A report issued by the Federal Trade Commission (FTC) says that credit scores are an “effective predictor” of risk when underwriting auto insurance. The study titled, Credit-Based Insurance Scores: Impact on Consumers of Automobile Insurance, confirms what industry professionals have always believed, that credit-based insurance scores provide an objective and reliable tool for determining which drivers present a greater risk and should therefore pay higher rates.
Insurance companies have always tried to correlate premium rates as closely as possible to the actual cost of claims. This practice helps insurers stay competitive and keeps them from hemorrhaging money. The majority of consumers also benefit from this correlation because they are not subsidizing people more likely to file claims than themselves.
Credit information has been used for a number of years to help underwriters decide whether or not to accept insurance applications. Developments in information technology have led to the creation of insurance scores, number rankings based on a person’s credit history, which give insurers a far more accurate way to assess the risk of future claims.
Statistically, people with a poor credit history are more likely to file claims. Insurance scores are used to help underwriters differentiate between lower and higher insurance risks, which enables them to charge a premium appropriate for the level of risk assumed.
However, some in the insurance industry oppose this technique because they feel credit scores don’t always present an accurate picture of a person’s credit history. Credit scores don’t reflect the good payment records of consumers who pay their bills in cash. Credit scores may also provide an incorrect image of consumers who normally have good credit, but have been negatively impacted by one-time unexpected events, such as medical emergencies.
Despite these instances, the FTC report says the use of credit-based insurance scores provides benefits for consumers.Evaluating credit scores allows insurance companies to calculate risk with greater accuracy. This enhanced capability may make them more willing to offer insurance to higher-risk consumers for whom they would otherwise not be able to determine an appropriate premium.Using credit scores also may make the process of granting and pricing insurance quicker and cheaper, cost savings that can be passed on to consumers.