I am surprised no one has jumped on this to say how the use of credit score is so terrible, and not an accurate indicator of risk. I only hope that the actuaries are able to explain why we should use credit scoring to rate; however, even if they can give the best explanation that doesn’t even leave one inch of room for doubt, people will moan and complain about it because anything that makes their insurance go up is wrong. While credit score is not the sole determinant in accidents or propensity for taking risks, when used with other underwriting and rating data it provides a much more accurate rating of the risk.
Credit scoring is the most important rating factor. Auto and homeowners rates are based on risk. Driving record, age, sex, marital status, type of vehicle, choice in past on coverages, territorial riskiness, living near storm areas, are all measures of risk RESPONSIBILITY… Credit scoring is one more measuring tool that separates every level of risk’s responsibility. 10000 persons with no claims history in past five years will have 1000 or so auto claims in the next 12 months. Since none of them have a past claim’s history…the most accurate measure to group those least likely to have a loss as a measure of responsibility…Credit scoring does that best.
Lowell I couldn’t agree with you more that the key word is responsibility and that being rich,poor,black,white has nothing to do with. Credit is the best way to measure responsibility.
Dustin, you could show ten years worth of film of irresponsible people being responsbile for higher losses due to their behavior and because of the fact that most of them are minorities, no one will lend credence to this sudy. I love how they say people attack credit scoring due to not understanding why their is a correlation between it and risk.
Me thinks they undestand it just fine.
Is that your argument, that you can make statistics say whatever you want them to say? Hasn’t the argument that irresponsibility in your life, finances, etc leads to irresponsible driving been proven yet? I think the argument makes perfect sense. People who take risks in their day to day lives are more likely to take risks on the highway.
Here’s a letter I sent to participants of the CAS modeling meeting reported on:
Dear Participant,
Re: Exhibit about the FTC Report on Credit-Based Automobile Insurance Scores
NOW’s seminar exhibit supplies the economic logic noted but not developed in the recent FTC Report to explain what causes the correlation of more claims with lower credit scores.
Not only lower credit scores but every group indicator of tight budgets (such as lower income zip codes and lower paid occupations) must predict more miles per car for the group and therefore more claims per 100 car years. WHY? Because pay-by-the-car, all-you-can-drive premiums cause financially constrained drivers to insure fewer cars and drive each more miles. This explanation is further documented by these two items:
1) Texas NOW fact sheet (2003) “Mandatory Automobile Insurance . . . Why high premiums for low-credit-score or low-income drivers can’t be regulated away!” Side 2 describes the free-market, cents-per-odometer-mile remedy. (#736 on website)
2) Short paper (2007) “Why Low Credit Scores Predict More Auto Liability Claims: Two Theories” (to appear in the Journal of Insurance Regulation and available at the exhibit). (The negligent driver theory discussed in the paper is supported by the biological correlates study by Credit Scoring Update panelists Brockett and Golden.)
Although the FTC Report presents a truncated version of the economic logic (page 32, citing a 2006 academic paper of mine), it does not consider the inevitability of the correlation of more claims with lower credit scores caused by a need to economize on car insurance. Furthermore, the report states without discussion that “companies find it difficult to capture information on ‘miles driven’ with a great deal of accuracy,” and ignores the study published in the 1993 CAS Forum (referenced in my 2006 paper) on the practical application of per-mile premiums under state insurance law and the 1972 Federal Odometer Act.
For high car insurance prices there is no such thing as “no cause.” By default, drivers with financial problems are currently assumed to be negligent drivers. NOW posits instead that these drivers are no different from other drivers but are economizing by insuring fewer cars, which, as illustrated by the enclosed fact sheet, must lead to high car insurance prices.
Please stop by the NOW exhibit for further information. I can also be reached at 202.628.8669, ext. 148, or by email: pbutler@centspermilenow.org.
Sincerely,
Patrick Butler
It has been my general experience that the more complex an explanation is, the less credibility it has. Credit scores are based on repayment histories, and therefore make their use in evaluating the risk of future debt repayment reasonable. Now that’s simple. What the actuaries are saying is not close to being simple. In fact, how much of contents in the proverbial black box do they know? Sometimes a correlation is valid and other times it is a post hoc ergo propter hoc – a logical fallacy and an assault to the senses of reasonable people.
As a banking executive who has risen through the ranks from being a part-time teller in my college days to a vice president of a national savings institution, I can tell you that credit scores alone are indicators at best. Good underwriting comes from having a good understanding of the subject, the risk if you will. In the case of the insurance industry, that would be the insured risk. Unfortunately, this concept still evades many people in the banking industry, where credit reports and scores have been used extensively for decades. It is not a far stretch believe that fresh users of this type of information have much to learn before they using this tool responsibly. It takes time to develop this kind of experience.
From a banker’s perspective, a person whose credit score is average or below average is more often than not a higher risk prospect; however, the credit score alone is not used to make that determination (nor is it in insurance). An underwriter must be responsible and dissect the applicant’s credit history, look for trends, irregularities, and learn about the person behind the report. Here are some factors that can impact a person’s credit score but might not impact their personality as an insured risk: Single income households, parents of multiple children, prior divorce, a billing error that leads to a collection action (happens more people than one would think), identity theft, and mistaken identities on the part of the reporting agency.
In some of the cases above, individuals and families who would otherwise qualify for a low premium based upon their actual claims history and risk profile would be bumped to a less desirable pricing tier due to their credit score. A case example: In the case of a single-income household, where one parent sacrifices a salary to stay at home and raise their children, it makes a world of difference. In real life, such a family made the right decision. Instead of turning over the second income to a child care provider, they forego the income and eliminate that expense, an expense that would not likely be reported on a credit bureau report anyway (at least for timely payments). However, these households typically carry a higher leverage burden as there is only one income. This impacts their credit score adversely. It’s not quite that simple, but the net trickle-down effect is the same. So in this example, a family doing the right thing, for the right reasons, pays more in premiums than a comparable family with two incomes and kids in daycare. This is but one example where credit bureau reports and scores may fall far short for their use in an insurance application.
Another thought to consider is that the formulas that the credit reporting agencies’ use are unknown to the general public and will not likely be released anytime soon. It takes a great deal of experience to use this kind of a tool in an underwriting process in a way that is not prejudicial or skewed. Even then, the experts sometimes make poor decisions.
The only good reason for using the information from a credit bureau report is to hypothecate future risk of debt repayment — that is after all why they were initially created. Repayment history is used to predict future repayment behavior — that is about as apples-to-apples as it gets. Actuaries will have to be more convincing in their position promoting the use of credit scores for risk profiling in their industry. Show me.
Good explanation and theories.
A couple of things from my own observations. First of all, blanketing all formulas that insurance companies use under the same umbrella is incorrect. Some companies use pretty much a straight credit score. Most use credit as one criteria, but factor in many other (secret) variables.
The national media has always assumed that because a person is low-income or doesn’t live in the right part of town, they automatically pay more in premium. That is definitely not the case. In fact, I have seen the opposite happen on more than one occasion.
Credit scoring is nothing more than the latest predicting tool. It will continue to undergo many changes in the future, and will never be a perfect tool. Unfortunately, many/most underwriters are no longer given any latitude when it comes to what a customer pays. If their score says they pay X, then they pay X or go elsewhere.
and credit scoring is the latest tool to offer insureds what they want. Furthermore, ability to pay is a factor when considering desirability because policies that lapse for nonpay and then are reinstated are in a different cost and profit category than policies that don’t lapse for nonpay. Also, as pointed out in another posting, not all insurers use the tool in the same way. When a client comes to the office we look at all their policies. 9 out of 10 times their auto premium has gone down, usually by $20 or $30 per policy period. That is a result of their good credit working to their advantage. I keep reading about other companies and other outcomes, but thats how it works with my company.
Hurrah! For once a discussion stayed on track. I use these comments to educate my coworkers and as background for discussions in meeting. My thanks to all of you for your well- thought-out arguments, without digression and without vitrolic tangents.
I’ve read a lot of good comments in this discussion. We have not touched on the relationship of credit scores and insurance fraud.
Credit scoring works but, we must be able to convey this to our customers. I bring to their attention several facts that makes sense to them. First, the use of credit scores with investigating fraudulent claims. I bring to their attention that in my 28 years as an agent that I have had about a dozen customers convicted of insurance fraud. Three of burning their homes and the remainder being various auto claims. Mind you – these were only the ones convicted as many more were suspects. In each and every case, the first indication of fraud to the investigators was credit scores. Their credit scores were so bad that those insureds may commit insurance fraud to get money from their polices. The economic impact of those three house claims alone would have been greater than the cost to replace 100 average roofs from a hail storm. This puts it in terms that the customer can relate too. After hearing this explanation most customers tend to be more open minded about accepting credit as a cost factor in their insurance premium. Not convinced but, at least more open minded to hear more.
Second, my customers with very good credit scores tend to maintain the homes and autos better – particuarly their homes. I have a balanced racially mixed business of whites, hispanics, blacks and asians. Many of my customers with the best credit scores live in the more economically depressed areas of town – Dallas/FW metro-plex. They may live there but, their homes are very well kept, they pay their premiums on time and almost never file a claim.
Bill mentioned the problem that I run into – different carriers using different credit scoring models. Do we continue to allow carriers to use different scoring models or should only one model be approved for carriers to use? The different credit scoring models is what makes our customers angry and push legislators to ban credit scoring. All carriers use the same loss records but, are allowed to weigh them differently. Actuaries may need to agree on one model then, allow carriers to weigh them differently. I think this may help gain the support of many legislative representatives.
If we want to continue to use credit scoring then, we must be able to make a good case with our customers. If customers understand the accuracy of credit scoring they won’t be pressing their local legislators to pass laws banning its use.
Just a question (because not all of us with bad credit scores care to do something fraudulent…I for one, don’t care to go to jail or pay heavy fines….in fact, i would be scared to file a claim for fear people would say it was fraud due to my poor credit, but anywho…)
first off, i’m working my butt off to get my credit fixed. so it’s low now, but on the way up. but lets say, for arguments sake, that it stays bad over the course of the next 10 years. but on the other hand, in regards to my auto ins, i’ve had no claims, no accidents, no tickets, etc…is it possible to go into your agent’s office and say, “look, my credit sucks, but i take care of my car, i drive safely, wear seatbelt, don’t speed, etc…is there anything you can do about my rate?”
meaning, if you are a good customer, that doesn’t file claims and always pays premium on time, but has bad credit, once you’ve proven yourself as a worthy customer, will they rate you as an individual as opposed to putting you in a group of people?
I really hope that makes sense! :)
Thanks to those who answer, i’m neither here nor there on using credit scoring, i just want to know the ins-and-outs!
The credit score alone will not give you a high insurance premium. It depends on the company’s rating and how much it is weighted on credit. Also, your “insurance score” is not solely your credit in all cases. If everything else looks great, while your credit score will still be an issue, it doesn’t mean that it will make up all of your rate. All these things together (# of vehicles, limits, claims experience, age, sex, location, credit, etc.) all go into making the most accurate rate. Again, that is just a small sampling of what makes the rate, and I am by no means an expert on this subject.
That actually helps Dustin…i think the reason people get so “scared” when it comes to using credit scoring is that they believe it’s a driving factor….that bad credit will result in a high rate, irregardless….
Nebraskan is correct in that credit is only one factor in rating. I support the use of credit but, think it has too much weight with some carriers. Using insurance fraud convictions as an example is simply a conversational tool that I use with customers in order to bring some validity to the use of credit. Please remember that those customers that were convicted had REALLY BAD CREDIT SCORES!!! I remember when carriers would decline a risk altogether based solely on credit scores.
I have difficulty in accepting some rates on customers with average credit in that they are obviously not fraud candidates. I don’t think even the best actuaries have developed good scoring models – fair at best! I think that we need to provide adequate explanation to our customers and legislators that the continued use of credit rating has merit.
I have many customers who have a low credit score strictly because they have health problems and many medical bills.
Is it fair to raise their rates, when they may have never had an accident because of these medical bills?
This why credit should not be a sole determining factor. There are other older people who have never had a credit card or anything like that and have little to no credit. Where I used to work, they would not get the worst score, but certainly not the best either. This is why there is a multi-faceted rating system, so that their age and driving ability can off set their negative credit scoring. It still goes into painting the whole picture, and while it is not the best way to rate, it is the best right now.
Why NOT JUST RATE IT THE WAY THEY USED TO.
based on losses incurred, driving record,
and accident history. Its just a deliberate action on the part of the insurance industry to raise rates.
Deliberate? If you simply look at the people whose rates went up, then rating on accidents and driving history was a deliberate attempt to raise rates FOR THOSE WHO HAD A BAD DRIVING RECORD. The insurance company tries to obtain the correct rate on a risk, and in many cases (obviously there are anamolies) credit is also an indicator of risk. In the case of your elderly insureds, their bad credit does not necessarily indicate an increase of risky behavior; however, I can see where there is a correlation between risk takers with credit and money and risk takers on the road. Not to mention, lower credit could indicate a morale hazard and simply not caring about the property. Again, I don’t want to characterize everyone, but credit is a way to rate for these other areas. You may say that if they take risks driving, then they will have a bad driving record, but that might not be the case. They may not have been caught, and might not be until that million dollar liability lawsuit. Credit fills in the gaps where driving record does not. Truthfully, how many times have you sped (enough over to get a ticket) and not gotten a ticket?
Running an agency was so much simplier when we used only driving and loss records. However, about 70% of my customers would see a rate increase if the carriers did away with the use of credit. That is up from about 60% several years ago. As far as customers with credit problems due to medical bills – that isn’t a problem if an agency provides good service to their customers. The law mandates that if a customer can show that medical bills are a material negative factor in regards to their credit score then, a carrier can not use credit as part of the rating process. In my agency, we help customers submit their data to underwriting. Underwriting changes their rating score to an “I” for incomplete – which gives an average or better than average premium.
I am troubled about the credit scoring of customers that use little or no credit. The good news is that my primary carrier (Farmers) has changed their credit model so that we are seeing these customers now get good credit scores vs the old models which gave them either bad, no hits or incomplete scores. The new model seems to put substantial weight for bad credit history but, little or no weight to those that rarely or ever use credit. This has resulted in customers that live in the worst areas of town having some of the best credit scores in my agency.
As stated before, why are there so many different credit scoring models? All of the models show that people with extremelly bad credit are more likely to have losses. All of the models show that people with extremelly good credit are less likely to have any losses. It is the majority of the customers that fall in between that are effected differently according to whatever credit rating model their carrier uses. Unlike driving or loss records, the credit model used by one carrier may or may not include risk factors used by other carriers. Carriers are not using credit on a level playing field. I feel that the American Academy of Actuaries and related organizations need to agree upon a standard set of factors that must be used for all credit rating in regards to insurance. Any model that falls outside of the agreed factors would be invalid. All of us need to relay this to our customers and our legislators.
I still see the traditional rating factors such as driving and loss records being about 85% of the premiums. Even then, some carriers use loss records differently. The carrier isn’t using certain types of losses to deliberately increase premium. The carrier’s experience with certain types of losses has simply been better or worse with some more than others so they weigh types of losses differently. I see this more in property than auto underwriting. It doesn’t matter if the customer has the best possible credit score – if they have had too many or the wrong type of loss sometimes the carrier won’t offer coverage at any price.
I am surprised no one has jumped on this to say how the use of credit score is so terrible, and not an accurate indicator of risk. I only hope that the actuaries are able to explain why we should use credit scoring to rate; however, even if they can give the best explanation that doesn’t even leave one inch of room for doubt, people will moan and complain about it because anything that makes their insurance go up is wrong. While credit score is not the sole determinant in accidents or propensity for taking risks, when used with other underwriting and rating data it provides a much more accurate rating of the risk.
Credit scoring is the most important rating factor. Auto and homeowners rates are based on risk. Driving record, age, sex, marital status, type of vehicle, choice in past on coverages, territorial riskiness, living near storm areas, are all measures of risk RESPONSIBILITY… Credit scoring is one more measuring tool that separates every level of risk’s responsibility. 10000 persons with no claims history in past five years will have 1000 or so auto claims in the next 12 months. Since none of them have a past claim’s history…the most accurate measure to group those least likely to have a loss as a measure of responsibility…Credit scoring does that best.
Lowell I couldn’t agree with you more that the key word is responsibility and that being rich,poor,black,white has nothing to do with. Credit is the best way to measure responsibility.
Dustin, you could show ten years worth of film of irresponsible people being responsbile for higher losses due to their behavior and because of the fact that most of them are minorities, no one will lend credence to this sudy. I love how they say people attack credit scoring due to not understanding why their is a correlation between it and risk.
Me thinks they undestand it just fine.
Is that your argument, that you can make statistics say whatever you want them to say? Hasn’t the argument that irresponsibility in your life, finances, etc leads to irresponsible driving been proven yet? I think the argument makes perfect sense. People who take risks in their day to day lives are more likely to take risks on the highway.
Here’s a letter I sent to participants of the CAS modeling meeting reported on:
Dear Participant,
Re: Exhibit about the FTC Report on Credit-Based Automobile Insurance Scores
NOW’s seminar exhibit supplies the economic logic noted but not developed in the recent FTC Report to explain what causes the correlation of more claims with lower credit scores.
Not only lower credit scores but every group indicator of tight budgets (such as lower income zip codes and lower paid occupations) must predict more miles per car for the group and therefore more claims per 100 car years. WHY? Because pay-by-the-car, all-you-can-drive premiums cause financially constrained drivers to insure fewer cars and drive each more miles. This explanation is further documented by these two items:
1) Texas NOW fact sheet (2003) “Mandatory Automobile Insurance . . . Why high premiums for low-credit-score or low-income drivers can’t be regulated away!” Side 2 describes the free-market, cents-per-odometer-mile remedy. (#736 on website)
2) Short paper (2007) “Why Low Credit Scores Predict More Auto Liability Claims: Two Theories” (to appear in the Journal of Insurance Regulation and available at the exhibit). (The negligent driver theory discussed in the paper is supported by the biological correlates study by Credit Scoring Update panelists Brockett and Golden.)
Although the FTC Report presents a truncated version of the economic logic (page 32, citing a 2006 academic paper of mine), it does not consider the inevitability of the correlation of more claims with lower credit scores caused by a need to economize on car insurance. Furthermore, the report states without discussion that “companies find it difficult to capture information on ‘miles driven’ with a great deal of accuracy,” and ignores the study published in the 1993 CAS Forum (referenced in my 2006 paper) on the practical application of per-mile premiums under state insurance law and the 1972 Federal Odometer Act.
For high car insurance prices there is no such thing as “no cause.” By default, drivers with financial problems are currently assumed to be negligent drivers. NOW posits instead that these drivers are no different from other drivers but are economizing by insuring fewer cars, which, as illustrated by the enclosed fact sheet, must lead to high car insurance prices.
Please stop by the NOW exhibit for further information. I can also be reached at 202.628.8669, ext. 148, or by email: pbutler@centspermilenow.org.
Sincerely,
Patrick Butler
It has been my general experience that the more complex an explanation is, the less credibility it has. Credit scores are based on repayment histories, and therefore make their use in evaluating the risk of future debt repayment reasonable. Now that’s simple. What the actuaries are saying is not close to being simple. In fact, how much of contents in the proverbial black box do they know? Sometimes a correlation is valid and other times it is a post hoc ergo propter hoc – a logical fallacy and an assault to the senses of reasonable people.
As a banking executive who has risen through the ranks from being a part-time teller in my college days to a vice president of a national savings institution, I can tell you that credit scores alone are indicators at best. Good underwriting comes from having a good understanding of the subject, the risk if you will. In the case of the insurance industry, that would be the insured risk. Unfortunately, this concept still evades many people in the banking industry, where credit reports and scores have been used extensively for decades. It is not a far stretch believe that fresh users of this type of information have much to learn before they using this tool responsibly. It takes time to develop this kind of experience.
From a banker’s perspective, a person whose credit score is average or below average is more often than not a higher risk prospect; however, the credit score alone is not used to make that determination (nor is it in insurance). An underwriter must be responsible and dissect the applicant’s credit history, look for trends, irregularities, and learn about the person behind the report. Here are some factors that can impact a person’s credit score but might not impact their personality as an insured risk: Single income households, parents of multiple children, prior divorce, a billing error that leads to a collection action (happens more people than one would think), identity theft, and mistaken identities on the part of the reporting agency.
In some of the cases above, individuals and families who would otherwise qualify for a low premium based upon their actual claims history and risk profile would be bumped to a less desirable pricing tier due to their credit score. A case example: In the case of a single-income household, where one parent sacrifices a salary to stay at home and raise their children, it makes a world of difference. In real life, such a family made the right decision. Instead of turning over the second income to a child care provider, they forego the income and eliminate that expense, an expense that would not likely be reported on a credit bureau report anyway (at least for timely payments). However, these households typically carry a higher leverage burden as there is only one income. This impacts their credit score adversely. It’s not quite that simple, but the net trickle-down effect is the same. So in this example, a family doing the right thing, for the right reasons, pays more in premiums than a comparable family with two incomes and kids in daycare. This is but one example where credit bureau reports and scores may fall far short for their use in an insurance application.
Another thought to consider is that the formulas that the credit reporting agencies’ use are unknown to the general public and will not likely be released anytime soon. It takes a great deal of experience to use this kind of a tool in an underwriting process in a way that is not prejudicial or skewed. Even then, the experts sometimes make poor decisions.
The only good reason for using the information from a credit bureau report is to hypothecate future risk of debt repayment — that is after all why they were initially created. Repayment history is used to predict future repayment behavior — that is about as apples-to-apples as it gets. Actuaries will have to be more convincing in their position promoting the use of credit scores for risk profiling in their industry. Show me.
Good explanation and theories.
A couple of things from my own observations. First of all, blanketing all formulas that insurance companies use under the same umbrella is incorrect. Some companies use pretty much a straight credit score. Most use credit as one criteria, but factor in many other (secret) variables.
The national media has always assumed that because a person is low-income or doesn’t live in the right part of town, they automatically pay more in premium. That is definitely not the case. In fact, I have seen the opposite happen on more than one occasion.
Credit scoring is nothing more than the latest predicting tool. It will continue to undergo many changes in the future, and will never be a perfect tool. Unfortunately, many/most underwriters are no longer given any latitude when it comes to what a customer pays. If their score says they pay X, then they pay X or go elsewhere.
the desire to sell more insurance by better rating risk and then offering the lowest rates to the best drivers.
and credit scoring is the latest tool to offer insureds what they want. Furthermore, ability to pay is a factor when considering desirability because policies that lapse for nonpay and then are reinstated are in a different cost and profit category than policies that don’t lapse for nonpay. Also, as pointed out in another posting, not all insurers use the tool in the same way. When a client comes to the office we look at all their policies. 9 out of 10 times their auto premium has gone down, usually by $20 or $30 per policy period. That is a result of their good credit working to their advantage. I keep reading about other companies and other outcomes, but thats how it works with my company.
Hurrah! For once a discussion stayed on track. I use these comments to educate my coworkers and as background for discussions in meeting. My thanks to all of you for your well- thought-out arguments, without digression and without vitrolic tangents.
I’ve read a lot of good comments in this discussion. We have not touched on the relationship of credit scores and insurance fraud.
Credit scoring works but, we must be able to convey this to our customers. I bring to their attention several facts that makes sense to them. First, the use of credit scores with investigating fraudulent claims. I bring to their attention that in my 28 years as an agent that I have had about a dozen customers convicted of insurance fraud. Three of burning their homes and the remainder being various auto claims. Mind you – these were only the ones convicted as many more were suspects. In each and every case, the first indication of fraud to the investigators was credit scores. Their credit scores were so bad that those insureds may commit insurance fraud to get money from their polices. The economic impact of those three house claims alone would have been greater than the cost to replace 100 average roofs from a hail storm. This puts it in terms that the customer can relate too. After hearing this explanation most customers tend to be more open minded about accepting credit as a cost factor in their insurance premium. Not convinced but, at least more open minded to hear more.
Second, my customers with very good credit scores tend to maintain the homes and autos better – particuarly their homes. I have a balanced racially mixed business of whites, hispanics, blacks and asians. Many of my customers with the best credit scores live in the more economically depressed areas of town – Dallas/FW metro-plex. They may live there but, their homes are very well kept, they pay their premiums on time and almost never file a claim.
Bill mentioned the problem that I run into – different carriers using different credit scoring models. Do we continue to allow carriers to use different scoring models or should only one model be approved for carriers to use? The different credit scoring models is what makes our customers angry and push legislators to ban credit scoring. All carriers use the same loss records but, are allowed to weigh them differently. Actuaries may need to agree on one model then, allow carriers to weigh them differently. I think this may help gain the support of many legislative representatives.
If we want to continue to use credit scoring then, we must be able to make a good case with our customers. If customers understand the accuracy of credit scoring they won’t be pressing their local legislators to pass laws banning its use.
Just a question (because not all of us with bad credit scores care to do something fraudulent…I for one, don’t care to go to jail or pay heavy fines….in fact, i would be scared to file a claim for fear people would say it was fraud due to my poor credit, but anywho…)
first off, i’m working my butt off to get my credit fixed. so it’s low now, but on the way up. but lets say, for arguments sake, that it stays bad over the course of the next 10 years. but on the other hand, in regards to my auto ins, i’ve had no claims, no accidents, no tickets, etc…is it possible to go into your agent’s office and say, “look, my credit sucks, but i take care of my car, i drive safely, wear seatbelt, don’t speed, etc…is there anything you can do about my rate?”
meaning, if you are a good customer, that doesn’t file claims and always pays premium on time, but has bad credit, once you’ve proven yourself as a worthy customer, will they rate you as an individual as opposed to putting you in a group of people?
I really hope that makes sense! :)
Thanks to those who answer, i’m neither here nor there on using credit scoring, i just want to know the ins-and-outs!
The credit score alone will not give you a high insurance premium. It depends on the company’s rating and how much it is weighted on credit. Also, your “insurance score” is not solely your credit in all cases. If everything else looks great, while your credit score will still be an issue, it doesn’t mean that it will make up all of your rate. All these things together (# of vehicles, limits, claims experience, age, sex, location, credit, etc.) all go into making the most accurate rate. Again, that is just a small sampling of what makes the rate, and I am by no means an expert on this subject.
That actually helps Dustin…i think the reason people get so “scared” when it comes to using credit scoring is that they believe it’s a driving factor….that bad credit will result in a high rate, irregardless….
Nebraskan is correct in that credit is only one factor in rating. I support the use of credit but, think it has too much weight with some carriers. Using insurance fraud convictions as an example is simply a conversational tool that I use with customers in order to bring some validity to the use of credit. Please remember that those customers that were convicted had REALLY BAD CREDIT SCORES!!! I remember when carriers would decline a risk altogether based solely on credit scores.
I have difficulty in accepting some rates on customers with average credit in that they are obviously not fraud candidates. I don’t think even the best actuaries have developed good scoring models – fair at best! I think that we need to provide adequate explanation to our customers and legislators that the continued use of credit rating has merit.
I have many customers who have a low credit score strictly because they have health problems and many medical bills.
Is it fair to raise their rates, when they may have never had an accident because of these medical bills?
This why credit should not be a sole determining factor. There are other older people who have never had a credit card or anything like that and have little to no credit. Where I used to work, they would not get the worst score, but certainly not the best either. This is why there is a multi-faceted rating system, so that their age and driving ability can off set their negative credit scoring. It still goes into painting the whole picture, and while it is not the best way to rate, it is the best right now.
Why NOT JUST RATE IT THE WAY THEY USED TO.
based on losses incurred, driving record,
and accident history. Its just a deliberate action on the part of the insurance industry to raise rates.
Deliberate? If you simply look at the people whose rates went up, then rating on accidents and driving history was a deliberate attempt to raise rates FOR THOSE WHO HAD A BAD DRIVING RECORD. The insurance company tries to obtain the correct rate on a risk, and in many cases (obviously there are anamolies) credit is also an indicator of risk. In the case of your elderly insureds, their bad credit does not necessarily indicate an increase of risky behavior; however, I can see where there is a correlation between risk takers with credit and money and risk takers on the road. Not to mention, lower credit could indicate a morale hazard and simply not caring about the property. Again, I don’t want to characterize everyone, but credit is a way to rate for these other areas. You may say that if they take risks driving, then they will have a bad driving record, but that might not be the case. They may not have been caught, and might not be until that million dollar liability lawsuit. Credit fills in the gaps where driving record does not. Truthfully, how many times have you sped (enough over to get a ticket) and not gotten a ticket?
Running an agency was so much simplier when we used only driving and loss records. However, about 70% of my customers would see a rate increase if the carriers did away with the use of credit. That is up from about 60% several years ago. As far as customers with credit problems due to medical bills – that isn’t a problem if an agency provides good service to their customers. The law mandates that if a customer can show that medical bills are a material negative factor in regards to their credit score then, a carrier can not use credit as part of the rating process. In my agency, we help customers submit their data to underwriting. Underwriting changes their rating score to an “I” for incomplete – which gives an average or better than average premium.
I am troubled about the credit scoring of customers that use little or no credit. The good news is that my primary carrier (Farmers) has changed their credit model so that we are seeing these customers now get good credit scores vs the old models which gave them either bad, no hits or incomplete scores. The new model seems to put substantial weight for bad credit history but, little or no weight to those that rarely or ever use credit. This has resulted in customers that live in the worst areas of town having some of the best credit scores in my agency.
As stated before, why are there so many different credit scoring models? All of the models show that people with extremelly bad credit are more likely to have losses. All of the models show that people with extremelly good credit are less likely to have any losses. It is the majority of the customers that fall in between that are effected differently according to whatever credit rating model their carrier uses. Unlike driving or loss records, the credit model used by one carrier may or may not include risk factors used by other carriers. Carriers are not using credit on a level playing field. I feel that the American Academy of Actuaries and related organizations need to agree upon a standard set of factors that must be used for all credit rating in regards to insurance. Any model that falls outside of the agreed factors would be invalid. All of us need to relay this to our customers and our legislators.
I still see the traditional rating factors such as driving and loss records being about 85% of the premiums. Even then, some carriers use loss records differently. The carrier isn’t using certain types of losses to deliberately increase premium. The carrier’s experience with certain types of losses has simply been better or worse with some more than others so they weigh types of losses differently. I see this more in property than auto underwriting. It doesn’t matter if the customer has the best possible credit score – if they have had too many or the wrong type of loss sometimes the carrier won’t offer coverage at any price.