We already distinguish between cars driven a lot and cars not driven a lot, by classing them based on weekly and annual mileage. As far as I know, there really isn’t an ‘all you can drive premuium’. If credit scoring is OK for a fiduciary responsibility like a home loan, its OK for a fiduciary responsibility like insurance. After all, when I collect $200 for six months of 250/500/100 liability, its obvious who has the big exposure, and who doesnt. I have $200, the insured gets $500k of BI protection. Pretty good deal for the insured.
I tell ya, we are all in for a world of hurting if McCarty has this much pull on the national level. They should keep him and his mess where it belongs. He’s done enough damage!!!
Yes, the use of credit scoring is discriminatory. It’s just not “unfairly discriminatory” like some legisalators think it is. Credit scoring is highly predictive and insurance companies wouldn’t go to such great expense if it wasn’t worth the trouble. Insurance companies don’t care what color you are, they just want to make money.
It’s common knowledge and a consistent practice in this country that we alter college admissions standards and employment criteria for certain race/ethnicities so these groups can “catch up” with the majority population. It only seems logical that credit scores follow the same trends for these groups? They probably do and these groups unfortunately pay more. Shoud we ask insurance companies to provide better rates to these groups or alter their credit scores until these groups can catch up with others who are the “lucky ones”. If so, they never will catch up. No incentive for it.
It’s been debated before. Credit scoring is objective, predictive, and this is the one variable (other than driving record) that the consumer can control or change over time. Don’t like your auto insurance rate? Shop it. There is always a better rate available.
I couldn’t agree more with you SWFL Mark. The credit scoring can go both ways. Like the article says in a down economy, the scores can suffer, which I can say first hand is happening here at my office. However, when things are good with the economy and the scores improve, so does the price. If the consumer is smart they shop the price. Then they are happy with the credit scoring. I truely believe that credit scoring does help more people than it hurts.
Credit based scoring was initiated for one reason only, to increase insurance revenues by charging increased premiums on people who have no accident history. Although credit scoring may be predictive of possible future accidents, the fact is most of the people given these increased premiums have a clean record. The insurance companies believe that all of the premiums collected belong to them and they don’t want to be penalized by paying claims. Credit scoring is just another method to collect premiums that the insurance companies are not entitled to and they use it to offset claims that are actuarially included in non credit scored premiums. Is insurance scoring predictive?, yes it is. Does that make it right?
What will you say when they start using DNA to set health insurance premiums. Only the people who are directly affected will complain. The rest will say too bad it’s a good predictor of futur claims.
I can think of dozens of things that they could use as valid predictors that would probably be very objectionable to different people depending on how they are affected by these predictors.
As far as insurance vs banking, the state doesn’t force an individual to bank, but insurance is mandatory in all states. Therefore, the cost must be reasonable and affordable for both rich and poor.
Be careful what you embrace in the dark, because you may just wakeup with an unwanted guest in your house.
Why is credit information acceptable for use for auto and home loans, but not for insurance rating? The disparate impact, if any, should be roughly the same. So the state governments believe banks may adversly impact by race, but not insurance companies (again, assuming such an impact exists)?!
If you can think of dozens of predictive modeling criteria, in addition to driving record, current insurance, garaged location, age and gender of driver, and credit scoring, then you should form ‘Mutual of Frustrated Insurance Company’, because you are way ahead of actuaries everywhere. You seem to overlook the 900 pound gorilla in the corner – that policyholders clamor for the lowest possible premium, in spite of those confounded insurers who, how did you put it ‘The insurance companies believe that all of the premiums collected belong to them and they don’t want to be penalized by paying claims’. Yeah, penalized by paying claims. Thats it alright. As an insured, frustrated, are you willing to pay more so that others with poor credit pay less, like the old days (five or more years ago).
I thought not. Your one of those ‘its OK for the next guy, but I’m not paying more’. You’ll notice, frustrated, that Geico advertises a savings of 15% to entice new business. They don’t advertise that they forsake the use of credit scoring, now do they? Gee, I wonder what they are missing.
Your words reveal you to be full of hooey, with little or no understanding of how premium dollars are distributed back to policyholders in claims payments, and how that action affects premiums. Do you ever consider that the auto insurance market is oversaturated with carriers, some of whom have no business even interacting with the public? And the overabundance of carriers has artificially lowered premiums? And yet you want us to believe in this age of artificially low premiums, that somehow, magically, insurers are enjoying increased revenues at the expense of drivers with clean records? Sorry, frustrated, you don’t know what you are talking about. Credit scoring is a revenue neutral competitive tool, with the objective of any carrier being the garnering of the best, least risk P & C book of business. Thats where the money is. Now back to the grassy knoll with you!
It appears you have all the answers. Good luck to you over in wonderland. If credit scoreing is the magic sword, then why are all these companies that you seem to know so much about still losing money with such an exceptional tool. Could it be poor management? If you believe that I am so far off base, why are you taking it so personally?
Clearly, I am not the only one who believes that insurance companies take advantage of the poor. Wakeup and smell the coffee. You can site all of the laundry lists of facts that you care too. But, there is one overiding fact of life and it has been true throughout history. Greed has no conscious and the free market does work.
McCarthys arguement is a dead issue since genetics, sex offenders databases etc…are NOT are part of credit score pricing for insurance. JUST THE CREDIT APPLIES. Even he acknowldges that the data demonstrates a correlation between credit and claims. So all the other stuff he’s saying is a smoke screen being blown up “somewhere” to divert attention from what is actually being used ….which is ONLY A CREDIT SCORE. My personal experience with both personal and commerical lines P&C insurance supports the correlation between claims and their severity and frequesncy and credit scores
In a ‘prior life’ something like 66-75% of our large property claims came on accounts with unacceptable financials… I’m no actuary but it sure did seem highly relevant to me.
Just to add: Poor financials = more ‘moral hazard’, less money to improve facilities / invest in risk management, more poorly paid thus inexperienced workforce, more older/outdated equipment, more likely non-compliance with building & safety codes, etc. Could reflect pending suits/leins, etc. Again, it is highly relevant information.
Even more so, why is it bad to use credit for insurance, but OK to use it for employment screening even for positions not handling money? If you think that charging more for insurance is a burden, what do you think not being able to get a job is?
I know I had to go through the credit check in order to become an agent, which makes sense to me, but like you said it doesn’t make sense for alot of potential jobs.
This statement supplies the economic logic—the why—to explain what causes the strong correlation of more auto insurance claims with lower credit scores. (The explanation accords with the factual findings of the 2007 Federal Trade Commission report.)
Not only lower credit scores but every group indicator of tight budgets (e.g. lower income zip codes, lower paid occupations, no-prior insurance, use of premium installment plans) must predict more miles per insured car year for the group and therefore more claims per 100 car years for insurers to pay. Why? Because pay-by-the-car, all-you-can-drive premiums cause financially constrained drivers to insure fewer cars and drive each more miles.
For high car insurance premiums 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 must lead to high car insurance prices. As ability to pay goes down, premiums go up.
What you are saying doesn’t really make sense-in short, you are saying that if someone has 3 cars, but is making some amount less, chooses to only insure say 2 cars and leave the 3rd uninsured. I don’t run into too many clients who do that-usually responsible folks buy insurance for their vehicles, but may cut back coverages. Other folks will make the choice to just not buy insurance at all for any vehicle they own. They are also the ones who will opt out of buying HO and medical cover either because they don’t feel that insurance is a good value or there are some folks who still don’t believe in insurance and there are more of those than you might think. Its a weird world out there when folks act like that.
So the free market does work? Then why do you want to make it less free by taking away a good rating tool? Also, you are born with your DNA, you control your credit. There is a BIG difference there, even though both can predict future claims.
And yes, insurers are out to make a buck. Shame on them. Let me know when you start working pro bono and I am sure they will too.
What is everyone smoking?
Who says credit scoring is fair and objective – and fair to who? I’ve been reading this crap for years and haven’t seen “studies” and “reports” proving that credit scoring isn’t just anothe version of what was declared illegal back in the 60’s.
Stop this bull – the bridge has already been sold!
Dallas is in an uproar because they are going to tow and impound your vehicle if you get caught driving uninsured. Now that is just wrong and a slap in the face of the poor people who have to have a car to get to work or their appointments. Who are the poor people? In Dallas they are minorities and mostly black minorities. First the state starts a program to be able to check your VIN# and see if you really have insurance or just a fake or expired card from your friends computere or one of those internet companies. Second the police are towing your car to the city pound when they catch you. Third when you go to get insurance you get screwed because your credit is bad since the only people lending money where you live are crooks. Fourth who you had runnibg the country for the last 8 years.
What strikes me as I read these threads is that we have all lost site of common sense. Hit myself on the forehead and say “DAH”. Nobody wants to discriminate unfairly against a particular ethnic group. Last I checked my credit score (as we all should) there was nothing in there which indicated the color of my skin or my ancestry. When and if that happens… I’ll be the first to scream. Until then, I control my credit score and nobody is to blame if it is bad but me. I’m a single mom with a single income trying to put two daughters through college. Does a credit score unfairly discriminate against single moms? I don’t think so. I know how much I make, I know how much I spend and I do not try to live above my means. I know people who have triple the income I have and a worse credit score. Maybe they are being discriminated against? Hmmm…
As far as making a comparison to DNA… again I say we’ve lost site of common sense. What a ridiculous leap. None of us have control of our pre-disposition to disease or illness and to use DNA as a means to control life and health insurance is absurd and as someone else said… against public policy (i.e. common sense). We’re overthinking this way too much. Ask yourself… what is common sense here.
By all means Darwin, don’t let facts and logic interfere with your opinions and feelings. It seems the nutters are out in force today. You just can’t argue facts with people like Darwin and Rochester so why try?
I’ve several companies that I quote with that give the option to credit score. If the insured chooses to decline the scoring, the premium given is the based off of garaging location, driving history, and certain discounts (prior coverage, multi-line, Homeowner, etc). In all cases that I’ve run into this premium is higher then what is quoted using the credit scoring.
Regarding racial bias? Not really an issue as I’ve had people of all races running the spectrum of good and bad scores.
What is the average credit score of someone with an income of 20,000? Is it the same as someone one makes 50,000, or how about 100,000?
Some of you might say yes, but I might suggest that it is much easier to manage your finances when you make more money.
I bet the numbers would back me up, but the powers that be wont make them available.
Its an even bigger issue when the bare necessities you need to raise a child are figured in.
If you only have 20,000 to work with, then naturally you will chose to go into debt rather than go without food and gas and clothing for your child.
With someone who only makes around 20,000 they are often not wasting money on big screen tvs and ipods, they are going into debt to pay for basic necessities, especially if they have a family.
Next we need to look at what the average income of a black person is, as compared to a white person. A Google search shows the median income of whites is higher than blacks.
After you look at all these factors, one might determine that credit scoring in insurance will cause minorities to pay more for insurance.
This is just a logical argument. Unfortunately these “studies” often times dont give us all the info we need to work with to make an educated decision.
For example, send me a link that shows the median credit score as it relates to income? You cant find it anywhere.
A more compassionate society might have a problem with this.
While most of us will agree that credit does indicate degree of risk, you have to also wonder if it might be used to jack up premiums if no other factors will do so.
I recently went to quote my own policy and was astounded at where I was tiered. I sent for the reports, thinking possibly something was wrong.
Turns out that my credit is great, claim history, none (insurance agents usually don’t make claims), driving record clean, vehicle usage normal, no young drivers in the household, three cars, two drivers, everything you would think desireable in a risk.
What caused my rates to increase? Because one of my cars, a 1989 Honda Civic, without comp & collision was deemed “to old”. For this car, my premium rate was 20% higher for the entire policy. No consideration taken for the condition of the vehicle. Another excuse for a higher rate.
You do have to question if scoring is also being used to inflate the premiums.
Of course knowing how the system works, I wrote the policy without the older car, got my preferred tier, than added the Honda after policy was issued.
I have to admit that reading this littany of posts is interesting, but also very amusing. Black vs. white. Poor vs. rich. Male vs. female. We need to be get our collective head out of the sand and, very simply, be honest.
We could back into any conclusion we want, especially if one’s agenda makes it politically expedient or, better yet, if there is some economic benefit behind one’s political agenda. Follow the money trail? I’m sure I could even back into a conclusion that rich white guys are somehow being discriminated against by credit scoring if I had the time or inclination.
There are a few inconvenient facts that get in the way of looking at this rationally. Credit scoring works…plain and simple. McCarty and other boorish detractors know it (McCarty even said it in his testimony for that matter), but they just don’t have the stones to support it because, let’s face it, politically protected groups might have to pay higher premiums. Truth be told, if a group happens to be disproportionately represented in the credit score layer proven to generate more losses, then that is simply a reality the group must face. The individuals (that’s right, individuals) within the group do, in fact, have the ability to improve their respective credit scores for which they are solely responsible.
Also, the underwriting process at the core of the insurance business is an extremely discriminating exercise. It has to be in order for the carrier to make good business decisions, generate revenue and, ultimately, a profit.
Insurance is nothing more than a financial transaction in which the insured transfers his/her risk to an insurance company for a premium deemed to be commensurate with the amount of risk. The insurance company is not alone in determination of “commensurate” since the insured has the ability to shop to other carriers if he/she believes the premium is excessive. If a carrier has a propensity for charging excessive premiums (which is perceived by some to be prevalent in the industry as suggested in previous posts), then the carrier will not likely generate sufficient revenue to sustain its operations.
I was raised in a white, blue collar household in a large urban area. I went to school for twelve years with kids across the socioeconomic spectrum: black, white, poor and rich. We sat in class next to each other for twelve years and had the same road blocks in front of us. We also had access to the same opportunities. I made choices that disregarded the road blocks and allowed me to take advantage of the opportunities. I am very middle class, but would be considered by some political standards as nothing more than a rich white guy who has had life very easy.
As a rational and honest individual would expect, my neighbors and classmates from my childhood also made choices….some good, some not so good and some bad. Their skin color, gender or economic status did not dictate their current lot in life. Rather, the choices that they made were the driving force.
Unfortunately, a legitimate and valid business decision such as credit scoring is nothing more than a political football for many. Capitalism works. Profit is not a bad word. Credit scoring is nothing more than the manifestation of capitalism and a drive for profit by responsible businesses in the insurance industry. Some of us have work to do in the real world, so I ask all of you crying foul about credit scoring to simply get out of our way and move on to some other social cause.
First, lower insurance scores do predict higher claim frequencies, all else equal. The 2003 study by Epic Actuaries of 2.6 million car years of experience found that the cars of the lowest credit score owners produced twice as many property damage liability claims per 100 car-years as the cars of owners with the highest scores.
Now rate out this comparison: A household of adult drivers insures two cars traveling 10,000 and 20,000 annual miles. The owners get in a credit jam and economize by selling one car and driving the other 30,000 annual miles. The annual risk and its cost transferred to the insurer is exactly the same, but the expected claim frequency per car-year is now double what if was, while total premium is nearly cut in half, taking account of loss of a 20% multicar discount.
The car-year premium structure actually “tells” people needing to economize to insure fewer cars and drive each more. This scenario is diagrammed at http://www.centspermilenow.org
Buckeye – You didnt read my post so heres another chance.
Credit Scoring does adversely affect the poor, so as a society we just need to admit it and say
“Yea, but who cares?” Its not my problem, im entitled to a lower rate, I dont care about poor people”
Buckeye, read this…..
What is the average credit score of someone with an income of 20,000? Is it the same as someone one makes 50,000, or how about 100,000?
Some of you might say yes, but I might suggest that it is much easier to manage your finances when you make more money.
I bet the numbers would back me up, but the powers that be wont make them available.
Its an even bigger issue when the bare necessities you need to raise a child are figured in.
If you only have 20,000 to work with, then naturally you will chose to go into debt rather than go without food and gas and clothing for your child.
With someone who only makes around 20,000 they are often not wasting money on big screen tvs and ipods, they are going into debt to pay for basic necessities, especially if they have a family.
the credit scoring issue is dead. The companies are going to use it and the regulators are allowing it.
To be fair a new client proably should be credit scored but after one to two years of experience with a company the company experience shoudld take presidence.
proably will not happen because the companies are making too much money with credit scoring.
Credit scores are the critera for making a profit. Credit scores are important to an insurance agency for loss control. The lower the credit score, the higher the losses. Under writing can not price a product with out credit scores. There are some insureds, no matter the price you charge, you can not make a profit. LEAVE THE INSURANCE COMPANIES ALONE. EB HALES
Model Year – If you have a brand new car, you might have a better credit score/income than someone with a junker.
Age – The average 20 year old doesn’t make as much money as the average 45 year old. By charging that 20 year old more, your adversely affecting him more. This is also a variable that the 20 year old can’t control.
Make/Model – Buying a Kia vs an Escalade probably reflects income/race.
Prior Insurance/Limits – A poor person/minority might not have been able to previously afford insurance.
Zip code/territory – Obviously this can reflect racial/income disparities.
Homeowner – Again there’s a disparity on income/race
MultiCar Discount – A rich family can afford more than one car while a poor family may not
Driving Record – Rich people can afford to have their tickets challenged by a lawyer while a poor person cannot. They can also pay out of pocket for smaller self caused claims so an accident may not be reported to the DMV/insurance company
Paid In Full Discount – Obviously the poor person can’t pay for their entire premium while the rich person may.
Mileage – a rich person may be able to afford to move very close to their work while a poor person can only live where they can afford so they may have to driver farther to work.
I assume we should not utilize any of those rating factors as they all show either race or income disparities which could be used to charge more for poor/minorities.
I have to apologize for being so heartless, Mike, but do not buy into your old and tired argument.
We live in a free society due, in large part, to the benefits of a capitalistic economy. Inherent in such a free society is a plethora of opportunity. The harsh reality of said free society, though, is the personal responsibility and need for self-reliance that come with it.
The issue is not the unfortunate, but legitimate insurance discrimination against someone who happens to have a bad credit score. Rather, it is the responsibility that someone should and must take for the choices they have made in life. A poor credit score is normally the result of poor choices and not some conspiracy against the poor. My mother and father are a prime example. They did not have much money during my childhood, but they have impeccable credit based on the responsible decisions and choices they made during 34 years of marriage the raising of three children. They simply chose to suit up everyday, not whine about their circumstance, not look for handouts and take care of their family…..nothing more, nothing less.
You seem fixated on this “20,000 vs. $50,000 or $100,000” mantra. I don’t have statistics and don’t need any. I live in the real world where we all have experiences and personal observations. First of all, level of income does not automatically translate into bad credit score (note my personal experience outlined above). Second, even if there is a correlation, then I would say the same personal choices resulting in an income of only $20,000 are probably also driving the poor credit score.
And let’s talk a little bit about compassion for the poor since that seems to be part of your script. Capitalism and the opportunities it presents to rich and poor alike is compassionate by its very nature. Let’s take the intelligent and honest high road by not confusing compassion with allowing individuals to simply plod through life without the need to take responsibility for their actions and decisions.
If it makes you feel better, you are more than welcome to round up a bunch of people making $20,000 per year so you can counsel them on the wrongs that have been committed against them and how to wage an ongoing battle against “the man” who is trying to keep them down. While you’re at it, you can also cut them a check for the additional insurance premium they need to pay based on a poor credit score.
If my views as expressed above are deemed ruthless and heartless, then I am guilty as charged.
1. The credit report contains information that, even after adjusting for proper rating of traditional risk variables, is useful;
2. We in the industry do a lousy job of properly rating on traditional risk variables;
3. The credit scores marketed by FICO et al are biased by age and income, and like it or not, income in this country is biased by ethnicity, so that bias transfers;
4. The credit reports COULD HAVE BEEN USED to develop algorithms that were simpler, easy to understand, and were free of the income and age biases;
5. The credit reports WEREN’T used to develop said simple algorithms, because simple doesn’t sell, and FICO et al want to sell their scoring models! An illusion of superior ability at data mining, gained through the “optics” of high complexity, sells better than providing simple models with open disclosure, even if it really isn’t an better in rating;
(and YES, I have seen inside the “black box”)
6. We as an industry knotted our own noose by telling the regulators and the public that the (OVERLY COMPLEX) credit-scoring models were “black boxes” that just worked, darnit!, and you don’t DESERVE to see what’s in ’em! Oh, yeah, THAT was a strategy that endeared itself to public support!
Further, I don’t care particularly much if any individual state allows, or doesn’t allow, credit information, any more than I care if they allow or don’t allow rating on age, driving record, or gender. The fact of the matter is that, as long as all carriers have the same rules to play by in any given state, the winner will be the one who blocks and tackles better than the losers block and tackle, and when rules change, the most adaptable companies will win.
From a personal standpoint, how those of us due to bad marriage (i.e. financial choices and bad spousal choices), set for foreclosure on home – I have been with my company for over ten years and NEVER filed a claim. In GA you better have insurance or ELSE! I may have made poor financial choices but I’ll be doggone if I am lumped with people that have low credit scores and are more likely to file a claim/commit fraud. I pay $84 a month for a TEN YEAR OLD car and that has been taken out of my paycheck for TEN YEARS. Compared to some other people I deserve a medal! EVERYTHING should figure in before you settle on my zipcode, credit score, etc. I work in insurance and fully understand that my company has to make a profit or else I will not get paid. I do not consider credit scores fair as the company needs to look at the WHOLE picture. Insurance companies do not run D & Bs on every insured – they love the loss history, coastal region part so they can jack up the premiums. Losses/Location By Association. Same with credit scores. It’s here to stay whether we like it or not.
Hi guys, I am a single mom, and also an insurance agent. I only make around 29k. My insurance score is not great. But the fact is, based on what Im making I really cant afford to raise a child.
Im on a budget that even my boss helped me to create. We are really close and he is a mentor to me.
I put all my food, cloths, and gas on my credit card and I pay my rent on time.
But Im moving backwards, even with my incredibly conservative spending. We even just got rid of cable and cell phone due to late payments.
I have a clean driving record, but everyone in the office laughs at how high my insurance is because my credit is poor.
Im working my but off but until I get a raise or prices go down, Im in trouble.
So, when you pay less for insurance because of your good ins score, thank my little girl for it. Because we are making sacrifices by paying more……
Sorry, thats just my little perspective. I wish I were a better sales person, or was just smarter so I could get a better job, by my grades just werent good enough.
The price of insurance on my home almost doubled from year to year one day because I had a low credit score. I had sold one of my businesses and the new owner didn’t pay his sales tax. The state revenue agancy issued a lien against me that showed up on my credit report. I eventually had it removed but I had to transfer the insurance to a trust just to get insurance. We pay a premium, we own the house, leave our credit rating out of it.
What the insurance companies need to do is not use credit scoring as such a big rating factor. When credit scoring came to our state, we agents and the public and the state regulators, were sold by the fact that the price between a good score and a bad score was only around a 20% difference. Now as the years have gone by they have increased the difference by as much as 75%. A person with good credit and a speeding ticket will pay less than someone with poor credit and a clean record. Too much rating is being placed on credit scoring and I think that’s what has become unfair.
Because with a loan the bank is paying the borrower, with insurance the insured is paying the insurer. This country is turning into a fascist big brother state…
I’m not sure I agree with your take on the difference between insurance and loans. With a loan, the bank utilizes its capital / assets to front the borrower the money to make a large purchase. The borrower then makes payments to the bank.
An insurance policy is a commitment by the carrier to defend and indemnify the insured in the event of a loss (a promise to pay), which also represents a commitment of assets or capital. The insured pays a premium for this commitment of capital or assets.
In both instances (loan and insurance transaction), the consumer benefits from and pays for the ability to take advantage of capital or assets. The difference is the timing of the commitment or usage of capital. The bank commits capital on the front end in the form of a loan. The carrier commits capital, but must hold capital in reserve for losses that occur in the future following the payment of premium.
I’m also not sure of the relevance of your “facsist / big brother” comment. I’m not sure how credit scoring is related to a centralized government or dictatorial control. Just curious.
RE JohnnyBoy’s comment:
“What the insurance companies need to do is not use credit scoring as such a big rating factor. When credit scoring came to our state, we agents and the public and the state regulators, were sold by the fact that the price between a good score and a bad score was only around a 20% difference. Now as the years have gone by they have increased the difference by as much as 75%. A person with good credit and a speeding ticket will pay less than someone with poor credit and a clean record. Too much rating is being placed on credit scoring and I think that’s what has become unfair.”
Not all companies have done that. Several, mine included, have actually lessened the impact of credit on rates over the last 5 years, especially when combined with other elements like prior insurance. We used to rate good credit alone as more important than prior insurance alone and took a beating for it. That just doesn’t work. But combining the 2 is much more predictive than either element by itself.
As to clean driving record & poor credit being more expensive than 1 speed and good credit, that may be so in some cases, but since when does 1 speeding ticket indicate a pattern of driving behavior? Several violations &/or accidents is more indicative of a trend than 1 random violation just like several negative items on a credit report being weighted much more heavily than 1 late payment.
Credit Scoring has allowed insurance companies to make more money than ever. Rates are much higher after credit scoring than before. In general higher rates for insureds and more money for insurance companies. Credit Scoring is working just fine so leave it alone.
Yeah, based on your situation, we should throw out piles of numerical statistical correlations that actuaries have proven time and time again.
I’m like you. I drive a Ford Mustang Shelby, I’ve never been in an accident. I shouldn’t pay high rates, I should pay the same as my neighbor who drives a 1982 Pontiac Parissienne. My situation proves that the insurance company’s use of make and model in pricing is wrong.
I have sold auto insurance in the State of NY for 35 years. And I am recently semiretired. I agree with NOT using credit scores. There are to many situations today with the rising cost of living that people can not pay for what they have compared to a couple of years ago. They may have the best driving record but are paying the price because they can not afford to pay for what they borrowed on. I am afraid that this will get worse with in the next 3 years. When The US is down we do not need to have an industry that will drive it farther down. Insurance education for the consumer is the way the Insurance industry should go today.
We already distinguish between cars driven a lot and cars not driven a lot, by classing them based on weekly and annual mileage. As far as I know, there really isn’t an ‘all you can drive premuium’. If credit scoring is OK for a fiduciary responsibility like a home loan, its OK for a fiduciary responsibility like insurance. After all, when I collect $200 for six months of 250/500/100 liability, its obvious who has the big exposure, and who doesnt. I have $200, the insured gets $500k of BI protection. Pretty good deal for the insured.
I tell ya, we are all in for a world of hurting if McCarty has this much pull on the national level. They should keep him and his mess where it belongs. He’s done enough damage!!!
Yes, the use of credit scoring is discriminatory. It’s just not “unfairly discriminatory” like some legisalators think it is. Credit scoring is highly predictive and insurance companies wouldn’t go to such great expense if it wasn’t worth the trouble. Insurance companies don’t care what color you are, they just want to make money.
It’s common knowledge and a consistent practice in this country that we alter college admissions standards and employment criteria for certain race/ethnicities so these groups can “catch up” with the majority population. It only seems logical that credit scores follow the same trends for these groups? They probably do and these groups unfortunately pay more. Shoud we ask insurance companies to provide better rates to these groups or alter their credit scores until these groups can catch up with others who are the “lucky ones”. If so, they never will catch up. No incentive for it.
It’s been debated before. Credit scoring is objective, predictive, and this is the one variable (other than driving record) that the consumer can control or change over time. Don’t like your auto insurance rate? Shop it. There is always a better rate available.
I couldn’t agree more with you SWFL Mark. The credit scoring can go both ways. Like the article says in a down economy, the scores can suffer, which I can say first hand is happening here at my office. However, when things are good with the economy and the scores improve, so does the price. If the consumer is smart they shop the price. Then they are happy with the credit scoring. I truely believe that credit scoring does help more people than it hurts.
Credit based scoring was initiated for one reason only, to increase insurance revenues by charging increased premiums on people who have no accident history. Although credit scoring may be predictive of possible future accidents, the fact is most of the people given these increased premiums have a clean record. The insurance companies believe that all of the premiums collected belong to them and they don’t want to be penalized by paying claims. Credit scoring is just another method to collect premiums that the insurance companies are not entitled to and they use it to offset claims that are actuarially included in non credit scored premiums. Is insurance scoring predictive?, yes it is. Does that make it right?
What will you say when they start using DNA to set health insurance premiums. Only the people who are directly affected will complain. The rest will say too bad it’s a good predictor of futur claims.
I can think of dozens of things that they could use as valid predictors that would probably be very objectionable to different people depending on how they are affected by these predictors.
As far as insurance vs banking, the state doesn’t force an individual to bank, but insurance is mandatory in all states. Therefore, the cost must be reasonable and affordable for both rich and poor.
Be careful what you embrace in the dark, because you may just wakeup with an unwanted guest in your house.
Why is credit information acceptable for use for auto and home loans, but not for insurance rating? The disparate impact, if any, should be roughly the same. So the state governments believe banks may adversly impact by race, but not insurance companies (again, assuming such an impact exists)?!
If you can think of dozens of predictive modeling criteria, in addition to driving record, current insurance, garaged location, age and gender of driver, and credit scoring, then you should form ‘Mutual of Frustrated Insurance Company’, because you are way ahead of actuaries everywhere. You seem to overlook the 900 pound gorilla in the corner – that policyholders clamor for the lowest possible premium, in spite of those confounded insurers who, how did you put it ‘The insurance companies believe that all of the premiums collected belong to them and they don’t want to be penalized by paying claims’. Yeah, penalized by paying claims. Thats it alright. As an insured, frustrated, are you willing to pay more so that others with poor credit pay less, like the old days (five or more years ago).
I thought not. Your one of those ‘its OK for the next guy, but I’m not paying more’. You’ll notice, frustrated, that Geico advertises a savings of 15% to entice new business. They don’t advertise that they forsake the use of credit scoring, now do they? Gee, I wonder what they are missing.
Your words reveal you to be full of hooey, with little or no understanding of how premium dollars are distributed back to policyholders in claims payments, and how that action affects premiums. Do you ever consider that the auto insurance market is oversaturated with carriers, some of whom have no business even interacting with the public? And the overabundance of carriers has artificially lowered premiums? And yet you want us to believe in this age of artificially low premiums, that somehow, magically, insurers are enjoying increased revenues at the expense of drivers with clean records? Sorry, frustrated, you don’t know what you are talking about. Credit scoring is a revenue neutral competitive tool, with the objective of any carrier being the garnering of the best, least risk P & C book of business. Thats where the money is. Now back to the grassy knoll with you!
It appears you have all the answers. Good luck to you over in wonderland. If credit scoreing is the magic sword, then why are all these companies that you seem to know so much about still losing money with such an exceptional tool. Could it be poor management? If you believe that I am so far off base, why are you taking it so personally?
Clearly, I am not the only one who believes that insurance companies take advantage of the poor. Wakeup and smell the coffee. You can site all of the laundry lists of facts that you care too. But, there is one overiding fact of life and it has been true throughout history. Greed has no conscious and the free market does work.
McCarthys arguement is a dead issue since genetics, sex offenders databases etc…are NOT are part of credit score pricing for insurance. JUST THE CREDIT APPLIES. Even he acknowldges that the data demonstrates a correlation between credit and claims. So all the other stuff he’s saying is a smoke screen being blown up “somewhere” to divert attention from what is actually being used ….which is ONLY A CREDIT SCORE. My personal experience with both personal and commerical lines P&C insurance supports the correlation between claims and their severity and frequesncy and credit scores
Can we use credit scoring to select and elect our government officials? That could be real interesting…
In a ‘prior life’ something like 66-75% of our large property claims came on accounts with unacceptable financials… I’m no actuary but it sure did seem highly relevant to me.
Just to add: Poor financials = more ‘moral hazard’, less money to improve facilities / invest in risk management, more poorly paid thus inexperienced workforce, more older/outdated equipment, more likely non-compliance with building & safety codes, etc. Could reflect pending suits/leins, etc. Again, it is highly relevant information.
Even more so, why is it bad to use credit for insurance, but OK to use it for employment screening even for positions not handling money? If you think that charging more for insurance is a burden, what do you think not being able to get a job is?
I know I had to go through the credit check in order to become an agent, which makes sense to me, but like you said it doesn’t make sense for alot of potential jobs.
This statement supplies the economic logic—the why—to explain what causes the strong correlation of more auto insurance claims with lower credit scores. (The explanation accords with the factual findings of the 2007 Federal Trade Commission report.)
Not only lower credit scores but every group indicator of tight budgets (e.g. lower income zip codes, lower paid occupations, no-prior insurance, use of premium installment plans) must predict more miles per insured car year for the group and therefore more claims per 100 car years for insurers to pay. Why? Because pay-by-the-car, all-you-can-drive premiums cause financially constrained drivers to insure fewer cars and drive each more miles.
For high car insurance premiums 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 must lead to high car insurance prices. As ability to pay goes down, premiums go up.
Further discussion can be found at http://www.centspermilenow.org.
Patrick Butler, Ph.D.
Insurance Project Director
National Organization for Women Foundation
What you are saying doesn’t really make sense-in short, you are saying that if someone has 3 cars, but is making some amount less, chooses to only insure say 2 cars and leave the 3rd uninsured. I don’t run into too many clients who do that-usually responsible folks buy insurance for their vehicles, but may cut back coverages. Other folks will make the choice to just not buy insurance at all for any vehicle they own. They are also the ones who will opt out of buying HO and medical cover either because they don’t feel that insurance is a good value or there are some folks who still don’t believe in insurance and there are more of those than you might think. Its a weird world out there when folks act like that.
So the free market does work? Then why do you want to make it less free by taking away a good rating tool? Also, you are born with your DNA, you control your credit. There is a BIG difference there, even though both can predict future claims.
And yes, insurers are out to make a buck. Shame on them. Let me know when you start working pro bono and I am sure they will too.
What is everyone smoking?
Who says credit scoring is fair and objective – and fair to who? I’ve been reading this crap for years and haven’t seen “studies” and “reports” proving that credit scoring isn’t just anothe version of what was declared illegal back in the 60’s.
Stop this bull – the bridge has already been sold!
Dallas is in an uproar because they are going to tow and impound your vehicle if you get caught driving uninsured. Now that is just wrong and a slap in the face of the poor people who have to have a car to get to work or their appointments. Who are the poor people? In Dallas they are minorities and mostly black minorities. First the state starts a program to be able to check your VIN# and see if you really have insurance or just a fake or expired card from your friends computere or one of those internet companies. Second the police are towing your car to the city pound when they catch you. Third when you go to get insurance you get screwed because your credit is bad since the only people lending money where you live are crooks. Fourth who you had runnibg the country for the last 8 years.
What strikes me as I read these threads is that we have all lost site of common sense. Hit myself on the forehead and say “DAH”. Nobody wants to discriminate unfairly against a particular ethnic group. Last I checked my credit score (as we all should) there was nothing in there which indicated the color of my skin or my ancestry. When and if that happens… I’ll be the first to scream. Until then, I control my credit score and nobody is to blame if it is bad but me. I’m a single mom with a single income trying to put two daughters through college. Does a credit score unfairly discriminate against single moms? I don’t think so. I know how much I make, I know how much I spend and I do not try to live above my means. I know people who have triple the income I have and a worse credit score. Maybe they are being discriminated against? Hmmm…
As far as making a comparison to DNA… again I say we’ve lost site of common sense. What a ridiculous leap. None of us have control of our pre-disposition to disease or illness and to use DNA as a means to control life and health insurance is absurd and as someone else said… against public policy (i.e. common sense). We’re overthinking this way too much. Ask yourself… what is common sense here.
By all means Darwin, don’t let facts and logic interfere with your opinions and feelings. It seems the nutters are out in force today. You just can’t argue facts with people like Darwin and Rochester so why try?
I’ve several companies that I quote with that give the option to credit score. If the insured chooses to decline the scoring, the premium given is the based off of garaging location, driving history, and certain discounts (prior coverage, multi-line, Homeowner, etc). In all cases that I’ve run into this premium is higher then what is quoted using the credit scoring.
Regarding racial bias? Not really an issue as I’ve had people of all races running the spectrum of good and bad scores.
What is the average credit score of someone with an income of 20,000? Is it the same as someone one makes 50,000, or how about 100,000?
Some of you might say yes, but I might suggest that it is much easier to manage your finances when you make more money.
I bet the numbers would back me up, but the powers that be wont make them available.
Its an even bigger issue when the bare necessities you need to raise a child are figured in.
If you only have 20,000 to work with, then naturally you will chose to go into debt rather than go without food and gas and clothing for your child.
With someone who only makes around 20,000 they are often not wasting money on big screen tvs and ipods, they are going into debt to pay for basic necessities, especially if they have a family.
Next we need to look at what the average income of a black person is, as compared to a white person. A Google search shows the median income of whites is higher than blacks.
After you look at all these factors, one might determine that credit scoring in insurance will cause minorities to pay more for insurance.
This is just a logical argument. Unfortunately these “studies” often times dont give us all the info we need to work with to make an educated decision.
For example, send me a link that shows the median credit score as it relates to income? You cant find it anywhere.
A more compassionate society might have a problem with this.
While most of us will agree that credit does indicate degree of risk, you have to also wonder if it might be used to jack up premiums if no other factors will do so.
I recently went to quote my own policy and was astounded at where I was tiered. I sent for the reports, thinking possibly something was wrong.
Turns out that my credit is great, claim history, none (insurance agents usually don’t make claims), driving record clean, vehicle usage normal, no young drivers in the household, three cars, two drivers, everything you would think desireable in a risk.
What caused my rates to increase? Because one of my cars, a 1989 Honda Civic, without comp & collision was deemed “to old”. For this car, my premium rate was 20% higher for the entire policy. No consideration taken for the condition of the vehicle. Another excuse for a higher rate.
You do have to question if scoring is also being used to inflate the premiums.
Of course knowing how the system works, I wrote the policy without the older car, got my preferred tier, than added the Honda after policy was issued.
What the heck company is that you are talking about?
I have to admit that reading this littany of posts is interesting, but also very amusing. Black vs. white. Poor vs. rich. Male vs. female. We need to be get our collective head out of the sand and, very simply, be honest.
We could back into any conclusion we want, especially if one’s agenda makes it politically expedient or, better yet, if there is some economic benefit behind one’s political agenda. Follow the money trail? I’m sure I could even back into a conclusion that rich white guys are somehow being discriminated against by credit scoring if I had the time or inclination.
There are a few inconvenient facts that get in the way of looking at this rationally. Credit scoring works…plain and simple. McCarty and other boorish detractors know it (McCarty even said it in his testimony for that matter), but they just don’t have the stones to support it because, let’s face it, politically protected groups might have to pay higher premiums. Truth be told, if a group happens to be disproportionately represented in the credit score layer proven to generate more losses, then that is simply a reality the group must face. The individuals (that’s right, individuals) within the group do, in fact, have the ability to improve their respective credit scores for which they are solely responsible.
Also, the underwriting process at the core of the insurance business is an extremely discriminating exercise. It has to be in order for the carrier to make good business decisions, generate revenue and, ultimately, a profit.
Insurance is nothing more than a financial transaction in which the insured transfers his/her risk to an insurance company for a premium deemed to be commensurate with the amount of risk. The insurance company is not alone in determination of “commensurate” since the insured has the ability to shop to other carriers if he/she believes the premium is excessive. If a carrier has a propensity for charging excessive premiums (which is perceived by some to be prevalent in the industry as suggested in previous posts), then the carrier will not likely generate sufficient revenue to sustain its operations.
I was raised in a white, blue collar household in a large urban area. I went to school for twelve years with kids across the socioeconomic spectrum: black, white, poor and rich. We sat in class next to each other for twelve years and had the same road blocks in front of us. We also had access to the same opportunities. I made choices that disregarded the road blocks and allowed me to take advantage of the opportunities. I am very middle class, but would be considered by some political standards as nothing more than a rich white guy who has had life very easy.
As a rational and honest individual would expect, my neighbors and classmates from my childhood also made choices….some good, some not so good and some bad. Their skin color, gender or economic status did not dictate their current lot in life. Rather, the choices that they made were the driving force.
Unfortunately, a legitimate and valid business decision such as credit scoring is nothing more than a political football for many. Capitalism works. Profit is not a bad word. Credit scoring is nothing more than the manifestation of capitalism and a drive for profit by responsible businesses in the insurance industry. Some of us have work to do in the real world, so I ask all of you crying foul about credit scoring to simply get out of our way and move on to some other social cause.
First, lower insurance scores do predict higher claim frequencies, all else equal. The 2003 study by Epic Actuaries of 2.6 million car years of experience found that the cars of the lowest credit score owners produced twice as many property damage liability claims per 100 car-years as the cars of owners with the highest scores.
Now rate out this comparison: A household of adult drivers insures two cars traveling 10,000 and 20,000 annual miles. The owners get in a credit jam and economize by selling one car and driving the other 30,000 annual miles. The annual risk and its cost transferred to the insurer is exactly the same, but the expected claim frequency per car-year is now double what if was, while total premium is nearly cut in half, taking account of loss of a 20% multicar discount.
The car-year premium structure actually “tells” people needing to economize to insure fewer cars and drive each more. This scenario is diagrammed at http://www.centspermilenow.org
Buckeye – You didnt read my post so heres another chance.
Credit Scoring does adversely affect the poor, so as a society we just need to admit it and say
“Yea, but who cares?” Its not my problem, im entitled to a lower rate, I dont care about poor people”
Buckeye, read this…..
What is the average credit score of someone with an income of 20,000? Is it the same as someone one makes 50,000, or how about 100,000?
Some of you might say yes, but I might suggest that it is much easier to manage your finances when you make more money.
I bet the numbers would back me up, but the powers that be wont make them available.
Its an even bigger issue when the bare necessities you need to raise a child are figured in.
If you only have 20,000 to work with, then naturally you will chose to go into debt rather than go without food and gas and clothing for your child.
With someone who only makes around 20,000 they are often not wasting money on big screen tvs and ipods, they are going into debt to pay for basic necessities, especially if they have a family.
the credit scoring issue is dead. The companies are going to use it and the regulators are allowing it.
To be fair a new client proably should be credit scored but after one to two years of experience with a company the company experience shoudld take presidence.
proably will not happen because the companies are making too much money with credit scoring.
Credit scores are the critera for making a profit. Credit scores are important to an insurance agency for loss control. The lower the credit score, the higher the losses. Under writing can not price a product with out credit scores. There are some insureds, no matter the price you charge, you can not make a profit. LEAVE THE INSURANCE COMPANIES ALONE. EB HALES
Model Year – If you have a brand new car, you might have a better credit score/income than someone with a junker.
Age – The average 20 year old doesn’t make as much money as the average 45 year old. By charging that 20 year old more, your adversely affecting him more. This is also a variable that the 20 year old can’t control.
Make/Model – Buying a Kia vs an Escalade probably reflects income/race.
Prior Insurance/Limits – A poor person/minority might not have been able to previously afford insurance.
Zip code/territory – Obviously this can reflect racial/income disparities.
Homeowner – Again there’s a disparity on income/race
MultiCar Discount – A rich family can afford more than one car while a poor family may not
Driving Record – Rich people can afford to have their tickets challenged by a lawyer while a poor person cannot. They can also pay out of pocket for smaller self caused claims so an accident may not be reported to the DMV/insurance company
Paid In Full Discount – Obviously the poor person can’t pay for their entire premium while the rich person may.
Mileage – a rich person may be able to afford to move very close to their work while a poor person can only live where they can afford so they may have to driver farther to work.
I assume we should not utilize any of those rating factors as they all show either race or income disparities which could be used to charge more for poor/minorities.
I have to apologize for being so heartless, Mike, but do not buy into your old and tired argument.
We live in a free society due, in large part, to the benefits of a capitalistic economy. Inherent in such a free society is a plethora of opportunity. The harsh reality of said free society, though, is the personal responsibility and need for self-reliance that come with it.
The issue is not the unfortunate, but legitimate insurance discrimination against someone who happens to have a bad credit score. Rather, it is the responsibility that someone should and must take for the choices they have made in life. A poor credit score is normally the result of poor choices and not some conspiracy against the poor. My mother and father are a prime example. They did not have much money during my childhood, but they have impeccable credit based on the responsible decisions and choices they made during 34 years of marriage the raising of three children. They simply chose to suit up everyday, not whine about their circumstance, not look for handouts and take care of their family…..nothing more, nothing less.
You seem fixated on this “20,000 vs. $50,000 or $100,000” mantra. I don’t have statistics and don’t need any. I live in the real world where we all have experiences and personal observations. First of all, level of income does not automatically translate into bad credit score (note my personal experience outlined above). Second, even if there is a correlation, then I would say the same personal choices resulting in an income of only $20,000 are probably also driving the poor credit score.
And let’s talk a little bit about compassion for the poor since that seems to be part of your script. Capitalism and the opportunities it presents to rich and poor alike is compassionate by its very nature. Let’s take the intelligent and honest high road by not confusing compassion with allowing individuals to simply plod through life without the need to take responsibility for their actions and decisions.
If it makes you feel better, you are more than welcome to round up a bunch of people making $20,000 per year so you can counsel them on the wrongs that have been committed against them and how to wage an ongoing battle against “the man” who is trying to keep them down. While you’re at it, you can also cut them a check for the additional insurance premium they need to pay based on a poor credit score.
If my views as expressed above are deemed ruthless and heartless, then I am guilty as charged.
I would like to know, when did you make a donation to the poor?
There is no doubt in my mind of the following:
1. The credit report contains information that, even after adjusting for proper rating of traditional risk variables, is useful;
2. We in the industry do a lousy job of properly rating on traditional risk variables;
3. The credit scores marketed by FICO et al are biased by age and income, and like it or not, income in this country is biased by ethnicity, so that bias transfers;
4. The credit reports COULD HAVE BEEN USED to develop algorithms that were simpler, easy to understand, and were free of the income and age biases;
5. The credit reports WEREN’T used to develop said simple algorithms, because simple doesn’t sell, and FICO et al want to sell their scoring models! An illusion of superior ability at data mining, gained through the “optics” of high complexity, sells better than providing simple models with open disclosure, even if it really isn’t an better in rating;
(and YES, I have seen inside the “black box”)
6. We as an industry knotted our own noose by telling the regulators and the public that the (OVERLY COMPLEX) credit-scoring models were “black boxes” that just worked, darnit!, and you don’t DESERVE to see what’s in ’em! Oh, yeah, THAT was a strategy that endeared itself to public support!
Further, I don’t care particularly much if any individual state allows, or doesn’t allow, credit information, any more than I care if they allow or don’t allow rating on age, driving record, or gender. The fact of the matter is that, as long as all carriers have the same rules to play by in any given state, the winner will be the one who blocks and tackles better than the losers block and tackle, and when rules change, the most adaptable companies will win.
From a personal standpoint, how those of us due to bad marriage (i.e. financial choices and bad spousal choices), set for foreclosure on home – I have been with my company for over ten years and NEVER filed a claim. In GA you better have insurance or ELSE! I may have made poor financial choices but I’ll be doggone if I am lumped with people that have low credit scores and are more likely to file a claim/commit fraud. I pay $84 a month for a TEN YEAR OLD car and that has been taken out of my paycheck for TEN YEARS. Compared to some other people I deserve a medal! EVERYTHING should figure in before you settle on my zipcode, credit score, etc. I work in insurance and fully understand that my company has to make a profit or else I will not get paid. I do not consider credit scores fair as the company needs to look at the WHOLE picture. Insurance companies do not run D & Bs on every insured – they love the loss history, coastal region part so they can jack up the premiums. Losses/Location By Association. Same with credit scores. It’s here to stay whether we like it or not.
Hi guys, I am a single mom, and also an insurance agent. I only make around 29k. My insurance score is not great. But the fact is, based on what Im making I really cant afford to raise a child.
Im on a budget that even my boss helped me to create. We are really close and he is a mentor to me.
I put all my food, cloths, and gas on my credit card and I pay my rent on time.
But Im moving backwards, even with my incredibly conservative spending. We even just got rid of cable and cell phone due to late payments.
I have a clean driving record, but everyone in the office laughs at how high my insurance is because my credit is poor.
Im working my but off but until I get a raise or prices go down, Im in trouble.
So, when you pay less for insurance because of your good ins score, thank my little girl for it. Because we are making sacrifices by paying more……
Sorry, thats just my little perspective. I wish I were a better sales person, or was just smarter so I could get a better job, by my grades just werent good enough.
The price of insurance on my home almost doubled from year to year one day because I had a low credit score. I had sold one of my businesses and the new owner didn’t pay his sales tax. The state revenue agancy issued a lien against me that showed up on my credit report. I eventually had it removed but I had to transfer the insurance to a trust just to get insurance. We pay a premium, we own the house, leave our credit rating out of it.
What the insurance companies need to do is not use credit scoring as such a big rating factor. When credit scoring came to our state, we agents and the public and the state regulators, were sold by the fact that the price between a good score and a bad score was only around a 20% difference. Now as the years have gone by they have increased the difference by as much as 75%. A person with good credit and a speeding ticket will pay less than someone with poor credit and a clean record. Too much rating is being placed on credit scoring and I think that’s what has become unfair.
Because with a loan the bank is paying the borrower, with insurance the insured is paying the insurer. This country is turning into a fascist big brother state…
I’m not sure I agree with your take on the difference between insurance and loans. With a loan, the bank utilizes its capital / assets to front the borrower the money to make a large purchase. The borrower then makes payments to the bank.
An insurance policy is a commitment by the carrier to defend and indemnify the insured in the event of a loss (a promise to pay), which also represents a commitment of assets or capital. The insured pays a premium for this commitment of capital or assets.
In both instances (loan and insurance transaction), the consumer benefits from and pays for the ability to take advantage of capital or assets. The difference is the timing of the commitment or usage of capital. The bank commits capital on the front end in the form of a loan. The carrier commits capital, but must hold capital in reserve for losses that occur in the future following the payment of premium.
I’m also not sure of the relevance of your “facsist / big brother” comment. I’m not sure how credit scoring is related to a centralized government or dictatorial control. Just curious.
RE JohnnyBoy’s comment:
“What the insurance companies need to do is not use credit scoring as such a big rating factor. When credit scoring came to our state, we agents and the public and the state regulators, were sold by the fact that the price between a good score and a bad score was only around a 20% difference. Now as the years have gone by they have increased the difference by as much as 75%. A person with good credit and a speeding ticket will pay less than someone with poor credit and a clean record. Too much rating is being placed on credit scoring and I think that’s what has become unfair.”
Not all companies have done that. Several, mine included, have actually lessened the impact of credit on rates over the last 5 years, especially when combined with other elements like prior insurance. We used to rate good credit alone as more important than prior insurance alone and took a beating for it. That just doesn’t work. But combining the 2 is much more predictive than either element by itself.
As to clean driving record & poor credit being more expensive than 1 speed and good credit, that may be so in some cases, but since when does 1 speeding ticket indicate a pattern of driving behavior? Several violations &/or accidents is more indicative of a trend than 1 random violation just like several negative items on a credit report being weighted much more heavily than 1 late payment.
Credit Scoring has allowed insurance companies to make more money than ever. Rates are much higher after credit scoring than before. In general higher rates for insureds and more money for insurance companies. Credit Scoring is working just fine so leave it alone.
Yea, isn’t it funny. Insurance companies have all these new methods for rating risks, yet the prices keep going higher & higher.
Yeah, based on your situation, we should throw out piles of numerical statistical correlations that actuaries have proven time and time again.
I’m like you. I drive a Ford Mustang Shelby, I’ve never been in an accident. I shouldn’t pay high rates, I should pay the same as my neighbor who drives a 1982 Pontiac Parissienne. My situation proves that the insurance company’s use of make and model in pricing is wrong.
Johnny,
Ever heard of inflation? It isn’t just some word used in Econ text books.
I have sold auto insurance in the State of NY for 35 years. And I am recently semiretired. I agree with NOT using credit scores. There are to many situations today with the rising cost of living that people can not pay for what they have compared to a couple of years ago. They may have the best driving record but are paying the price because they can not afford to pay for what they borrowed on. I am afraid that this will get worse with in the next 3 years. When The US is down we do not need to have an industry that will drive it farther down. Insurance education for the consumer is the way the Insurance industry should go today.