Insurance Rates Based on Credit Scoring

Article Number 3
GetCoveredUSA.com
April 18 , 2007

Credit scoring in some form or another has been adopted and applied to most Auto and Home policies available today. Some exceptions exist by state, for example California specifically prohibits any kind of credit scoring model. Most other states however allow it but often have legislation pop up every year to either restrict or shoot it down. Insurance Carriers actively lobby legislators to keep systems in place because they feel that the Credit Scoring system helps calculate which types of potential insured’s are more likely to have a loss.

GetCoveredUSA.com Insurance Tip: Choicepoint insurance scores don’t hurt your credit rating. Choicepoint is an entity that supplies underwriting information for insurance products.  They are the primary source of consumer report credit data to carriers.  They will also be the source listed on when you look at your report for the inquiry.  Choicepoint provides a summary report of the contents and not specific details about items on an particular consumer report.  Its not an insurance companies’ concern to see that data and wouldn’t use it for anything anyhow.  So there is a little comfort in that nobody sees an actual full credit report.  Its more like the Cliff notes of the full report.  The inquiry itself will also be indicated as a “soft hit” meaning that it will not affect your FICO score and the inquiry will not show to any creditors it basically has the same effect on your credit report as looking at it yourself or applying for a job.

Independent research by the Bureau of Business Research (BBR) from the University of Texas at Austin at the request of 2002

Lieutenant Governor Bill Ratliff was conducted to find if there is a statistical connection between credit ratings and insurance losses.  Texas, like California has been one of the more active battlegrounds in the battle between States and Insurance Companies.  Farmers Insurance Group completely pulled out of the Texas Homeowners insurance market December 30, 2001 by no longer writing new business and non-renewing existing clients due to a $32 million mold claim suit lost and subsequent attempt to remove water losses and limit mold claims.  Its no surprise that the state further scrutinized the industry in the year Farmers pulled its home policies from the market and caused chaos. 

A research team from the BBR was gathered and they started gathering random samples of insured’s from the top ¾ insurance carriers by market volume and looked at automobile policies loss histories, premiums, and a few other pieces of data. Of the 175,433 policies that were looked at, over 22k of them had no credit hit due to lack of information when the policy was written.  The true sample for this study was on 153,149 individually matched and scored by credit policies.  These were broken down and grouped by credit score.

Results:

Overall Loss average: $695/per policy
The 10% lowest credit ranking averaged: $918/per policy
The 10% with best credit averaged: $558/per policy

These results indicate almost a 40% higher loss rate difference between the top tier and bottom tier credit rating groups and a 24% higher loss rate deviation from the baseline average.

Statistically speaking based on this study data suggests that as a persons credit score degrades, their claim frequency or claim magnitude increases. Data also indicated that the loss ratio of the top 10% best credit scored group had a .75 loss ratio and the lowest credit bracket was 1.53.  A 1.0 loss ratio is the amount expected by the company.  This number can be far more deceiving than actual loss numbers by dollar amount though because companies vary a great deal on expectations of loss per group.  That said, averaged in as a whole the bottom 10% of the credit scored individuals had a 53% higher than expected loss rate. Overall the study concludes that there is a significant correlation between credit and relative loss ratio in regards to automotive insurance policies

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