Use of Credit Scores in Insurance on the Rise

Insurers are increasingly using credit-based insurance scores for rate determination and underwriting although there is no single model for the application of the data, a situation which critics say penalizes low-risk policy holders with credit problems.

The insurance industry maintains, however, that a person’s credit history can be used as a predictor of their likelihood of one day filing a claim that will cost the insurer money.

Loretta L. Worters, president of the industry group the Insurance Information Institute was quoted in a story for Fox News. “Insurers use credit-based insurance scores in a variety of ways. Some companies use it for rate making, some for underwriting, others do not use it at all.”

“Insurance scores are designed to predict insurance losses; credit scores predict the likelihood of delinquency or nonpaying of credit obligations,” said Worters. “While some of the same factors or characteristics are used to develop a credit-based insurance score, not all of the credit information is used.”

According to FICO, the leading credit model, approximately 95 percent of auto insurance policies are awarded on credit-based insurance scores, with some 90 percent of homeowners policies granted on the same basis.

Worters estimated that more than 100 factors are used to determine a credit score, with only 20 to 30 used to calculate a credit-based insurance score. Certain types of personal information may not be used, including income, race, age, address, marital status and nationality.

Credit scores have actually held steady during the recession, and in some cases improved, as consumers have concentrated on paying bills in a timely fashion, resolving debt, and avoiding risky spending. This behavior may prove to have an added benefit since the hard truth is that a missed credit card payment could well increase your insurance premiums as well as saddle you with a finance charge.