is bad or credit score low. How is a person making 20-25K per year suppose to have a high credit rating??
My opinion is rate based upon claims,driving record, zip code and number of miles driven per year.
You know what I like? The fact that everybody is so busy taking stands that no one will answer my question. Not being a numbers guy, I couldn\’t hack my way through the study, so I\’m sadly ignorant.
Let me take a stab at answering my question using the positions staked out by other posters.
Position 1: There is a published, peer-reviewed study that shows a statistically defensible correlation between good credit scores and low claims.
Position 2: Credit scores are being misused by companies in order to promote racist and \”class\” (whatever the hell that is) agendas.
Position 3: Any sort of rating scheme that relies on individual characteristics is bad, and everyone should pay the same amount regardless of past history, current status, or predicted behavior.
Did I miss something?
Would somebody answer my question, or are we going to continue chest-beating and castle building?
I\’ll give it a shot Mjolnir. I do not believe insurers use credit scoring in an inappropriate manner AND credit scores in and of themselves are NOT biased…however, due to the number, frequency and severity of errors in the scores themselves and in the formulations used to create the scores those things may seem to be true.
I have a great score, a great claims record and a great insurance rate and I like it that way but unless we can make SCORING companies (NOT CREDITORS) accountable for errors in scores (and when I say accountable I\’m talking do-re-mi) nothing in them will change and nothing will become more fair. Credit scores on a large scale predict the likelihood of loss and numbers don\’t lie but the scores themselves sure do.
Did I get it or did I miss your question altogether?
Peace people.
Anyone who believes credit scoring is a great underwriting tool has never been in an agency. You see we insure people not statistics, with proper field underwriting my agency has been profitable 30 out of 32 years. Insurance companies want there employees to buy into blind and statistical underwriting, and you have! Why because you are easier to manipulate. Credit scoring in California for example is illegal, and our rates over the past 10 years have improved. We also write in Nevada, Oregon, Washington, and Arizona, all of which use credit scoring. All have lower repair costs, less dense population, and fewer attorneys. So why are my rates in Northern California lower than all those states. CALIFORNIA DOES NOT USE CREDIT SCORING, THATS WHY. All of you company people that buy into your companies virtue wake up! You only know what the industry tells you, and they tell you that agency owners are complainers. We complain because your bosses and CEO\’s are afraid of the truth. Please the only thing that credit scoring is marginally accurate at determining is the insured\’s ability to pay, and that is biased.
Credit scoring is a tool that works in the right hands. Need we not forget the law of large numbers. This tool works for the masses and may not be a perfect fit for every individual case, but it does work. This is not something that is going away either, so use it to your advantage. Learn the system and play the game, because just about anyone can raise their insurance score and lower their rates. A site that I, as an agent, find helpful is insurancescore.net. This may be a shameful plug, but they have helped several of my clients lower their premiums. Just keep in mind this is not a regular \”credit score\” that the industry is using, it is calculated differently and is referred to as an \”insurance score.\”
Dont go to that website – ITs a scam. That last post was an advertisment for a fishing scam. Thats really low.
Thank you so much for your reasoned responses. I\’m relatively new to the game and I\’m sure I\’ll have clients asking me about this, so I\’m grateful for something besides \”Allstate is run by the Klan!!!\” to give them.
Thanks all, and good luck.
My experience is as an insurance agent in MA for 25 years. Last year our primary carrier started using credit scores. The first 5 clients we put into the system came back as unacceptable. Three of them had been long time, claim free policyholders (6+ years)with the same carrier now rejecting them. Each had purchased a new home and wanted to purchase insurance from their existing company. When I complained to the marketing rep… voila.. a new (Choicepoint)system was implemented and suddenly one of the companies in their group because acceptable for the same people who had been denied; unfortunately we lost several of them due to the distasteful experience with the carrier. I don\’t agree with credit scoring as I also feel the agent has a better perspective on their client…resulting in 5 figure contingency check! That is why we are called Professional Insurance Agents…we are professional! Happy New Year to all!
QUOTE: \”It is more likely that a person with bad credit will cost the insurer money. It\’s actuarial statistical fact.\”
I am not saying this is true or not true. If it is true, why haven\’t figures been realeased to show this? Why haven\’t the companies or the regulators or anyone else released the studies with the hard numbers?
Does this even exist? If so, please tell me where to access this information.
1. Credit algorithms are not secret in some states such as Texas. I myself have copies of TransUnion, Choicepoint, Progressive, etc algorithms obtained from the TDI.
2. Using credit for underwriting alone relegates poor scoring folks to non-standard carriers. Allowing credit to be used for rating, allows standard carriers to write high risks.
3. Credit scoring works. I know one company that reduced its fire claims 60% in a year by implementing credit underwriting/rating! The head of the company personally told me this.
4. The issue here is not whether credit works, but that companies using credit are alleged not to have followed the rules!
As an insurance agent in the State of NY for over 30 years, the use of credit score, or insurance score as the insurance companies would like us to name it, is an insult to any intelligent human being. Anyone who agrees with it use only see it from a selfish prespective and that\’s usually the insurance company. There is no correlation between a credit score and driving. There is no correlation between credit scores and owning a house. This is just a way for the insurance comapnies to charge more based on a tool call \”segmentation\”. Instead of one table rate, segmentation delivers many and it is driven by credit and other factors. There are no hard evidence to support it but the insurance companies are doing their best to make our politicans believe it is true. Only the smart politicans, like the new Governor-elect of the State of New York, Elliot Spitzer, will recognize it for what it is. It is a system of greed based on contrived data to drive the product up for people who don\’t always pay on time. The system is discriminating against low income people which are usually minorities. I see it everyday and it is a crying shame that for people who can earn big money, they are the ones who usually pay more. The use of credit score should be ban throughout the entire 50 States because it also drive Identity Theft. The hackers are getting right into the companies that supply the \”insurance scores\” and now the consumer is victimized once again. That is the only correlation that credit scores provide, possible theft of your social security number and all your other personal data. So let your State Senator know that you object to it and maybe there will be more than 13 States seeking a ban on its use.
Enough is enough. State regulated insurance with rates based on historical risk factors that are directly related to the insured risk. Only allow a 10% max profit to those underwriting / administering the program. Thus, no more profit motive, no more need to look for biased ways to redline and make irrationally exhuberant profits. JUSTICE FOR ALL – REASONABLE PREMIUMS FOR ALL.
JB,
That is our experience. Aisus.com builds online rating for insurance companies. We have seen companies \’open\’ up to more difficult risks using our technology to rate/underwrite online with scoring.
When I hear agents complaining about scoring, I believe they don\’t know their own markets. Captive and leading independent carriers like Progressive are taking better risks out of the independent agency. The business walking into the independent agency is of higher risk on average than 5-10 years ago because of this. The companies we represent have noticed a decline in \’good\’ scoring new business as that business migrates. More and more business is business that has had rates significantly increased or dropped due to scoring with captive companies.
Scoring is good for independent agents because the companies they write for will be able to implement the same policies as State Farm, Progressive, etc making them competitive.
First and foremost, there is no such thing as walk-in business. The professional independent recieves over 90% of their business by referral. Your numbers are significant because the independent agency today is burning and churning for survival. The older established agancies are still field underwriting new business at a high profit rate of return. Statistics are good tools, however, it takes knowlege and experience to understand how the results were actually derived. Progressive has taken a huge market share, however, in the next five years the multi-line carriers will take back those lost policies where multi-policy discounts will beat their mono-line rate. Further more, Progressive has always cut the agents commissions so the independent agent will be glad to rewrite Progressive autos along with their homes, and umbrella\’s. Only time will tell.
The real topic for the insurance industry is demonstrating the complex metrics of the \”insurance score\” of which credit is only one of many complex factors. Since the introduction of insurance scoring and predictive credit modeling in Connecticut, we have seen incredible decreases in the vas majority of our client\’s premiums being paid for auto and homeowner\’s insurance.
At the very same time, insurance companies have begun offering more choice and broader markets for more difficult risks. The Connecticut Assigned Risk plan is at an all time low participation rate, (based on the last posted numbers) indicating that the voluntary market is working extremely efficiently to provide affordable insurance to the marketplace.
Change is uncomfortable, but not always bad.
JB
You gotta be kidding!
You want me to pay higher premiums so that folks that make poor decisions can get insurance cheaper???
This is what insurance is about, measuring risk and insuring it as accurately as possible, and that is why companies like Progressive are winners in this game. They are a whole level above any other player in the game when it comes to know and pricing auto risks.
Tell me truthfully, should you pay the same rate as a driver with a CNI and a couple of DWIs, and three AFAs? Should you pay the same rate as a homeowner with two complete fire losses, multiple minor non-wind claims, on the coast, and in a flood zone? If you say yes, then I can only say that you are not responding to logical arguments.
Governments and courts decide what are \”fair\” risk criteria. Any company that does not use these criteria to the fullest extent of the law is endangering the company.
What you are proposing is that we get rid of insurance agents and companies and all submit to a government pool so that we get the same rate for insurance….I think thats called communism or some kind of ism, but not America. This is a land of choices and repercussions and insurance rates are a free market form of repercussion.
einstein—- are you listening…or reading… what you just wrote? College grads will have fewer losses becuase they make more money?!?!?! What the heck are you talking about? That isn\’t what this is all about. People who behave a certain way have more losses. You just made one of the dumbest statements about this I have seen yet!
So there should just be one rate for everyone based on what you are saying. The same rate for people in Brooklyn as in Iowa. The same rate for the married 40 year old woman as the 17 year old single male…. the same rate for the person with 5 DWIs as for the person who has never had a ticket or an accident… That is what your logic would give us. How is that fair? It isn\’t it just makes your life easier.
What I will explain in very very simple words, a good credit score is a characteristic of a good driver. I never implied that driving records should not be an underwriting guideline. I also think that the professional agent can field underwrite better than any federal guidelines or company guidelines. Progressive has a very strong niche in the monoline market, and in many cases by paying the agent less commissions. In closing, wealth, education, and credit scores are all characteristics of a good driver. The only difference is that we have allowed corporate america to convince some of you since it is used to underwrite loans, that it should be used to underwrite insurance. In reality, it is just a common characteristic of a driver who had NO CITES,or ACCIDENTS. Also with credit scoring reaching an all time high in identity theft, and inaccurate credit scores, please tell me how you tell your client (a real person) that sorry we have increased your insurance rate. Tell them that it is good that they pay more so that you ( a new client) will pay less, oh and this client has been claim free with the same carrier for 20 years. If you believe this to be right and good for business than please talk to my clients for me, because in my world this really happens all the time.
Very interesting but St……. Who said the rate factors of liltgations frequency, labor costs, and state laws would not effect the price of insurance. Wow now that would be dumb. Back to the point 13 states ( Insurance commissioners) do not feel that this should be rating factor. They are right, it means that more good drivers ( accident and cite free)have higher credit scores, but conversely it does not mean that people with higher credit scores are all better drivers. It really is that simple and I know from years of experience that is unfair. As they say good night and good luck
So the concern is that poor people are paying more for insurance because they are poor. This is the same argument made for rating by zip code. We can\’t rate by zip code because certain races will pay more based on where they live. Maybe they will maybe they won\’t. The fact is that insurance companies (I know you won\’t believe this but it is true) don\’t look at race or income when using these rating tools. They look at….wait for it….. LOSSES!!!! The cost of doing business. Like it or not the companies are in business to make a profit. They also all want to grow their auto business very very much! Look at PRG they were the most sophisticated users of credit and they are growing like a weed. They want to write everyone they can at the right price. Almost all insurance companies are that way when it comes to auto. There are some very repsonsible 17 year olds out there and very few of them have any money to speak of but they sure do pay the highest rates for insurance. Let\’s have an argument about that? We don\’t becuase the facts back up the price.
Why do they need to take a loss on a category of business they can price properly? Why should I pay more for car insurance because others don\’t want to pay what it should really cost for them? Driving is not a right it is a privilege.
You didn\’t need to say how long you have been in the business… your statement-
\”The fact that many companies have incorporated credit history into the rating process rather than rely on its \”predictive\” value for underwriting, further confuses the issue.\”
It is clear you have no clue about predictive modeling and rating based on risk of future losses. Glad you are not a regulator any longer. Sophisticated companies don\’t use \”predictive\” values for underwriting they use them for rating. In your world of using it for underwriting these people wouldn\’t be able to get insurance at all. Is that a better solution? Decline the risk?
Thanks for a sensible post! This is like the problems we have now with supplemental commissions or whatever you want to call them. Some companies don\’t follow the rules and everyone pays!
This issue that the 13 states have joined on is providing proper notice and that needs to be done.
be careful Nan! The same people who want to take away credit scoring also want to take away your 5 figure contingency check!
This leads us to the bottom-line, is right or wrong a business decision. Corporate america will rationalze wrong to improve their profit, however, if it is not right then we are letting corporate america make decisions for us by telling us we will save money. Insurance was designed to pool money for the good of all, not just a percentage who can get a better deal. Look at how americans can not afford medical insurance, guess what corporate america is making a profit only insuring the healthy, and we get reduced premiums, but we are paying it out in taxes. The analogy that we reduce auto insurance for good drivers has nothing to do with credit scores being an equal underwriting value. I will bet that college grads have fewer losses, why because they make more money and will then have higher credit scores. The final no brainer is how about discounts for golfers. I bet if we studied golfers we could reduce their risk especially compared to bowlers. Why because we know that golfers make more money because of its high participation cost, and of course, bowlers drink beer. Sorry, I could go on and on with this elitist arguement, but the bottom-line we should as an industry provide insurance for ALL at the lowest possible rate. We need to quit trying to outsmart the system with stats, because if we the will gett smaller and smaller.
If 13 commissioners think it\’s bad, that means that 37 either think it\’s fine or are neutral. Are you arguing that the 13 are somehow smarter or better informed than the 37? Or since they agree with your omniscient opinion, they must be right and the others are, prima facie, wrong? ********. Just because 13 comissioners support a lawsuit does not mean it is draped in unsullied, shining cloth of gold. All 13 of those states could have corrupt or political reasons for demanding a change, so cease trumpeting that number as though it stops all discussion as to the legitimacy of credit scoring.
As far as your statement \”…it does not mean that people with higher credit scores are all better drivers.\” No ****. What it means is there is a statistical correlation between credit scores and claims. Not accidents- claims. And not all credit scores are right? Good point… except where you forgot to realize that A) the majority are and 2) victims of credit fraud file claims for losses under homeowners. How about that- a bad credit score leading to losses. I\’m sure your favorite carrier is just aching to have loss ratios over 1. Because we all know that the way to profitability and continued policy service is year after year of financial losses.
Here\’s a radical idea- companies want to take money in, and keep it. God Damn those heartless corporations- how dare they make a profit- it\’s downright un-Venezuelan. They don\’t want to take it in and give it back out. Loss is a function of insurance, but underwriters and actuaries are rewarded for identifying potential losses and guarding against them.
In all the rants against \”excessive premiums\” and \”the tragedy of uninsured citizens\” I have yet to hear one of you rant against the root causes of expensive insurance. How about a big cheer for tort reform, lower medical costs, and getting senile, immature, and drunk drivers off the road- permanently? If credit scoring is leading to higher premiums for a particular customer of yours, why don\’t you earn your fee by contacting the carrier and getting an adjustment? If all we do is submit apps and collect premium checks we might as well show all our customers how to use Geico or e-surance and go into a different line of work.
Do you really believe that the government should be in charge of nationalized insurance? After their stellar record on social security, veterans benefits, and military spending? Yeah- good plan genius. Let\’s turn auto insurance over to the hard working legislators responsible for the up-armored humvee program. Remember that debacle on the nightly news?
I\’ll meet you halfway- you prove that insurance companies are doing anything more than pursuing profit, and I\’ll agree they should be closed down. If they are discriminating on anything other than potential loss, they should be hammered into extinction. However, if all they\’re doing is attempting to identify (and charge for) potential losses, what\’s the problem?
Or are you just
um no Einstein… maybe you should read the article. 13 states have concern about notice. That is what this is all about adverse action notice. Everyone has just turned it into a conversation about if it should be used at all.
You obviously don\’t understand how insurance is priced… you want to go back to the days of one rate sheet you could turn to in a book. Go back to your microfiche this internet thing isn\’t going to work out either.
Wow guess I have hit a nerve. You are right about corporate america they are profit driven by there shareholders. That in itself is not bad deriving by not doing the right thing is. Why do you believe we sent out millions of opt-out letters? They got caught selling data, now you are justifying that unauthorized data. It really is quite simple they gathered this data and found there were fewer claims with people with higher credit scores. That did not prove that those who were claims free whether they had higher credit scores were better drivers than those with lower scores, this would not be fair to those who did not have a claim. All good drivers should pay the same rate based on sound underwriting (experience driving,cites, and claims, and valid insurance costs (attorney penetration, hospitol costs,labor rates). Please quit trying to insult me, no matter how you slice it insured\’s who have no losses or claims ( same cost factors) should pay the same rate. I am sure if the characteristic that people with higher credit scores had more claims that would not even have an issue. So please get real because I have heard for years its a business decision live with it.
Once again Einstein you show you don\’t understand the word \”predective\”. Higher rates aren\’t charged for people who have losses because of the loss they had it is because they are more likely to have future losses. That can also be predicted based on where you live, your age, your gender, the car you drive and yes…. your credit score.
Once again your logic falls apart. So since the newly licensed 16 year old has no accidents he should pay the same as the 40 year old married male with no accidents….. doesn\’t work.
You have no idea how to price the product… just stick to selling.
Driving experience regardless of age states that you have no track record of good driving, therefore, you pay more. Please explain why claims free and cite free drivers (20 years no losses) should pay more money than someone with a higher credit score and has only been claims and accident free for 3 years. The issue here is not that credit tracking works, its just unfair to use this to determine a rate based on driving, experience, and claims. When you get favorable results by using unfair methods, regardless you are obligated to do the right thing. I have a philosphy \” when you ignore experience and knowledge you become arrogently ignorant\”. Credit scoring in the next 5 years will go down in flames, because its wrong. My family has been selling insurance for over 50 years and over 90% of those years profitable and I have no clue how to write profitable insurance WOW.
I didn\’t say you don\’t know how to write profitable insurance I said you don\’t know how to price it. There is a big difference!
I am sure you are a good agent. You just can\’t price based on predicting future losses. Yes someone with no losses and bad credit should pay more because they fit into a group that we can predict will have more losses that is exactly what pricing based on future loss potential is all about. What about the clean driver that lives in Brooklyn for 30 years with no losses? Why do they pay more than the clean driver that lives in rural NY State that has been clean for 30 years? Or better yet. Why do they pay more than the driver with 1 or maybe even 2 accidents in the past 5 years? Because they live in Brooklyn and even though they have been clean for 30 years they are in an area that is more likely to cost more and have more losses. It is the same thing. You just don\’t like that you can\’t hold it in your hand and look at it. Credit works! It may go away but we will be worse off for it.
Look at PRG they don\’t just do it by paying low commissions. Their ability to grow isn\’t because they pay 10% and everyone else pays 15% it is a variety of things but first and foremost it is because of their sophisticated pricing model. They must be able to offer more people lower prices by using credit or they wouldn\’t do it.
Sorry you are so resistant to progress and change.
We have many city (large), suburban, and rural clients. Theft is much higher in the city (higher comp), repair costs, and attorney penetration. That is why it is fair to charge identical drivers in these two settings different rates. Crystal ball forecasting using stastistics should be used for marketing strategy not rating. Progressive\’s challenge will be to keep there clients. They have very little agent/broker loyalty as a result of cutting commissions and spending that savings on advertising. As their client matures, buys more vehicles, and a home they will save money by switching to a more traditional carrier. As I wrote earlier only time will tell, but history in the industry tells us good news travel fast, and bad news even faster
Again only time will tell regarding Proressive. I still believe credit scoring is rewarded indirectly by other means of discounting. Progressive is growing in part because the the major companies like Farmers. Allstate, and Farmers have lost touch with the real world. I think we see the same results (Progressive) we differ on who to credit. The question is will the brokers, agents, and customers stay loyal, I believe that as fast as they grew they have a tough job on their hands.
I see historical value, and track record you value predicting. Twenty years ago i would probable agree with predicting, but I have learned many lessons from the past, and I still believe that predicting is an edcucated guess. Underwriting is a very complex formula, however, I still believe in right and wrong. Maybe it is true in the short term that Clue is not as good as credit scoring, but you see credit scoring still does not reward you for good driving and Clue does. Simple right and wrong.
Insurance scoring may work in a perfect world but it sure does make life difficult for an Agency Principal trying to explain to a long term customer who has no previous claims, a credit score of of 780+,and pays his premium in full yearly why his premium went up $200 REAL DOLLARS and then to find after talking to choicepoint and experian that the reason his score changed is because he purchased a RV.For goodness sake the guy is retired and has a six figure income!
Is this Fair?
What happened to good ol common sense?
Bt the way I have a customer who always pays late(most of the tome after receiving a cancellation notice )whose yearly rate dropped over $300.00 because guess what,He has a great Insurance Score!!
Here are some links. Copy and paste into a browser.
American Academy of Actuaries:
http://www.iii.org/media/hottopics/insurance/creditscoring/ (This one mentions other studies.)
Casualty Actuarial Society:
http://www.casact.org/pubs/forum/00wforum/00wf079.pdf
Insurance Institute Study:
http://server.iii.org/yy_obj_data/binary/729782_1_0/Credit.pdf
Univ of Texas Study:
http://www.insurancecouncil.org/news/2003/UTcreditstudy.pdf
That\’s all for now. Let me know what you think. Read the C.A.S. study in particular.
This is a complex issue; generally, credit scoring follows loss ratios, and that works for the majority of carrier. However, while it works for most, it does not work for all. I\’d hate to be in a position where I ran into credit problems, and then paid higher premiums as a result, even though I had a sparkling driving record.
There needs to be a genuine appeal process available for credit scoring to be used and accepted; it may get it right 80% of the time, but that is no excuse to shortchange, or even undercharge, the remaining 20%. I know from personal experience, as a physician billing that should have been covered by my health carrier was turned in to a collection agency 3 years after the fact; my rates went up 20% overnite. Once we found out why, we contested the collection, but the original insurer wouldn\’t budge, so we switched companies and were fortunate to find a rate much lower than the first company. Not everyone gets lucky with finding a second carrier.
Since people are being charged rates that in some cases are not connected to their driving or loss records, look for this practice to be changed by the courts. Carriers are letting credit records do their underwriting; it may work well for them, but it doesn\’t set a fair playing field for all policyholders.
No, u/w is not as simple as checking credit. However it is a component.
I will agree that credit shouldn\’t be a factor in accepting/denying coverage.
However, it should be a component in rating. Please see the posts in this discussion called \”Predictor!\”
I don\’t believe I disagreed that credit was a \’predictor\’; however, simply because something is a predictor, does not imply it is correct in 100% of cases. Credit is not foolproof and results in both overcharges and undercharges. I know of companies who will give you a good rate, even if you have multiple tickets and a DUI, so long as you have good credit. Where do you think they are balancing that undercharge?
All I stated is there should be a valid appeal process, so someone who is an excellent/good risk has the opportunity to prove that and not be penalized by making a prior poor financial decisions.
Should there be an appeals process for the driver with a lot of traffic tickets but with no accidents?
What about for a driver who is male, single, and under 25?
If you have an appeals process for one component in a rating model, why not for all of them? Why is credit more special?
If you agree that credit is a predictor, how can you advocate an appeals process? I\’m not trying to be condescending, but you don\’t understand the concept of predictor, if you\’re advocating an appeals process.
You\’re not going to make a case that simply because something generally predicts an outcome that it should be looked at as the same as the outcome.
I\’m well aware of the credit role and what it means to the majority of insurers, however, you have not answered why it is ok to overcharge the driver with no losses and poor credit while it\’s ok to undercharge the driver with good credit and a poor DRIVING record. Sorry, but a DRIVING record is a much more reliable indicator than credit.
Credit is a great measure, but it cannot be the only measure, and and it cannot be absolute. Sorry, you and I will not agree here. If you want to add appeals for what color of car, etc, that\’s fine with me, but credit is not an absolute measure of risk. Yes, it\’s a measure that many carriers have used to become more profitable, but that does not make it an ethical measure for a regulated business.
Public policy determines whether race based underwriting/rating can be used if it was statiscally valid. Gender based rating is generally considered statiscally valid, but some states don\’t allow it. Age based rating is generally considered statiscally valid, but some states don\’t allow it (allowing similar years driving experience).
Credit based rating is generally considered statiscally valid by those who have looked at the numbers, but society and public policy must decide whether that is a factor that can be used.
And for those who say that having bad credit doesn\’t mean that they\’re a better driver, there are a ton of rating variables that have nothing to do with driving… homeownership, paying the premium in full, having prior insurance, quoting the new business more than x days in advance, being a good student, et al, but all of those have discounts related to them that are statiscally supported.
Technically even the car you drive may not indicate what kind of driver I am. If I drive a Ford Taurus, am I a safer driver than if I drive a Corvette? No one knows, but even without looking at the statistics do you assume that a Corvette driver and a Taurus driver have the same driving habits? They may, but statistics for the general population would reflect otherwise. Should I charge the same liability rate for both vehicles? In the past, many companies did.
Einstein I think we just disagree on how things should work. You want these predictive things to be used for underwriting and marketing. That would mean that those people who have \”negative\” predictive characteristics would not get insurance. No one would sell it to them or they would be denied insurance for underwriting reasons. So your solution is one rate or at least a limited rating plan with coverage available for the few. The theory of the \”progressive\” pricers is coverage for all but at the right price. That sure sounds less discriminatory than your way of pricing \”fairly\” but only providing coverage to the limtited few.
I remember when PRG was at $2 billion and everyone at the \”big companies\” said \”it is easy to grow by 20% when you are so small\” and then they got to $4 billion and they said the same thing. They are now, like it or not, a dominant force. The agents complain about commission all day and talk about how they are not loyal but they still put business with them and now they are growing direct. Trust me I have spent much of my career in the IA channel and want and need it to be successful but you can\’t deny that the PRG model keeps working.
Ok Ray you and Einstein seem to think certain things can be used as predictors and others can\’t. Which are they? It seems clear that credit is not. More because you don\’t understand the science behind predictive models than anything else. Zip seems ok, age seems ok. You say that credit isn\’t 100% but then you dispute when LLCJ and I say what about young drivers what about those with violations but no accidents. That is all about predicting losses but it isn\’t 100%. So how is it different? No rating variable is 100%
You say that driving record is much more reliable but that only shows how little you understand about rating and segmentation. In fact I would give up CLUE reports and MVRs long before I gave up credit reports. @80% of the market is clean but over 90% have a credit report. It is much more predictive and reliable.
What about model year on liability? Your argument would say it doesn\’t matter the year of the car for liability right? But it does! Model year is a predictor of future losses even for liability.
There are hundreds of competitors in this market place more than for any other product I can think of. Here is the bottom line bare bones facts. If someone can sell insurance for less they will. So why would companies choose to over price customers if someone else would just come in and write them for less and make money?
The answer is that the companies that don\’t use credit are losing their shirts from adverse selection. I have seen it over and over again.
But you and I do agree! I agree that Credit is not absolute. But I also agree that traffic tickets are not absolute, nor is age, nor is marital status, nor is zip code.
Not one of these things is absolute. They are all predictors. Why, then, is credit singled out as being unfair? All the factors listed above are predictors, yet credit is the one being harped upon.
No one is being overcharged here. That\’s the point. Driving record is only one component in the formula. credit is only one component.
Remember, insurance companies are in the business of minimizing risk. Risk here is defined as payouts. Credit is a huge factor correlated to claims payouts. So if they surcharge a bad credit risk with good driving record, so be it! They\’re minimizing claims payout risk! No one is being over charged!
Everyone is being charged according to the risk they present to the insurer. This risk is a claims payout.
Some folks take this banter a little too seriously; I\’m not out to insult anyone, but I don\’t see the need to insult me; I have a pretty good understanding of the importance of credit scores.
I\’m not advocating them to be disallowed.
But I do have concern that we are using credit, which is a non driving factor, as the \’big factor\’ when setting rates. Sorry, I realize carriers can lump most of their customers by that factor, but we\’re talking about a regulated business. When a business is regulated, it has duties beyond simply making profit. If a person has a dui, traffic tickets, prior losses, or buys a vehicle with a high rate of incident, then those are statistical DRIVING factors.
Credit is not a driving factor. Perhaps we\’ll find out that folks who eat at buffet\’s are 30% more likely to have losses than those who are vegetarian; the argument can be make that should be allowed as a rating factor it there was a reliable way to measure it. It could work, however, that is not a driving factor, it is a diet factor that is correlating to driving losses. That is the simple reason I believe there should be an review/appeal process when insurance is denied, or rates increased, simply due to credit factors.
I\’m not rooting for the court to overturn credit scoring, it benefits the insurance industry, which in turn benefits me. But the fact that we\’re using something that is not driving related leaves me to believe the court will not leave the practice untouched. Maybe I\’m wrong, but we\’ll have to see how the folks in the robes rule.
I have found all the postings very interesting and thank you for all your insight. First, when did we consider 80% results anything but barely average ( barely will get you into a community college). Predicting snow does not mean do not go to work. Just because it has worked and made money for one company, does not mean it is right, (look at stock options).Lastly, is it right to use unrelated data to predict an unrelated outcome, even if it works 80% and makes profit, no, its not. Let me give you a very basic comparison. Two students are applying for scholarships in science. Student A has an A GPA, won science awards,all the clubs and scored a 680 on the math part of his SAT. Student B has a B GPA, no science awards or clubs, and 700 on his math SAT. Which student deserves a reward (scholarship)in this field? It is a stastical fact that those students above 700 in math are predicted to do better in science. If you honestly believe that predicting success is better than rewarding merit, than I give up. An 80% successful prediction because it makes money is not right. The End
credit has nothing to do with future claims and geico knows this.It only affects the ability to pay overpriced ins. premiums.I currently work for a company that only uses driving history for underwriting and is very profitable.Geico uses credit history to place drivers into less favorable catergories to make a profit if that person cannot maintain the payment structure.At least thats what they told us in training.
According to the CAS study, I am getting screwed because I have zero revolving credit. Evidently I need to have a bunch of credit cards, just never use them.
You are not getting screwed.
You are using less credit than other folks therefore you have less to be evaluated on.
Insurance score and Credit score are slightly different but there are some similarities. Some of the things I seem to remember from the Progressive model and other models were:
1. It is better to have 50% (not 0,25, or 90%) of the available balance on credit cards used.
2. You should not have in excess of $10K on credit cards.
3. You get good points for every month a checking/savings account has open.
4. You get neg points for late payments.
5. Bankruptcies, collections, etc are very bad.
6. Excessive store cards are bad.
7. Long histories of timely mortgages and car payments are good.
This is why cash paying folks get a \’No Score\’ as opposed to a \’No Hit\’ or a low score.
Also, the data used in models vary from provider to provider. Some providers may use data that another provider will classify as \’unvalidated\’ and not use. That means that scores can vary between providers.
someone who has no credit receives a poor credit premium under these plans, even though they technically have no credit rating to base it on. Know personally.
I know I promised, my final posting…..but. All of this credit scoring is interesting, but whar does it have to do with rewarding insure\’s for claims-free and cite-free driving NOTHING. Its really scarey that we can use unrelated data to determine insurance rates. What if we used height on drivers license (can\’t use weight everyone lies)and we predicted anyone under 5\’4\” has more losses (which might have some correlation)would we use that to basically surcharge short people. Please play with you #\’s have fun, but it really does not belong on the real world.
Inaccurate credit reports are difficult to correct and once corrected the inaccuracies may resurface the following year.
Don, an earlier poster, states “The fact that many companies have incorporated credit history into the rating process rather than rely on its \”predictive\” value for underwriting, further confuses the issue.”
In other words, an underwriter does not evaluate the credit score; the process is automated and extenuating or mitigating circumstances are not considered.
Some may see this as a more sophisticated approach that eliminates the need for underwriting, and others may disagree.
I have read the entire study from the C.A.S. and find it very hard to believe that you are referring someone to a study with statistics that are over a decade old! Gain some up to date knowledge regarding this subject many changes in reporting, lifestyles and numerous other things have changed and your sources are very out dated.
I really think we have forgot that these statistics are people, if it is unfair we should not do it…………
1. As a former GEICO agent, underwriter, and supervisor the point of using credit scoring isn\’t to penalize by putting poor people in the high risk company to make extra money. The poster who wrote that should go back to watching the History Channel Conspiracy marathon. It is to grow profitably in the most profitable segments in the most accurate and cost efficient way possible while ensuring high levels of insured retention. It isn\’t a conspiracy and this isn\’t a commune or kabutz (sp?). It is free enterprise capitalism at it\’s best. Any doubts compare the rate structures for auto in States that allow competition against those in highly regulated, particularly no-fault, states. Competition wins.
2. GEICO underwrites using occupation (as one of many, many variables) in most states because it is a legal discriminator (insurance by it\’s nature is discriminatory)which like other factors has a relevance to future claims likelihood. Like it or not sometimes stereotypes are accurate in life. I\’ll write 10,000 mechanical engineers at a lower rate that 10,000 roofers (because the engineers exhibit a higher level of responsibilty than the roofers as a group) or 10,000 police officers because as a group they are greater risk takers. You may not like it but being right is it\’s own defense.
3. Credit scoring in repeated studies over the last fifteen years has shown a greater correlation to claims filing than any other indicator to date including driving record. Don\’t like it, too bad. Insurance isn\’t about equality, see discriminatory above. Insurance uses legal, proven facts regarding large groups of similar risks to determine which groups are most likely to cost the most money. These groups are charged the most. If there is a problem with that then you should use hard work and education to improve your situation. Everyday homogeneous groups of McDonald\’s employees go to work. Some buy cars and treats and get into debt. Others buckle down, get an education or skill, and make something of their lives. Having come from nothing no one will ever convince me that anyone is stuck with the life they start with. Ok off that soapbox and back to the insurance one.
4. Credit scoring bias – Credit scoring isn\’t based on how much credit you have, possible minor debate on those models that include the number of credit accounts, but how well you pay your bills. Another poster commented on the impact of an emergency car repair or buying Johnny new xmas clothes: Generally these purchases would help your score and would only hurt if you didn\’t make your payments on time and/or used up more than a safe portion of your credit ratio to income. Live in Central LA and pay your bills on time (and don\’t tell me in the land of Captial one et al that everyone in this country isn\’t getting credit card offers)your credit will be ok. Live above your means in Beverly Hills and your credit won\’t be ok.
4. Lastly, yes there are exceptions. But folks, this is 2007, and if you haven\’t learned yet you can\’t manage by exception like in the 1920\’s and be a large company. Progressive started this in insurance and all they really did was take some of the manufacturing logic to the service industry. If you want service by exception you might be better served by some Independent Agents but for the majority who are buying a commodity, auto insurance, a company that can accurately rate 95%+ of the risks presented is going to be good enough. And at the end of day good enough has to be good enough.
Mjolnir,
In your response regarding the 13 commissioners, I think you missed the biggest point: Insurance Commissioners are typically either elected or appointed. In many cases that doesn\’t mean they know anything insurance other than they know how to raise money, elected, or raise money for someone else, appointed. They might as well be ambassadors or a cabinet level appointee to the white house for all their subject matter accumen.
Unfortunately you are right and whats wrong with our industry. Yes its 2007, and I know no one cares, and its all about the money. Getting away with discrimination does not make it right, it just means when we sell our soul it takes on a life of its own. Insurance companies could make a profit by charging a rate based on real factors, driving record, losses, mileage, cost factors, experience, useage etc. Then we started stasically grouping insureds, occupations for example. This is a true predictor, but in reality unfair and discriminating. The industry got away with it, and now there is no limit or conscious in making a profit. We insure people, and our industry has well protected themselves, but the fact is why not scharge roofers more to ride the bus than an engineer. The reasoning is that it costs more to clean the seats of the bus for a roofer. If a bus driver tried it he would get his clock cleaned, and no one would ride the bus. Insurance only get away with it because they have never sat been held personally accountable.
I disagree with your logic. Any factor that accurately identifies risks that are likely to cost more more fairly proportions the costs across the spectrum of risks. Look at it from the perspective of the consumer who pays the lower premium because they represent, regardless of reason, a lower risk of claim. Isn\’t unfairly discrimintory to not charge them the lower rate it has been proven they deserve?
As far as the bus example, it isn\’t an applicable analogy. Bus service is generally a government subsidized benefit for the population. Insurance isn\’t and shouldn\’t be due to the morale and moral hazards that would be incurred. I suggest better examples would be:
Taxi – Charges by the distance segment, risk, based on costs to get there plus a reasonable profit.
Landlord – Charges a higher rent and security deposit based on the assumed greater risk of a tenent with a pet.
If you were to privatize the bus service and have that service have certain buses carry engineers and others carry (assumed)dirty roofers, all other being the same or otherwise mitigated, over time the bus company would charge a higher rate for the roofers in order to compensate for its higher costs.
Auto Insurance is a funny product: A promise to pay for a loss that is at least partially controllable by the insureds actions. You can\’t socialize it for the reasons mentioned above, Massachusetts and NJ proof positive, but if you make it completely objective (fairly discriminatory)someone -class is going to suffer, pay more. The leftover question is are the risks paying the premium for the risk the represent? Regardless of anything subjective a yes answer to that can be the only acceptable solution…
Proof positive ignorance is bliss…
1. It\’s not monopolize…Regulate into the ground perhaps. Monopolize would mean one company would write all the business. Ask the folks in NJ how well that went.
2. Every insurer in the US would love a 10% underwriting profit.
3. How would you calculate the up to 10%? On a year that I run a 150% loss due to the next Katrina do I get several years of extra profit?
4. Massachusetts and Michigan have something similar and they have some of the highest rates in the US.
5. Where is the encouragement for competition? We basically would end up with a cost plus business model and we\’ve seen how well that does in the defense industry.
6. Dictator Chavez stick to screwing up investment in your energy infrastructure.
Everyone wants low rates, higher than value payouts, no rate increases, all the discounts and none of the surcharges. You can have one or two of them but it will be at the expense of the others.
I seel insuracne and teach insurance classes. My experience has been that people who have access to large amounts of unsecured debt are also adversely inpacted by credit/insurance scores. Case in point; I had a household with two surgeons aquire insurance in my agency and the received a slightly below average score. The same day I insured a employee at a cabinet shop earning $10 and hour with a stay at home spouse and 1 child. He got the best score available. Neither party used their credit irresponsibly but the former had access to large amounts of unsecured debt. So there my be an INVERSE relationship to income and credit scores.
In the end I would prefer to see those who don\’t believe in the use of credit scores to acquire their insurance with companies who don\’t use them. I suspect however, that they like many others consider insurance an expense and make an attempt to keep these costs as low as you can by shopping around and buying the least expensive.
I guess I will continue to subsidize people making poor choices by paying more for health insurers due to smokers, more for credit cards due to identity theives and bankrupcy filers, more for my clothes due to shoplifters ….. and the list goes on.
No wonder I\’m so tired all the time.