From Wikipedia, the free encyclopedia Insurance score
Insurance score
An insurance score - also called an insurance credit score
- is a numerical point system based on select credit re-
Support and opposition
port characteristics. There is no direct relationship to fi- The use of credit information in insurance pricing and
nancial credit scores used in lending decisions, as insur- underwriting is heavily disputed. Proponents of insuran-
ance scores are not intended to measure creditworthi- ce credit scoring include insurance companies, the Amer-
ness but rather to predict risk. Insurance companies use ican Academy of Actuaries (AAA),[1] the Insurance In-
insurance scores in underwriting decisions and to par- formation Institute (III),[2] and credit bureaus such as
tially determine charges for premiums. Insurance scores Fair Isaac[3][4] and TransUnion.[5] Active opponents in-
are applied in personal lines, namely homeowners and clude many state insurance departments and regulators,
private passenger automobile insurance, and not typical- and consumer protection organizations such as the Cen-
ly elsewhere. ter for Economic Justice,[6] the Consumer Federation of
America,[7] the National Consumer Law Center [8] and
Texas Watch.[9] As a result of successful lobbying by the
Background insurance industry, credit scoring is legal in nearly all
Insurance scoring models are built from selections of states. The state of Hawaii has banned all use of credit in-
credit report characteristics, combined with insurance formation in personal automobile underwriting and rat-
claims and profitability data, to produce numerical for- ing and other states have established restrictions.[10] A
mulas or algorithms. A scoring model may be unique to number of states have also made unsuccessful attempts
the insurance company and each line of business (e.g. to ban or restrict the practice. The National Association
homeowners or automobile), including the characteris- of Insurance Commissioners has acknowledged that a
tics selected for consideration and the magnitude of the correlation does exist between insurance scores and loss-
point assignments. As insurance credit scores are not in- es, but asserts that the use of credit reports as beneficial
tended to measure creditworthiness, they commonly fo- to consumers has not yet been established.[11]
cus on financial habits and choices (i.e. - age of oldest ac-
count, number of inquiries in 24 months, ratio of total
balance to total limits, number of open retail credit cards,
Public information
number of revolving accounts with balances greater than Insurance credit scoring models are considered propri-
75% of limits, etc.) As such, it is possible for a consumer etary and trade secret, in most cases. The designers
with a high financial credit score and excellent payment would like to protect their models from view for a num-
history to receive a poor insurance score. Insurers con- ber of reasons, for example, they may provide competi-
sider credit report information in their underwriting and tive advantage in the insurance marketplace, or they an-
pricing decisions as a predictor of profitability and risk ticipate consumers might alter results if the computa-
of loss. Various studies have found a strong relationship tions were common knowledge. As such, there is little
between credit-based insurance scores and profitability public information available about the inner workings of
or risk of loss. The scores are generally most predictive insurance credit scoring models.
when little or no other information exists, such as in the ° One actuarial study has been published, The Impact
case of clear driving records or claims-free policies; in in- of Personal Credit History on Loss Performance in Per-
stances where past claims, points, or other similar infor- sonal Lines, by James Monaghan, ACAS MAAA.[12]
mation exists on record, the personal histories will typ- ° Allstate has made public a private passenger au-
ically be more predictive than the scores. Insurers con- tomobile credit scoring model, the ISM7 (NI) Scorecard
sider credit report information, along with other factors, (where "NI" indicates no inquiries are considered). [13]
such as driving experience, previous claims and vehicle
age, to develop a picture of a consumer’s risk profile and
to establish premium charges. The correlation between
Key reports and studies
credit-based insurance scores and overall insurance prof- Credit-Based Insurance Scores: Impacts on Consumers of
itability and loss experience has not been disputed. Automobile Insurance, A Report to Congress by the Fed-
eral Trade Commission [14] This study found that insur-
Commission.
ance credit scores are effective predictors of risk. It also
showed that African-Americans and Hispanics are sub-
stantially overrepresented in the lowest credit scores,
1
From Wikipedia, the free encyclopedia Insurance score
and substantially underrepresented in the highest, while levels. The study found a strong relationship between
Caucasians and Asians are more evenly spread across the credit scores and claims experience on an aggregate ba-
scores. The credit scores were also found to predict risk sis. In 2002, the Texas Department of Insurance received
within each of the ethnic groups, leading the Federal a peak of 600 complaints related to credit scoring, which
Trade Commission (FTC) to conclude that the scoring declined and leveled to 300 per year.
models are not solely proxies for redlining. The FTC in- Alaska,
Insurance Credit Scoring in Alaska State of Alaska,
dicated little data was available to evaluate benefit of in- Department of Community and Economic Development,
surance scores to consumers. The report was disputed Division of Insurance.[20] The study suggested unequal
by representatives of the Consumer Federation of Amer- effects on consumers of varying income and ethnic back-
ica, the National Fair Housing Alliance, the National Con- grounds. Specifically, the higher income neighborhoods
sumer Law Center, and the Center for Economic Justice, and those with a higher proportion of Caucasians were
for relying on data provided by the insurance industry the least impacted by credit scoring. Although data avail-
not open to examination. [15] able for the study was limited, the state of Alaska deter-
The Impact of Personal Credit History on Loss Per- mined that some restrictions on credit scoring would be
Lines,
formance in Personal Lines by James Monaghan ACAS appropriate to protect the public.
MAAA.[12] This actuarial study matched 170,000 policy
records with credit report information to show the cor-
relation between historical loss ratios and various credit
References
report characteristics. [1] ^ The Use of Credit History for Personal Lines of
The Use of Credit History for Personal Lines of In- Insurance, American Academy of Actuaries
surance: Report to the National Association of Insurance [2] Insurance Information Institute, Topic: Credit
Commissioners American Academy of Actuaries Risk
Commissioners, Scoring
Classification Subcommittee of the Property/Casualty [3] Fair Isaac (For Consumers)
Products, Pricing and Market Committee.[1] [4] Fair Isaac, FICO Insurance Risk Scores (For
Insurers’ Use of Credit Scoring for Homeowners In- Insurers)
surance in Ohio: A Report to the Ohio Civil Rights Com- [5] TransUnion
mission,
mission from Birny Birnbaum, Center for Economic Jus- [6] Center for Economic Justice, Topic: Insurance
tice.[16] Birny Birnbaum, Consulting Economist, argues Credit Scoring
that insurance credit scoring is inherently unfair to con- [7] Robert Hunter, Director of Insurance, Consumer
sumers and violates basic risk classification principles. Federation of America, Insurance Journal (February
Insurance Credit Scoring: An Unfair Practice Center
Practice, 2010)
for Economic Justice.[17] This report argues that insur- [8] Credit Scoring and Insurance: Costing Consumers
ance scoring: is inherently unfair; has a disproportionate Billions and Perpetuating the Economic Racial
impact on consumers in poor and minority communities; Divide, The National Consumer Law Center (June
penalizes consumers for rational behavior and sound fi- 2007)
nancial management practices; penalizes consumers for [9] Ban Texas Insurance Scoring, Texas Watch
lenders’ business decisions unrelated to payment history; [10] State Laws Governing Insurance Scoring Practices,
is an arbitrary practice; and undermines the basic insur- National Association of Mutual Insurance
ance mechanism and public policy goals for insurance. Companies
The Use of Credit Scoring in Automobile and Home- [11] National Association of Insurance Commissioners,
owners Insurance, A Report to the Governor, the Legis- Topic: Credit Scoring
Michigan,
lature and the People of Michigan by Frank M. Fitzger- [12] ^ The Impact of Personal Credit History on Loss
ald, Commissioner, Office of Financial and Insurance Ser- Performance in Personal Lines, by James
vices.[18] This report reviewed the viewpoint of the in- Monaghan ACAS MAAA
dustry, agents, consumers, and other interested parties. [13] ISM7 (NI) Scorecard, Allstate Property & Casualty
In conclusion, insurance credit scoring was found to be Company
within the scope of Michigan law. [14] Credit-Based Insurance Scores: Impacts on
Use of Credit Information by Insurers in Texas, Re- Consumers of Automobile Insurance, Federal Trade
port to the 79th Legislature Texas Department of In-
Legislature, Commission (July 2007)
surance.[19] This study found a consistent pattern of dif- [15] Consumers Dispute FTC Report on Insurance Credit
ferences in credit scores among different racial/ethnic Scoring, www.consumeraffairs.com (July 2007)
groups. Whites and Asians were found to have better [16] Insurers’ Use of Credit Scoring for Homeowners
scores than Blacks and Hispanics. Differences in income Insurance in Ohio, Birny Birnbaum, Center for
levels were not as pronounced as for racial/ethnic Economic Justice (January 2003)
groups, but average credit scores at upper income levels [17] Insurance Credit Scoring: An Unfair Practice,
were better than those at lower and moderate income Center for Economic Justice (January 2005)
2
From Wikipedia, the free encyclopedia Insurance score
[18] The Use of Credit Scoring in Automobile and
Homeowners Insurance, Frank M. Fitzgerald,
External links
Commissioner, Office of Financial and Insurance • The Truth Behind Insurance Scoring,
Services, Michigan (December 2002) www.InsuranceScored.com
[19] Use of Credit Information by Insurers in Texas, • Insurance firms blasted for credit score rules, by
Texas Department of Insurance (December 2004) Herb Weisbaum, Con$umerMan on MSNBC (January
[20] Insurance Credit Scoring in Alaska, State of Alaska, 2010)
Division of Insurance (February 2003) • Washington Commissioner Criticizes Insurers’ Credit
Score Use, Insurance Journal (July 2010)
• Caution! The Secret Score Behind Your Auto
Sources Insurance, Consumer Reports (August 2006)
• Insurance Information Institute Credit Insurance
Fact Sheets
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Categories:
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