The insurance value - also called insurance credit score - is a numerical point system based on the characteristics of the selected credit report. There is no direct correlation with the credit score used in loan lending decisions, since insurance scores are not intended to measure creditworthiness, but rather to predict risk. Insurance companies use insurance scores for underwriting decisions, and to determine a portion of fees for premiums. Insurance scores are applied in personal product lines, ie homeowners and private passenger car insurance, and usually not elsewhere.
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The insurance scoring model builds on the choice of credit reporting factors, combined with insurance claims and profitability data, to produce numerical formulas or algorithms. Assessment models may be unique to insurance companies and to every business line (eg homeowners or cars), in terms of factors chosen for consideration and weighting of assignment points. Since insurance credit scores are not intended to measure creditworthiness, they typically focus on customs and financial choices (i.e., oldest account age, number of inquiries within 24 months, total balance to total limit ratio, number of open retail credit cards, number of rolling accounts with balance more than 75% of the limit, etc.) Therefore, it is possible for consumers with high financial credit scores, and excellent payment history, to receive poor insurance scores. Insurers consider credit report information in their underwriting decisions and pricing as predictors of profitability and risk of loss.
Various studies have found a strong relationship between credit-based insurance scores and profitability or risk of loss. Scores are generally most predictive when little or no other information, such as in the case of clean driving records, or a claim-free policy; in cases where claims, points, or other similar information are on record, personal history will usually be more predictive than the score. Insurers consider credit report information, along with other factors, such as driving experience, previous claims and vehicle age, to develop a consumer risk profile picture and set premium rates. Correlations, between credit-based insurance scores and overall profitability and insurance losses, have not been debated.
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Support and conflict
The use of credit information in pricing and underwriting insurance is highly contested. Supporters of insurance credit scoring include insurance companies, American Academy of Actuaries (AAA), Insurance Information Institutions (III), and credit bureaus such as Fair Isaac and TransUnion. Active opponents include many state insurance departments and regulators, and consumer protection organizations such as the Center for Economic Justice, the American Consumer Federation, the National Consumer Law Center, and Texas Watch. As a result of successful lobbying by the insurance industry, credit ratings are legal in almost all states. The state of Hawaii has banned all use of credit information in underwriting and private car assessments, and other countries have set limits. A number of countries have also made unsuccessful attempts to ban or limit the practice. The Association of National Insurance Associations has acknowledged that there is a correlation between insurance scores and losses, but confirms that the benefits of credit reports to consumers have not been established.
Public information
An insurance credit rating model is considered ownership, and trade secrets, in most cases. Designers want to protect their models from view for a number of reasons: they can provide a competitive advantage in the insurance market, or they anticipate consumers might try to change the results, by changing the information they provide, if the calculation is general knowledge. So there is little public information available about the details of the credit insurance rating model.
- One actuarial study has been published, Impact History of Personal Loans on Performance Losses in Personal Lines , by James Monaghan, ACAS MAAA.
- Allstate has published a personal passenger car loan rating model, ISM7 (NI) Scorecard (where "NI" indicates no questions are considered).
Main reports and studies
Credit Insurance Score: Impact on Consumer Car Insurance, Reports to Congress by the Federal Trade Commission . The study found that insurance credit scores were an effective risk predictor. It also shows that African-Americans and Hispanics are substantially the lowest credit ratings, and are substantially under-represented at the highest level, while Caucasians and Asians are more evenly spread across scores. Credit scores were also found to predict risk within each ethnic group, leading the Federal Trade Commission (FTC) to conclude that the assessment model is not merely a proxy for redlining. The FTC states that little data is available to evaluate the benefits of insurance scores to consumers. The report was disputed by representatives of the American Consumer Federation, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice, relying on data provided by the insurance industry, which is not open to examination.
The Impact of Personal Credit History on Performance Losses in Personal Lines , by James Monaghan ACAS MAAA. This actuarial study matches 170,000 policy records with credit report information to show the correlation between the historical loss ratio and various elements of the credit report.
Use of Credit History for Private Insurance Path: Report to Association of National Insurance Associations , Academy of Actuarial Academy Subcommittee on Risk Classification of Property/Victim Product, Price and Market Committee.
Credit Life Insurance Usage for Homeowner Insurance in Ohio: Report to Ohio Civil Rights Commission, from Birny Birnbaum, Center for Economic Justice. Birny Birnbaum, Consultant Economist, argues that insurance credit ratings are inherently unfair to consumers and violate basic risk classification principles.
Credit Rating Insurance: Unfair Practices , Economic Justice Center. The report argues that insurance assessment: basically unfair; have a disproportionate impact on consumers in poor and minority communities; punishing consumers for rational behavior and sound financial management practices; punishing consumers for business decision of lender unrelated to payment history; is an arbitrary practice; and undermine basic insurance mechanisms and public policy objectives for insurance.
Use of Credit Scoring in Car Insurance and Home Owners, Reports to Governors, Legislatures and the Michigan Society , by Frank M. Fitzgerald, Commissioner, Office of Financial and Insurance Services. This report reviews the viewpoints of industry, agents, consumers, and other interested parties. In conclusion, insurance credit ratings are found to be within the scope of Michigan law.
Use of Credit Information by Insurers in Texas, Report to Legislative 79th , Texas Department of Insurance. The study found a consistent pattern of different credit scores among different racial/ethnic groups. Whites and Asians are found to have better scores than blacks and Hispanics. Differences in income levels are not as pronounced as for racial/ethnic groups, but average credit scores at higher income levels are better than low and medium income levels. This study finds a strong relationship between credit score and claims experience in aggregate. In 2002, the Texas Department of Insurance received a peak of 600 complaints related to credit ratings, which declined and leveled to 300 per year.
Credit Scoring Insurance in Alaska , Alaska State, Department of Community and Economic Development, Insurance Division. This study suggests unequal effects on consumers of various incomes and ethnic backgrounds. In particular, higher-income environments and those with a higher proportion of Caucasians are least affected by credit scoring. Although the data available for this study is limited, Alaska states that some restrictions on credit ratings will be appropriate to protect the public.
References
Source
- Insurance Information Institute Credit Insurance Fact Sheet
External links
- The Truth Behind Scoring, www.InsuranceScored.com
- Insurance companies are let down due to credit score rules, by Herb Weisbaum, Con $ umerMan at MSNBC (January 2010)
- Washington Commissioner Criticizes Insurance Score by Insurers, Journal of Insurance (July 2010)
- Caution! The Secret Score Behind Your Car Insurance, Consumer Reports (August 2006)
Source of the article : Wikipedia
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