Hey, you’re really oppressing deadbeats. Just because some people play by the rules doesn’t mean that they should be rewarded for such good behavior. (I’m being sarcastic, of course.)
Hey, how ’bout this. Start with really high rates and then reward with premium credits those with good credit scores? Would this appease the commie whinners blogging here today? This way, you wouldn’t have to debit (penalize by increasing the premium) the premium for those with bad credit scores. This seems fair to me. Or do you deadbeat whinners believe that no good deed should go unpunished and that all good deeds should go unrewarded?
BTW, occupation is a very good indicator of one’s driving record. Another BTW, attorneys, as a group, have a very poor driving record.
Hey, how do ya’ll like my newer, softer, gentler monikers?
The use of credit is not necessary in my opinion. I’ve spoken to actuaries on both sides of the argument. While credit can be a predictor, there are numerous other factors that correlate with that credit. Don’t jump on me for stating that, I’ve watched the numbers crunched and wrote my thesis on the practice.
Tickets, claims of all types, accidents of all types, and internal payment history are all indicators of future loss. Perhaps carriers should start to share their internal payment histories via a program like CLUE to help use this as a factor. Combine that with driver experience and location and you’ve got a pretty darn accurate picture of your risk.
I suspect that insureds ad regulators will have the same issues like “number of years an individual has been insured and employed”. I can hear the insured now: “you’re telling me I am being penalized because I found a better, more high-paying job and haven’t been there long enough”.
Credit may not or should not be the only underwriting variable used to calculate rates, but I’ll take an insured who has followed a prudent, responsible path with respect to their own financial responsibility than someone who has maxed out every credit card and then quits paying.
I don’t have an issue with “payment history” becoming a variable. Could be a good idea. Although it could be that people with numerous PIP claims pay their bills on time becuase of the “cash cow” they are milking.
I didn’t write my thesis on the use of credit however in my 17 years on the company side I have reviewed extensive data that indicates the correlation of losses (by all line items – PIP, UM, etc) and credit history. It’s not perfect but it probably works on the extreme ends of the credit curve. Additionally, some credit modeling (ex: removing bad debt from Medical bills) that varies from the straight FICO scores may work better.
I’m not anti-credit entirely, but you can trust me when I tell you that it’s not as clear cut as the industry would have you believe. Using credit as any more than about 10% of the rate is absolutely outrageous in my opinion. But you know as well as I do that there are many carriers who use credit almost entirely. Many of those carriers are screaming about PIP fraud as we speak. Guess their actuaries need to sharpen the pencils.
You’re probably right, credit on both extremes is a good indicator. Those who absolutely don’t care will file more claims (claims history and driving history will reflect this as well). Those who are meticulous about their credit will likely have fewer claims (claims history and driving history will also reflect this…see a trend?). It’s those folks in the middle who may have no credit or who may have been late a few times or may be over extended temporarily that I worry about.
I just got divorced in a community property state where my ex makes about 3 x more than I do. Because of the community property state, I ended up with about 50k in debt that I did not have when I got married. I pay my bills on time & always have until I moved here after marrying my ex and getting stuck with his credit. It did not matter that I did not use the credit cards – the law didnt care. I was forced to file bankruptcy to support my son & me on what I earn. I still pay my bills on time, just not the credit card bills. Sorry guys, I disagree with you because I am a good risk, I have never filed a claim for injury, have filed maybe 2 collision claims, 1 auto liability claim and 1 or 2 comp claims, no work comp claims, no property claims (and yes I have owned homes in the past), no GL claims in all of the 32 years I have been driving and my 48 years of life. I have been in the ins business since I was 20. There are circumstances that change the “look” of a risk. Credit is not necessary. FYI, I have a very good driving record as well.
It’s high time the insurance industry abandons credit scoring as a primary underwriting factor for personal lines of insurance. We all now know that economic circumstances for anyone can change in the blink of an eye through no fault of any person who loses their job or whose income is somehow reduced because of the economy.
Credit scoring should never have been used for that purpose and now that we’ve all experienced an unprecedented recession (depression for many unemployed) we know that losing a job, for example, has no direct bearing on anyone’s driving ability or whether someone is a good or bad driver.
The people at Fair Isaacson have never been held accountable to disclsoe how they designed the ‘black box’ that determines all our credit scores. Today if a bank arbitrarily elects to reduce my available credit on my equity line or my VISA credit card, it dings my socre because now any balance I have appears as utilizing a larger percentage of my avaialble line. We know banks have often unilaterally adjusted credit lines even when there was no delinquency or other change in the customer’s profile.
Insurers, as this actuary suggests, should get back to using measurable criteria that have a direct bearing on predicting the likelihood of increased claim frequency. Driving record, type of vehicle, miles driven, age of driver, claim history, for example, all would appear more relevant. How well I maintain my home or claim frequency all would appear to indicate if I’m a good prospect for homeonwer’s insurance.
Credit scoring always was discriminatory in a passive manner and now that this ‘discrimmination’ has spilled over to middle class people it becomes obvious that credit scoring always was a flawed basis for insurancce underwriting.
If credit score or insurance score (as other things go into insurance score beside credit) is not a good predictor of loss then let companies that believe that not use credit and those that want to use credit use it. It is a free market and companies shoul be able to use what they want within reason. Let the market decide who uses what. If credit scores are not an accurate predictor then companies that use them will stop as they will lose money. One thing is certain and the statistics back it up, credit scores are a very good tool in predicting future losses period.
I happen to write business in a state (Calif)that bans the use of credit scoring for any P/L business. Prior to the banning of credit scoring, carriers were all on the bandwagon of credit being a forecaster of future claims probability. Since the time credit scoring has been banned, rates have stayed stable and carriers in general are far more profitable without the scoring scenario and also generally more profitable than every other state that uses credit or a multi-tiered pricing mechanism. The fact that carriers make money here without resorting to credit scoring and a “take all comers” auto marketplace indicates that while scoring can have an impact, it is extremely minor in the overall picture.
Here’s the rub, we have financial responsibility laws to try to force the irresponsible people to buy auto insurance then we raise their rates because they are irresponsible, thereby reducing the probability that they will purchase insurance. In the four years I’ve paid $1,500 (deductibles) out for two accidents with uninsured drivers – Am I saving money on my auto insurance because of credit scoring? I think not.
Some examples: I take $200,000 from savings to purchase an asset priced at $500,000. The loss of savings coupled with the new debt produces a lower score. We domn’t know if I will pay on time[uncertainty]. I have several claims caused by uninsured drivers and my score goes down. You get the drift. If I didn’t pay my bills you would have a reason for a lower score. What happens if your score misses a threshold by one point and you miss preferred and move down to a standard policy. This plus the score modification could take you down at the knees. Idea. More open facts about the score is developed so if I ask how can I impoprove my sore someone can specifically tell me. What happens at scoring for renewal that after the score but 60 days later a rescoring is higher. If the renewal went shoping the new quote has a built in advantage. Like the old days where an accident surcharge dropped off and the new company didn’t have to include same. More transparancy in the beginning would have probably avoilded all of this. We fear what we cannot see to understand.
Good points, SWFL. It’d be foolish to outright ban the use of credit scores, but they should be available for use by insurers. Assigning scores a weighted value and/or accounting for delinquent medical bills and looking at the details of job changes (e.g., higher pay, employer went BK or otherwise closed up shop, change of career, spouse transferred, to name a few) also s/b factored into the weighted value of the scores.
Al Forst,
The fact that State Farm does not use credit scoring clearly illistrates that their business model WILL NOT work. They are bankrupt and don’t know it. Ask the rest of the industry, they will be glad to explain to State Farm that State Farm is simply wrong and the remainder of the industry is correct. Silly, silly, silly State Farm.
The bottom line is that credit scoring is used to enable insurers to avoid taking on people of limited financial means. For certain lines of business, this is fair. But for mandated lines such as personal auto, this is enormously unethical.
Regarding correlation between good credit history and loss costs, I could have told you that financially stable people make much better risks than the less fortunate members of our population for financial products of a all kinds.
Having said that, the real evil is with the insurers who use occupation as an underwriting tool. This has gotten a lot less push back from the public but is actually a far more sinister practice.
Simply put, good risks will pay more without it sure as it gets dark in the evening.
It’s what’s happening to America- no responsibility for anything anymore, no benefit for “playing by the rules” and “no penalty” no NOT playing by the rules.
Classic: “It’s not MY fault”.
Adjustmetoo is a good risk? Didnt she mentioned the posibility of 5 claims, and poor credit? What was her point? I wonder what she would consider a bad risk?
There are so, so many things that could negatively effect your credit score that have absolutely NOTHING to do with character. Saying that is akin to saying that poor people are all of low character.
There are a lot of rich folks, i.e. great credit scores, who are of very, very poor character.
I have to agree with you: “Credit scoring always was discriminatory in a passive manner and now that this ‘discrimmination’ has spilled over to middle class people it becomes obvious that credit scoring always was a flawed basis for insurancce underwriting.”
Only when it starts to affect those society deems “important enough” is it now a raging issue again.
Mostly I’ve seen a number of peeps here today with a flippant attitude; supporting the use of credit…-or the so-called Insurance Score. It’s all bogus and it hurts the core of our books of business..the middle class.
How many of you are writing that yuppees’ “B’mer” ?
I thought so.
What the industry is doing in continuing the use of credit is exactly what Wall Street recently did to the American public …..truly ripping them off
Well, then let’s just ban anything that either hints at discrimination or is out of the insured’s control. Got to feel sorry for “adustmetoo”. She posted that she got a divorce (I am sure it wasn’t her fault) and her insurance will go up because she is now single. That doesn’t seem fair does it? Oh, the data on single females says differently? Well based on the majority of these posts we’re not going to use data (even if it has some validity), we’re just going to use what’s fair. What is fair?
I do have carries that don’t use credit, but their rates are always higher. Why is that?
Approximetly 40 years ago when I started in this business ( and everything then was agency billed) my boss said ” Watch the people who pay their premiums on time ; they are more likely not to have claims!” Wow was he correct I never forgot that peice of information.
Good post SWFL Agent. All that oppose credit scoring because of singular references (i.e. My credit score shot up because my wife maxed out my credit cards, etc.) forgot one primary reason carriers use LARGE numbers. Simple fact, when a consistent trend is noted, carriers rate accordingly. So when they discovered credit scoring showed trends, they picked up on them and used them. Those carriers who didn’t suddenly found themselves overpriced on good credit risks, OR they were getting all the remaining risks with more accidents and their LR increased.
Simple example – everyone agrees single youthful males (16-18)are one of the worst risks out there. Yet only 1/3 of them have accidents, NOT all of them. Two thirds are good risks and don’t have accidents. But no one balks at rating all of them higher than a 30 year old married male. Why – because we know the entire POOL of 16-18 single males will have more accidents. If we knew which single males had better risk characteristics, we would give discounts to them. But ya know, I was an honor grad with great grades heading to college yet I had an accident when I was 16. I sure didn’t fit the “profile” of a bad risk, but turns out I sure acted like I did by having an accident!!!
So for those who have a lower credit score for ANY reason, you are lumped into a POOL of people who have characteristics which indicate more accidents will occur. IF carriers knew the exact reason why your credit score was low AND knew that reason meant you shouldn’t be in that POOL, they would use that variable and change your rate.
I’ve seen the studies, been included in developing the models, been active in learning how they work – it isn’t thievery, it isn’t discrimination, it is just better rating.
Now if you remove credit scoring from everyone (i.e. CA) than companies will figure out a way to rate to make a profit, that’s the nature of the business. It doesn’t mean that is “better”, it just means some people won’t get as good a rate as they should, and those who deserve a higher rate will pay a lower one. Kind of like out tax system!
How is having occupation as an underwriting tool a “sinister practice”? I assume that they use that to avoid having to worry about doing an investigation to see if the insured is lying or not about business use. The two most common lies I get from my insureds are “I don’t have any tickets or accidents” and “I do not use my vehicle for any kind of business use”. When you insure people that are working the system and flat out lying, you are only hurting the other insured’s with that company so that the company can cover the money that they are losing on those fraudulant claims.
We all know its stealing but in order to look like the perfect loyal agent several seem to go Robot on us and sound just like the CEO! Thats not going to put you in the CEO’s seat. What will is going to bat for the people feeding you, Your Client’s! Credit Scoring is 100% BS!! it was designed as a way to get rid of us (agents) thought was with the Internet sites, credit scoring, ect. We can say adios to those damn agents once and for all BUT it did not work. Like Credit Scoring does NOT work. I have more info on this than you can shake a stick at, if your interested in FACTS not towing the Co Line Id be hapy to share it. It Happened to me, after being with a Diners Club a Citi Bank Company for 17 years plus. 209 Pymnts in Full, avg of $3,228.46
Late one time in year 4 of 17 plus years, that was an 18 day late payment, No excuses it had fallen through the cracks.
I received a letter that we were to send the cards back and were no longer allowed to charge. It said they had done a routine audit on us and if we wanted to know why to call this 800 number. I did and was told my wifes credit score had fallen to 635 and that was why they pulled the plug. I was both in disbelief and livid. I have 24 employees of which all have Diners club cards (at the time they legitimatly covered rental cars when you used the card to rent the car) Of the 24 I know for a fact 16 of them have been routinely late making payments and 9 of them I would not loan a dime to without full collateral. Not one of these lost their cards. When I explained we had been hit with Identity theft, sent Police reports, defendant reports as the ring was busted withing a month, Letter from the 2 Banks, ect. I was told “Were Sorry but its out of our control”
Then we got the letter from Nationwide raising our Home owners and Auto Policies which were already high with 2 kids aged 16 and 18 on the policies. I with One ticket was moved to a County Mutual! I wanted to puke. What did I earn from this, 1.The District Courts are so overrun with “Identity Theft” Cases the bigger counties, this happens to be Dallas County, Texas do not have the man power so they say If its not 7 Digits or more we cannot help you, they send people to the City Police Financial Crimes Unit. Go visit one of these offices, 3-4 officers, 100’s of 1,000’s of files literally stacked in 6′ stacks like a maize around the office. When I ask whats the likelyhood of recovering any of the money (183k)he laughed and pointed to the stacks. It was a drug ring paying 30% to the Pakistani Convinence Store to cash the checks they were making on my accounts. My case had 7 druggies cashing an avg of 12 checks/day at the store for an avg of 305.00 per check. If I didnt know the Criminal Justice Biz The Store owner would have never been prosecuted and deported. But did I open a Pandoras Box with these stores!! death threats ect.
I could go on and on but in the end we received a little more than 1/2 back from the bank. Do not think simply because you are only signer on the account and someone signed 1,000 checks as Bambi, Goofy, Donald Duck, ect that the bank is obligated to pay you back!! They will always pay 100% when its less than 5k, but over that and he bank has to decide will I make this amount off of this customer. 183k is a lot for a guy who does not borrow so the answer was obviously No. What happens is the bank will claim it with the processing co and the processing bank will pay or wont pay. If not your bank will say So sorry and call security when you get mad. They already know your going to get mad as hell when it hits you that They have lied to you, have done Nothing to help, do not care, ect. ASK a Banker!
But like Insurance agents, the Bankers that truly deal with the public (dieing breed) will tell you point blank The Banks profit more than anyone but yet Washington has continually let them off the hook. Tell me can you go get Bank and Bank Customer information in order to design a identity theft system NO!! They are the only ones who can do it and they will Not do it. The Millions of Middle class Americans hit with Identity theft are the ones getting hit with Higher costs on everything and have No options and No one will listen.
In reality, the woman going through the divorce is NOT whining and the butt kissing agent that simply says “the data says different” and then out of Ignorance I presume makes a comment about Fault.
Does the agent know if her parents are helping her, does she now have a rich boyfriend, does she have a trust, he doesnt know a damn thing except he must have gone through a tough divorce and hates women and the system says married good divorced bad!
If we agents would do what we are supposed to do we would Know all about her and her situation, would be able to call her up and ask questions and explain that BIG BROTHER says because she is divorcing she is now a credit risk. She will be your customer for life when you do this and help her through it. Sure you might miss out on 3 holes of golf but what are we 1st Ins Agents or Golfers.
Now that you saved her money, she tells everyone of her friends about you, you didnt try to get in her pants you just took care of her insurance needs during a tough time. You will build a 2nd Book off of that one client provided you just play golf on weekends or with new and old clients!
CREDIT SCORING MUST GOOO!! It is so Wrong
Do what GEICO does when you call for a free rate quote. Shake the magic 8 ball and the scoring system allows to just make up a rate to beat what they already have. This has been going on at GEICO for years.
Ever notice why you never get the same rate twice with them.
Using it to confirm the potential for business use? BULL****!!! I have absolutely no problem asking the occupation question – any insurer not asking is being an idiot in fact. You can check for business use based on occupation all you want.
They ask so they can charge more for a tea-totaling waitress at a diner trying to raise three children on a limited income who has not had a ticket or accident in 35 years than for an electrical engineer who would not even know what it feels like to drive sober.
Mike I think you’re right. Occupation IS NOT a predictor of loss. Unfortunately agents out there forget who pay the bills. It’s not the companies.
Let me be very clear. We as independent agents choose which companies we do business with. We could have squashed the credit scoring abuses from the beginning by refusing to represent carriers that adopted the practice. We didn’t. We could refuse to do business with companies that compete directly with us. We don’t. And when you’re selling just based on price, you’re devaluing our profession and making it a commodity. I hope you enjoy your future employment with GEICO.
The ignorance of some of you amazes me. You clearly have no real understanding of how rating models are developed. How can a rating factor be discriminatory if it has been statistically proven to be a valid predictor? Credit scoring is one of the best predictors we have. Without it, it will be more difficult to reward good risks with lower rates and vice-versa. Cut the “it’s not fair” crap. Everyone is born with a blank credit slate. I bet you’re all fans of the current administration’s wealth redistribution schemes.
I will reiterate what I stated in my original post; there is a correlation between loss costs and credit. I will also reiterate that I wish they had just asked me instead of doing studies since I would have been happy to tell them that for one hundredth the cost.
The reason using credit (and moreso occupation) represents unfair discrimination vs fair discrimination (such as driving distance and driving history) is that it pits rich against poor. Add to that my other original assertion: Such underwriting practices are acceptable for voluntary insurance products but MUST NOT BE USED for mandated insurance products such as personal auto.
When you combine an underwriting criterion that essentially defines a risk based on their financial stability with another criterion that says if you want to keep your car so you can keep your job, you have to buy this even though you barely can meet your rent obligations, it becomes evil. This is especially terrible considering there are other underwriting criteria which they could use but do not because they would avoid their target customers: rich people.
I restate my other conclusion: The carriers use these criteria to separate rich from poor.
(This is not rich-person bashing as I consider myself one.)
I do not know what company or companies you write for, but the companies I represent do not change the price based solely on occupation. If the risk is the same (Age, driving record, terr, vehicle symbol, ect) but one is a doctor and another is a cook at McDonalds, they are going to charge the same price if every other part of the rick is identical. I have not heard of any company charging more just due to occupation, I have only heard of companies not accepting a risk because of occupation and not wanting the higher potential for business use fraud. Now I am not saying that charging more for certin occupations is either right or wrong. I am not an acuary, so I do not know if there would be an acuarial benifit for charging more for certain occupations.
The owner of the agency I work for had an interesting observation. When he was young and broke, he had great credit, but now that he has lots of money and his credit is shot. I am young and broke, but my credit is excellent for my age, and I have been noticing this trend more and more amoung my clients. So that defeats your “Its rich against poor” ideal, doesn’t it? Yes, there are exceptions to the rule. Just because you have horrible credit, that does not mean you are irresponsible. Stuff happens in life. Divorce, unemployment, illness, but if you look at all the people that have horrible credit and pick out those who fit into those catagories, you are still going to have a LOT of people left, and tend to be the more irresposible ones, and the irresponsible ones are the higher risks for accidents.
This is what I forsee if they get rid of credit scoring, all the companies are going to do is jack up the rates for the people that have good credit. I do not forsee them lowering the rates for the people with bad credit like they hoped. What I have noticed with the carriers that I write. Really the only time that the non-credit scored companies are competitive, when they want just liability, no prior (yet another indicator on the reponsiblity of that perticular insured) and they tend not to keep the policy for the full term. Even with my clients that have bad credit, there are plenty of times that a credit scored company will win out the business vs a non-credit scored company. I say keep credit scoring legal for insurance companies so they can continue to benifit the ones that have good credit. Why penilize the ones that worked hard to keep their credit good just because there are people out there that have bad credit and are companing about it “Not being fair”?
Think about this, the only way to have and maintain good credit is to work very hard and keep it that way, whereas it doesn’t take much at all to have a credit score go to hell. So how I see it, credit scoring is an incentive and a perk of hard work on keeping and maintaining your credit.
Thank you for your comment. It is good to know not all are doing it. I wish I could state who specifically is doing it but I should not. (Not because I do not know who is doing it but I do not have hard examples handy at the moment.)
I came across this information at underwriting meetings and I confirmed it through my work with some local charities where I assisted persons with obtaining auto insurance proposals. I currently am an underwriter, not an agent or broker, and do not work in personal lines at all. Having said that, I have extensive experience in personal lines on the agency side and underwriting side, it just happens that I am not currently working in that capacity.
I can’t effectively respond to all your points in the brief space here although I appreciate the professionalism in your comments. Just keep in mind I already conceded there is correlation between credit background and loss cost. Where I disagree with you (and apparently almost everyone out there) is that credit history as an underwriting criterion is fair for legally mandated coverages.
You too bring up very valid points as well. Just because someone has bad credit doesn’t nessisarily mean they are irresponsble and are a higher risk then someone with good credit. you can have good credit but still be a horrible driver, or on the flip side, you could have horrible credit but a great driver. But I am assuming that there is a signifigant corrilation between good credit and less claims. If the numbers were negliable, I doubt they would sell out the money to do the credit scoring in the first place.
But its funny that people that are against credit scoring never mention that insruance comapanies charge men more then women on average, or charge younger drivers then older drivers. They tend not to complain about that. Your age is not something that you can control, but for the most part, you can control your credit rating. So charge people more on things that they can not control at all, but don’t charge them for something that they have some control over. Doesn’t make much sense to me.
I don’t know why, but whenever I hear someone saying that “its not fair that the base your rate on your credit score” to me, that seems like they are really saying “Its not fair that I am getting punished because I didn’t do what I said I was going to do.” Now I know that is not true, because, as i have mentioned, just because someone has bad credit doesnt mean they are at fault, but I want to go out on a limb and say that the majority of people with bad credit have such because of their own actions or inactions.
And I also have to say thank you for being civil as well. Name calling gets you nowhere in an argument. Its rare to find people in debates that are civil and are willing to concede points. There are very, very few arguments that are simple black and white, there are almost always shades of gray, and i do my best to see those shades of gray, and I am more then willing to concede a point or admit if I am completely wrong on a perticular subject.
Hey, you’re really oppressing deadbeats. Just because some people play by the rules doesn’t mean that they should be rewarded for such good behavior. (I’m being sarcastic, of course.)
Hey, how ’bout this. Start with really high rates and then reward with premium credits those with good credit scores? Would this appease the commie whinners blogging here today? This way, you wouldn’t have to debit (penalize by increasing the premium) the premium for those with bad credit scores. This seems fair to me. Or do you deadbeat whinners believe that no good deed should go unpunished and that all good deeds should go unrewarded?
BTW, occupation is a very good indicator of one’s driving record. Another BTW, attorneys, as a group, have a very poor driving record.
Hey, how do ya’ll like my newer, softer, gentler monikers?
Anyway, let the deadbeats eat cake.
The use of credit is not necessary in my opinion. I’ve spoken to actuaries on both sides of the argument. While credit can be a predictor, there are numerous other factors that correlate with that credit. Don’t jump on me for stating that, I’ve watched the numbers crunched and wrote my thesis on the practice.
Tickets, claims of all types, accidents of all types, and internal payment history are all indicators of future loss. Perhaps carriers should start to share their internal payment histories via a program like CLUE to help use this as a factor. Combine that with driver experience and location and you’ve got a pretty darn accurate picture of your risk.
I suspect that insureds ad regulators will have the same issues like “number of years an individual has been insured and employed”. I can hear the insured now: “you’re telling me I am being penalized because I found a better, more high-paying job and haven’t been there long enough”.
Credit may not or should not be the only underwriting variable used to calculate rates, but I’ll take an insured who has followed a prudent, responsible path with respect to their own financial responsibility than someone who has maxed out every credit card and then quits paying.
I don’t have an issue with “payment history” becoming a variable. Could be a good idea. Although it could be that people with numerous PIP claims pay their bills on time becuase of the “cash cow” they are milking.
I didn’t write my thesis on the use of credit however in my 17 years on the company side I have reviewed extensive data that indicates the correlation of losses (by all line items – PIP, UM, etc) and credit history. It’s not perfect but it probably works on the extreme ends of the credit curve. Additionally, some credit modeling (ex: removing bad debt from Medical bills) that varies from the straight FICO scores may work better.
I’m not anti-credit entirely, but you can trust me when I tell you that it’s not as clear cut as the industry would have you believe. Using credit as any more than about 10% of the rate is absolutely outrageous in my opinion. But you know as well as I do that there are many carriers who use credit almost entirely. Many of those carriers are screaming about PIP fraud as we speak. Guess their actuaries need to sharpen the pencils.
You’re probably right, credit on both extremes is a good indicator. Those who absolutely don’t care will file more claims (claims history and driving history will reflect this as well). Those who are meticulous about their credit will likely have fewer claims (claims history and driving history will also reflect this…see a trend?). It’s those folks in the middle who may have no credit or who may have been late a few times or may be over extended temporarily that I worry about.
Why doesn’t State Farm use credit scoring?
Independant agent…
I just got divorced in a community property state where my ex makes about 3 x more than I do. Because of the community property state, I ended up with about 50k in debt that I did not have when I got married. I pay my bills on time & always have until I moved here after marrying my ex and getting stuck with his credit. It did not matter that I did not use the credit cards – the law didnt care. I was forced to file bankruptcy to support my son & me on what I earn. I still pay my bills on time, just not the credit card bills. Sorry guys, I disagree with you because I am a good risk, I have never filed a claim for injury, have filed maybe 2 collision claims, 1 auto liability claim and 1 or 2 comp claims, no work comp claims, no property claims (and yes I have owned homes in the past), no GL claims in all of the 32 years I have been driving and my 48 years of life. I have been in the ins business since I was 20. There are circumstances that change the “look” of a risk. Credit is not necessary. FYI, I have a very good driving record as well.
It’s high time the insurance industry abandons credit scoring as a primary underwriting factor for personal lines of insurance. We all now know that economic circumstances for anyone can change in the blink of an eye through no fault of any person who loses their job or whose income is somehow reduced because of the economy.
Credit scoring should never have been used for that purpose and now that we’ve all experienced an unprecedented recession (depression for many unemployed) we know that losing a job, for example, has no direct bearing on anyone’s driving ability or whether someone is a good or bad driver.
The people at Fair Isaacson have never been held accountable to disclsoe how they designed the ‘black box’ that determines all our credit scores. Today if a bank arbitrarily elects to reduce my available credit on my equity line or my VISA credit card, it dings my socre because now any balance I have appears as utilizing a larger percentage of my avaialble line. We know banks have often unilaterally adjusted credit lines even when there was no delinquency or other change in the customer’s profile.
Insurers, as this actuary suggests, should get back to using measurable criteria that have a direct bearing on predicting the likelihood of increased claim frequency. Driving record, type of vehicle, miles driven, age of driver, claim history, for example, all would appear more relevant. How well I maintain my home or claim frequency all would appear to indicate if I’m a good prospect for homeonwer’s insurance.
Credit scoring always was discriminatory in a passive manner and now that this ‘discrimmination’ has spilled over to middle class people it becomes obvious that credit scoring always was a flawed basis for insurancce underwriting.
If credit score or insurance score (as other things go into insurance score beside credit) is not a good predictor of loss then let companies that believe that not use credit and those that want to use credit use it. It is a free market and companies shoul be able to use what they want within reason. Let the market decide who uses what. If credit scores are not an accurate predictor then companies that use them will stop as they will lose money. One thing is certain and the statistics back it up, credit scores are a very good tool in predicting future losses period.
I happen to write business in a state (Calif)that bans the use of credit scoring for any P/L business. Prior to the banning of credit scoring, carriers were all on the bandwagon of credit being a forecaster of future claims probability. Since the time credit scoring has been banned, rates have stayed stable and carriers in general are far more profitable without the scoring scenario and also generally more profitable than every other state that uses credit or a multi-tiered pricing mechanism. The fact that carriers make money here without resorting to credit scoring and a “take all comers” auto marketplace indicates that while scoring can have an impact, it is extremely minor in the overall picture.
Here’s the rub, we have financial responsibility laws to try to force the irresponsible people to buy auto insurance then we raise their rates because they are irresponsible, thereby reducing the probability that they will purchase insurance. In the four years I’ve paid $1,500 (deductibles) out for two accidents with uninsured drivers – Am I saving money on my auto insurance because of credit scoring? I think not.
State Farm uses internal data only after 2 years in FL. Raw new business places some emphasis on credit.
Some examples: I take $200,000 from savings to purchase an asset priced at $500,000. The loss of savings coupled with the new debt produces a lower score. We domn’t know if I will pay on time[uncertainty]. I have several claims caused by uninsured drivers and my score goes down. You get the drift. If I didn’t pay my bills you would have a reason for a lower score. What happens if your score misses a threshold by one point and you miss preferred and move down to a standard policy. This plus the score modification could take you down at the knees. Idea. More open facts about the score is developed so if I ask how can I impoprove my sore someone can specifically tell me. What happens at scoring for renewal that after the score but 60 days later a rescoring is higher. If the renewal went shoping the new quote has a built in advantage. Like the old days where an accident surcharge dropped off and the new company didn’t have to include same. More transparancy in the beginning would have probably avoilded all of this. We fear what we cannot see to understand.
Good points, SWFL. It’d be foolish to outright ban the use of credit scores, but they should be available for use by insurers. Assigning scores a weighted value and/or accounting for delinquent medical bills and looking at the details of job changes (e.g., higher pay, employer went BK or otherwise closed up shop, change of career, spouse transferred, to name a few) also s/b factored into the weighted value of the scores.
Of course, I’m an unlicensed and a non-certified counselor, but, still, my opinions and advise is worth something (not quite 2 cents)
Here is an opinion: While you may have a good driving record, your marriage record isn’t good, as you’re batting zero – oh for one.
Al Forst,
The fact that State Farm does not use credit scoring clearly illistrates that their business model WILL NOT work. They are bankrupt and don’t know it. Ask the rest of the industry, they will be glad to explain to State Farm that State Farm is simply wrong and the remainder of the industry is correct. Silly, silly, silly State Farm.
The bottom line is that credit scoring is used to enable insurers to avoid taking on people of limited financial means. For certain lines of business, this is fair. But for mandated lines such as personal auto, this is enormously unethical.
Regarding correlation between good credit history and loss costs, I could have told you that financially stable people make much better risks than the less fortunate members of our population for financial products of a all kinds.
Having said that, the real evil is with the insurers who use occupation as an underwriting tool. This has gotten a lot less push back from the public but is actually a far more sinister practice.
Simply put, good risks will pay more without it sure as it gets dark in the evening.
It’s what’s happening to America- no responsibility for anything anymore, no benefit for “playing by the rules” and “no penalty” no NOT playing by the rules.
Classic: “It’s not MY fault”.
Give me a break little children.
Adjustmetoo is a good risk? Didnt she mentioned the posibility of 5 claims, and poor credit? What was her point? I wonder what she would consider a bad risk?
Good post, Realist. Agree 100%.
There are so, so many things that could negatively effect your credit score that have absolutely NOTHING to do with character. Saying that is akin to saying that poor people are all of low character.
There are a lot of rich folks, i.e. great credit scores, who are of very, very poor character.
I have to agree with you: “Credit scoring always was discriminatory in a passive manner and now that this ‘discrimmination’ has spilled over to middle class people it becomes obvious that credit scoring always was a flawed basis for insurancce underwriting.”
Only when it starts to affect those society deems “important enough” is it now a raging issue again.
Mostly I’ve seen a number of peeps here today with a flippant attitude; supporting the use of credit…-or the so-called Insurance Score. It’s all bogus and it hurts the core of our books of business..the middle class.
How many of you are writing that yuppees’ “B’mer” ?
I thought so.
What the industry is doing in continuing the use of credit is exactly what Wall Street recently did to the American public …..truly ripping them off
Well, then let’s just ban anything that either hints at discrimination or is out of the insured’s control. Got to feel sorry for “adustmetoo”. She posted that she got a divorce (I am sure it wasn’t her fault) and her insurance will go up because she is now single. That doesn’t seem fair does it? Oh, the data on single females says differently? Well based on the majority of these posts we’re not going to use data (even if it has some validity), we’re just going to use what’s fair. What is fair?
I do have carries that don’t use credit, but their rates are always higher. Why is that?
Approximetly 40 years ago when I started in this business ( and everything then was agency billed) my boss said ” Watch the people who pay their premiums on time ; they are more likely not to have claims!” Wow was he correct I never forgot that peice of information.
Good post SWFL Agent. All that oppose credit scoring because of singular references (i.e. My credit score shot up because my wife maxed out my credit cards, etc.) forgot one primary reason carriers use LARGE numbers. Simple fact, when a consistent trend is noted, carriers rate accordingly. So when they discovered credit scoring showed trends, they picked up on them and used them. Those carriers who didn’t suddenly found themselves overpriced on good credit risks, OR they were getting all the remaining risks with more accidents and their LR increased.
Simple example – everyone agrees single youthful males (16-18)are one of the worst risks out there. Yet only 1/3 of them have accidents, NOT all of them. Two thirds are good risks and don’t have accidents. But no one balks at rating all of them higher than a 30 year old married male. Why – because we know the entire POOL of 16-18 single males will have more accidents. If we knew which single males had better risk characteristics, we would give discounts to them. But ya know, I was an honor grad with great grades heading to college yet I had an accident when I was 16. I sure didn’t fit the “profile” of a bad risk, but turns out I sure acted like I did by having an accident!!!
So for those who have a lower credit score for ANY reason, you are lumped into a POOL of people who have characteristics which indicate more accidents will occur. IF carriers knew the exact reason why your credit score was low AND knew that reason meant you shouldn’t be in that POOL, they would use that variable and change your rate.
I’ve seen the studies, been included in developing the models, been active in learning how they work – it isn’t thievery, it isn’t discrimination, it is just better rating.
Now if you remove credit scoring from everyone (i.e. CA) than companies will figure out a way to rate to make a profit, that’s the nature of the business. It doesn’t mean that is “better”, it just means some people won’t get as good a rate as they should, and those who deserve a higher rate will pay a lower one. Kind of like out tax system!
How is having occupation as an underwriting tool a “sinister practice”? I assume that they use that to avoid having to worry about doing an investigation to see if the insured is lying or not about business use. The two most common lies I get from my insureds are “I don’t have any tickets or accidents” and “I do not use my vehicle for any kind of business use”. When you insure people that are working the system and flat out lying, you are only hurting the other insured’s with that company so that the company can cover the money that they are losing on those fraudulant claims.
We all know its stealing but in order to look like the perfect loyal agent several seem to go Robot on us and sound just like the CEO! Thats not going to put you in the CEO’s seat. What will is going to bat for the people feeding you, Your Client’s! Credit Scoring is 100% BS!! it was designed as a way to get rid of us (agents) thought was with the Internet sites, credit scoring, ect. We can say adios to those damn agents once and for all BUT it did not work. Like Credit Scoring does NOT work. I have more info on this than you can shake a stick at, if your interested in FACTS not towing the Co Line Id be hapy to share it. It Happened to me, after being with a Diners Club a Citi Bank Company for 17 years plus. 209 Pymnts in Full, avg of $3,228.46
Late one time in year 4 of 17 plus years, that was an 18 day late payment, No excuses it had fallen through the cracks.
I received a letter that we were to send the cards back and were no longer allowed to charge. It said they had done a routine audit on us and if we wanted to know why to call this 800 number. I did and was told my wifes credit score had fallen to 635 and that was why they pulled the plug. I was both in disbelief and livid. I have 24 employees of which all have Diners club cards (at the time they legitimatly covered rental cars when you used the card to rent the car) Of the 24 I know for a fact 16 of them have been routinely late making payments and 9 of them I would not loan a dime to without full collateral. Not one of these lost their cards. When I explained we had been hit with Identity theft, sent Police reports, defendant reports as the ring was busted withing a month, Letter from the 2 Banks, ect. I was told “Were Sorry but its out of our control”
Then we got the letter from Nationwide raising our Home owners and Auto Policies which were already high with 2 kids aged 16 and 18 on the policies. I with One ticket was moved to a County Mutual! I wanted to puke. What did I earn from this, 1.The District Courts are so overrun with “Identity Theft” Cases the bigger counties, this happens to be Dallas County, Texas do not have the man power so they say If its not 7 Digits or more we cannot help you, they send people to the City Police Financial Crimes Unit. Go visit one of these offices, 3-4 officers, 100’s of 1,000’s of files literally stacked in 6′ stacks like a maize around the office. When I ask whats the likelyhood of recovering any of the money (183k)he laughed and pointed to the stacks. It was a drug ring paying 30% to the Pakistani Convinence Store to cash the checks they were making on my accounts. My case had 7 druggies cashing an avg of 12 checks/day at the store for an avg of 305.00 per check. If I didnt know the Criminal Justice Biz The Store owner would have never been prosecuted and deported. But did I open a Pandoras Box with these stores!! death threats ect.
I could go on and on but in the end we received a little more than 1/2 back from the bank. Do not think simply because you are only signer on the account and someone signed 1,000 checks as Bambi, Goofy, Donald Duck, ect that the bank is obligated to pay you back!! They will always pay 100% when its less than 5k, but over that and he bank has to decide will I make this amount off of this customer. 183k is a lot for a guy who does not borrow so the answer was obviously No. What happens is the bank will claim it with the processing co and the processing bank will pay or wont pay. If not your bank will say So sorry and call security when you get mad. They already know your going to get mad as hell when it hits you that They have lied to you, have done Nothing to help, do not care, ect. ASK a Banker!
But like Insurance agents, the Bankers that truly deal with the public (dieing breed) will tell you point blank The Banks profit more than anyone but yet Washington has continually let them off the hook. Tell me can you go get Bank and Bank Customer information in order to design a identity theft system NO!! They are the only ones who can do it and they will Not do it. The Millions of Middle class Americans hit with Identity theft are the ones getting hit with Higher costs on everything and have No options and No one will listen.
In reality, the woman going through the divorce is NOT whining and the butt kissing agent that simply says “the data says different” and then out of Ignorance I presume makes a comment about Fault.
Does the agent know if her parents are helping her, does she now have a rich boyfriend, does she have a trust, he doesnt know a damn thing except he must have gone through a tough divorce and hates women and the system says married good divorced bad!
If we agents would do what we are supposed to do we would Know all about her and her situation, would be able to call her up and ask questions and explain that BIG BROTHER says because she is divorcing she is now a credit risk. She will be your customer for life when you do this and help her through it. Sure you might miss out on 3 holes of golf but what are we 1st Ins Agents or Golfers.
Now that you saved her money, she tells everyone of her friends about you, you didnt try to get in her pants you just took care of her insurance needs during a tough time. You will build a 2nd Book off of that one client provided you just play golf on weekends or with new and old clients!
CREDIT SCORING MUST GOOO!! It is so Wrong
All drug addicts ate carrots as a child.
SO WHAT.
Do what GEICO does when you call for a free rate quote. Shake the magic 8 ball and the scoring system allows to just make up a rate to beat what they already have. This has been going on at GEICO for years.
Ever notice why you never get the same rate twice with them.
Using it to confirm the potential for business use? BULL****!!! I have absolutely no problem asking the occupation question – any insurer not asking is being an idiot in fact. You can check for business use based on occupation all you want.
They ask so they can charge more for a tea-totaling waitress at a diner trying to raise three children on a limited income who has not had a ticket or accident in 35 years than for an electrical engineer who would not even know what it feels like to drive sober.
Mike I think you’re right. Occupation IS NOT a predictor of loss. Unfortunately agents out there forget who pay the bills. It’s not the companies.
Let me be very clear. We as independent agents choose which companies we do business with. We could have squashed the credit scoring abuses from the beginning by refusing to represent carriers that adopted the practice. We didn’t. We could refuse to do business with companies that compete directly with us. We don’t. And when you’re selling just based on price, you’re devaluing our profession and making it a commodity. I hope you enjoy your future employment with GEICO.
The ignorance of some of you amazes me. You clearly have no real understanding of how rating models are developed. How can a rating factor be discriminatory if it has been statistically proven to be a valid predictor? Credit scoring is one of the best predictors we have. Without it, it will be more difficult to reward good risks with lower rates and vice-versa. Cut the “it’s not fair” crap. Everyone is born with a blank credit slate. I bet you’re all fans of the current administration’s wealth redistribution schemes.
Mr/Ms Statistics Believer:
I will reiterate what I stated in my original post; there is a correlation between loss costs and credit. I will also reiterate that I wish they had just asked me instead of doing studies since I would have been happy to tell them that for one hundredth the cost.
The reason using credit (and moreso occupation) represents unfair discrimination vs fair discrimination (such as driving distance and driving history) is that it pits rich against poor. Add to that my other original assertion: Such underwriting practices are acceptable for voluntary insurance products but MUST NOT BE USED for mandated insurance products such as personal auto.
When you combine an underwriting criterion that essentially defines a risk based on their financial stability with another criterion that says if you want to keep your car so you can keep your job, you have to buy this even though you barely can meet your rent obligations, it becomes evil. This is especially terrible considering there are other underwriting criteria which they could use but do not because they would avoid their target customers: rich people.
I restate my other conclusion: The carriers use these criteria to separate rich from poor.
(This is not rich-person bashing as I consider myself one.)
I do not know what company or companies you write for, but the companies I represent do not change the price based solely on occupation. If the risk is the same (Age, driving record, terr, vehicle symbol, ect) but one is a doctor and another is a cook at McDonalds, they are going to charge the same price if every other part of the rick is identical. I have not heard of any company charging more just due to occupation, I have only heard of companies not accepting a risk because of occupation and not wanting the higher potential for business use fraud. Now I am not saying that charging more for certin occupations is either right or wrong. I am not an acuary, so I do not know if there would be an acuarial benifit for charging more for certain occupations.
The owner of the agency I work for had an interesting observation. When he was young and broke, he had great credit, but now that he has lots of money and his credit is shot. I am young and broke, but my credit is excellent for my age, and I have been noticing this trend more and more amoung my clients. So that defeats your “Its rich against poor” ideal, doesn’t it? Yes, there are exceptions to the rule. Just because you have horrible credit, that does not mean you are irresponsible. Stuff happens in life. Divorce, unemployment, illness, but if you look at all the people that have horrible credit and pick out those who fit into those catagories, you are still going to have a LOT of people left, and tend to be the more irresposible ones, and the irresponsible ones are the higher risks for accidents.
This is what I forsee if they get rid of credit scoring, all the companies are going to do is jack up the rates for the people that have good credit. I do not forsee them lowering the rates for the people with bad credit like they hoped. What I have noticed with the carriers that I write. Really the only time that the non-credit scored companies are competitive, when they want just liability, no prior (yet another indicator on the reponsiblity of that perticular insured) and they tend not to keep the policy for the full term. Even with my clients that have bad credit, there are plenty of times that a credit scored company will win out the business vs a non-credit scored company. I say keep credit scoring legal for insurance companies so they can continue to benifit the ones that have good credit. Why penilize the ones that worked hard to keep their credit good just because there are people out there that have bad credit and are companing about it “Not being fair”?
Think about this, the only way to have and maintain good credit is to work very hard and keep it that way, whereas it doesn’t take much at all to have a credit score go to hell. So how I see it, credit scoring is an incentive and a perk of hard work on keeping and maintaining your credit.
Thank you for your comment. It is good to know not all are doing it. I wish I could state who specifically is doing it but I should not. (Not because I do not know who is doing it but I do not have hard examples handy at the moment.)
I came across this information at underwriting meetings and I confirmed it through my work with some local charities where I assisted persons with obtaining auto insurance proposals. I currently am an underwriter, not an agent or broker, and do not work in personal lines at all. Having said that, I have extensive experience in personal lines on the agency side and underwriting side, it just happens that I am not currently working in that capacity.
I can’t effectively respond to all your points in the brief space here although I appreciate the professionalism in your comments. Just keep in mind I already conceded there is correlation between credit background and loss cost. Where I disagree with you (and apparently almost everyone out there) is that credit history as an underwriting criterion is fair for legally mandated coverages.
You too bring up very valid points as well. Just because someone has bad credit doesn’t nessisarily mean they are irresponsble and are a higher risk then someone with good credit. you can have good credit but still be a horrible driver, or on the flip side, you could have horrible credit but a great driver. But I am assuming that there is a signifigant corrilation between good credit and less claims. If the numbers were negliable, I doubt they would sell out the money to do the credit scoring in the first place.
But its funny that people that are against credit scoring never mention that insruance comapanies charge men more then women on average, or charge younger drivers then older drivers. They tend not to complain about that. Your age is not something that you can control, but for the most part, you can control your credit rating. So charge people more on things that they can not control at all, but don’t charge them for something that they have some control over. Doesn’t make much sense to me.
I don’t know why, but whenever I hear someone saying that “its not fair that the base your rate on your credit score” to me, that seems like they are really saying “Its not fair that I am getting punished because I didn’t do what I said I was going to do.” Now I know that is not true, because, as i have mentioned, just because someone has bad credit doesnt mean they are at fault, but I want to go out on a limb and say that the majority of people with bad credit have such because of their own actions or inactions.
And I also have to say thank you for being civil as well. Name calling gets you nowhere in an argument. Its rare to find people in debates that are civil and are willing to concede points. There are very, very few arguments that are simple black and white, there are almost always shades of gray, and i do my best to see those shades of gray, and I am more then willing to concede a point or admit if I am completely wrong on a perticular subject.