November 16th, 2010
The Truth Behind Insurance Scores: Do They Really Work?
The next time you shop for insurance, you may be new to the fact that credit history—from credit score to debt ratio to past delinquencies—is on hand for most insurers to use to determine how much you will pay. In our last post on auto insurance scores, we discussed what exactly an insurance score is; this week, we’re breaking down the logic and truth behind it.
Here’s the simplified process that connects your credit background to your insurance: your credit background is examined, your predicted risk is calculated based on your credit, you’re placed in an insurance score bracket accordingly, and your insurance score will help price your premiums.
The biggest question in most consumers’ minds is whether or not credit-based scoring actually helps to predict and evaluate insurance risk, and if their premiums are being priced fairly. So, do insurance scores really work?
The Argument for Insurance Scores
In 2007, the FTC issued a report on credit-based auto insurance scores that gives insight into why insurers insist there is a correlation between credit history and insurance risk.
The report analyzed data from several insurance companies that included the credit history and history of claims of insured consumers. According to their insurance score, consumers were placed into different insurance score brackets, and each bracket was analyzed for average number of claims, size of claims, and total amount paid for claims.
Check out the graph below. The key takeaway here is that there is a correlation between credit-based insurance scores to number of claims: as insurance scores increase, the risk of loss in number of claims and claim size consistently decreases, and vice versa.
In another example, the FTC reports that insurers paid out nearly twice as much on property damage liability policies of customers with the lowest insurance score as customers with the highest insurance score. According to these numbers, credit-based insurance scores actually predict an individual’s claims as well as how much the insurer will pay in claims.
Conclusion #1: Insurance scores DO work
Insurers aren’t looking at your credit history to determine the likelihood that you’ll pay your premiums on-time; they are interested in how much you will cost to insure. If you have a high insurance score, your expected losses are lower and thus insurers can reduce your premiums; if you have a low insurance score, you have a higher expected loss so insurers adjust your premiums higher accordingly.
Insurers argue for the use of insurance scores because these studies show there is a consistent correlation of credit history (as represented by insurance scores) to potential claims. And since there is a statistical explanation, insurers will continue to price premiums accordingly. Ultimately, it helps to minimize expected losses from risky consumers and maximize appealing premiums to low-risk consumers.
Conclusion #2: Insurance scores DON’T predict responsibility
A common conclusion drawn about insurance scores is that insurers perceive consumers with good credit history to be generally more responsible and stable. They are less likely to file fewer insurance claims and cost insurers less money. However, insurance scores do not claim to predict overall responsibility or creditworthiness—again, that isn’t what insurers are looking for here. Insurance scores predict expected claims and losses, which is a significant factor when determining premiums.
So, what do you think, is it fair for insurers to determine your insurance premiums according to credit-based insurance scores?
Join us on next week’s post as we discuss whether or not insurance scores are a fair practice, and what consumers can do about it.
There isn’t anything i can do about my bad credit, and my bad credit has not adversely affected my claim history (had a minor collision claim 20 years ago before my credit went bad; none since), so I don’t see how my insurance score predicts my insurance risk.
My credit tanked almost ten years ago when a long hospitalization and illness without income brought my $6/hr income to zero and left me unable to make payments.
All my open accounts were closed and charged off, and these debts are sold and resold and re-aged, keeping my credit score in the tank. (I have not used any credit in more than eight years.)
I live on a poverty level income so I can’t just pay off the old debt.
I’m so confused.
My cerdit score has been holding steady. But, my aut risk score has decresed from 851 tp 814 (poor). No deragaotry information has been added to my credit reports for years. Mt Transrisks is 734 and my Vantage is 728.
MY CK grade is C
B – credit using
A – payment history
B -account mix
B -acount age
B – derogatory remarks
D – inquires.
My credit score on Credit.com is A.
My debt to income ratio is 1%
Where is the logic?
HOGWASH!!!! I have not had an at-fault accident in 8 years; I also have not had a ticket or accident of any kind in 6 years. Credit has absolutely NOTHING to do with driving history.
You’re right! This insurance score is completely independent of your driving history. This blog post explains more about why these scores are sometimes used to help set rates.
How ridiculous is this. If you don’t charge your ass off they consider you a risk. Insurance scores are NOT a FAIR practice !
I want to know what we consumers can do about this.
If we do not try to defend ourselves the insurance companies will keep up their usual practice of gouging us with high premiums on a regular basis……but try to make a claim and see how unfair they are with their pay out. This is just another form of big business screwing the consumer!
Basically, it is another tool in use-since you it’s mandated for you to have auto insurance- to jack your premiums-and you have no choice but to pay the premiums and they know it. These companies and those like them want the consumer to assume ALL risk. The University of Texas study so often cited for supporting the credit based insurance premiums has been disputed on methodology and how it’s conclusions were made.
Believe it or not people, auto insurance scores can alter your yearly premium up to 50% in cost…… YES..FIFTY PERCENT….
My relative has been an agent for 27 years. She told me someone who has a low auto insurance score and pays lets say $1500.00/year for two vehicles, would be paying 680-740.00/year for the exact same policy if they were at the highest auto insurance score rating…..
I think it is ridiculous that one can be discriminated against by our own government to have the ability to place these sort of restrictions into place. Why don’t they charge the individuals that file consistent claims a higher rate? What is the point of keeping a good driving history if it is not being used to determine one’s insurability. The same goes for house insurance. My policy has increased almost $500.00 and the reasoning given is because of all the fires in the state. So once again I am paying for another individuals claim status….This is wrong!
This is ridiculous. My credit is perfect, excellent, nothing wrong, no claims, no accident, no tickets, just nothing and my auto insurance score is poor – 817. They just taking money from us.
My question is how long it takes to improve the record. I have a couple accidents that will be off my driving record in the next year, but the credit rating is an F. All of my other scores are C or higher. What does it take to improve the score?