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How Credit Scores affect Car Insurance Rates and
even result in Denial of Coverage
www.rebuildcreditscores.com
even result in Denial of Coverage
www.rebuildcreditscores.com
Many of them rely heavily upon credit scores as a predictor of risk.
Insurance companies believe the better someone’s credit rating the least
likely an insurance claim will be made and the more likelihood insurance
premiums will be paid.
Problems with Insurance Industry and Credit Scoring
Decisions based on insurance scores
An insurance company can approve or deny you auto insurance based
on your insurance score, even if you have a spotless driving record and
never had an at-fault car accident. They can also raise your premiums
based on their credit scoring model. The scores have become more
important than your driving record in determining your premiums.
Why are insurance companies viewing credit histories
When an insurance company pulls your credit they are looking for
predictor items associated with credit management patterns. These
patterns supposedly correlate insurance risk. The predictors are
outstanding debt, how long you have utilized credit, late payments, public
records such as bankruptcy, collection items and new credit applications.
Emphasis is put on credit activities occurring in the last 12 months. Their
belief is that insurance scores predict the average claim behavior of a
group of people with essentially the same credit history. A consumer with
a good score, typically 760 and above, is least likely to file an insurance
claim. While consumers with a bad score, typically 600 and below, tend to
file more claims.
A standard scoring model does not exist
Some insurance companies use a scoring model created by ChoicePoint
and Fair Isaac Corporation, the company that invented credit scoring.
Other insurance companies have designed their own scoring models. A
standard scoring model does not exist. Each insurance company uses
different models and weighs different data in a consumer’s credit report.
Credit reports contain errors
According to a study by PIRG (Public Interest Research Group), as many
as 79% of credit reports contain errors and 29% of those errors are
serious enough to result in a denial of credit. The credit data from which
the scores are derived have a reputation for being inaccurate, erroneous
and out of date. While the information used in insurance scoring models
does not include personal data such as a race, religion, gender, marital
status, age, nationality, handicap, address or income; several studies
have shown that insurance scoring adversely affects African Americans,
Hispanics, and low-income consumers.
Steven Parton, general counsel for the Florida Office of Insurance
Regulation, says, “What they’re really looking to see with insurance
scores is who is most likely to file a claim, not who will most likely have an
accident. If I have the money, I won’t file a claim, because my rates will go
up. People of low economic status don’t have that luxury.” Parton adds,
“Insurance companies are looking at whether they’re relying on their
insurance in case they have an accident, which is what they’re buying
insurance for to begin with.” (ConsumerReports.org)
A consumer must be informed if credit data is used
Insurance companies must disclose to consumers they are using credit
information in the underwriting process and to determine rates. If a
consumer’s credit score is the determinant in rejecting an application for
insurance or another adverse decision, the consumer must be notified. In
accordance with the Fair and Accurate Credit Transactions Act of 2003
(FACT), a copy of the consumer’s credit report must be made available
to the consumer free of charge.
Studies by ConsumerReports.org (August 2006)
Studies done by ConsumerReports.org found “erratic results” when
credit scoring models were used by insurance companies.
But some state regulators still have doubts. “You can’t say this is the best
predictor we have, but at the same time we all do it completely
differently,” says Joel Ario, the insurance administrator of Oregon. “Either
there’s a core to this or it’s a farce.””
Insurance companies believe the better someone’s credit rating the least
likely an insurance claim will be made and the more likelihood insurance
premiums will be paid.
Problems with Insurance Industry and Credit Scoring
Decisions based on insurance scores
An insurance company can approve or deny you auto insurance based
on your insurance score, even if you have a spotless driving record and
never had an at-fault car accident. They can also raise your premiums
based on their credit scoring model. The scores have become more
important than your driving record in determining your premiums.
Why are insurance companies viewing credit histories
When an insurance company pulls your credit they are looking for
predictor items associated with credit management patterns. These
patterns supposedly correlate insurance risk. The predictors are
outstanding debt, how long you have utilized credit, late payments, public
records such as bankruptcy, collection items and new credit applications.
Emphasis is put on credit activities occurring in the last 12 months. Their
belief is that insurance scores predict the average claim behavior of a
group of people with essentially the same credit history. A consumer with
a good score, typically 760 and above, is least likely to file an insurance
claim. While consumers with a bad score, typically 600 and below, tend to
file more claims.
A standard scoring model does not exist
Some insurance companies use a scoring model created by ChoicePoint
and Fair Isaac Corporation, the company that invented credit scoring.
Other insurance companies have designed their own scoring models. A
standard scoring model does not exist. Each insurance company uses
different models and weighs different data in a consumer’s credit report.
Credit reports contain errors
According to a study by PIRG (Public Interest Research Group), as many
as 79% of credit reports contain errors and 29% of those errors are
serious enough to result in a denial of credit. The credit data from which
the scores are derived have a reputation for being inaccurate, erroneous
and out of date. While the information used in insurance scoring models
does not include personal data such as a race, religion, gender, marital
status, age, nationality, handicap, address or income; several studies
have shown that insurance scoring adversely affects African Americans,
Hispanics, and low-income consumers.
Steven Parton, general counsel for the Florida Office of Insurance
Regulation, says, “What they’re really looking to see with insurance
scores is who is most likely to file a claim, not who will most likely have an
accident. If I have the money, I won’t file a claim, because my rates will go
up. People of low economic status don’t have that luxury.” Parton adds,
“Insurance companies are looking at whether they’re relying on their
insurance in case they have an accident, which is what they’re buying
insurance for to begin with.” (ConsumerReports.org)
A consumer must be informed if credit data is used
Insurance companies must disclose to consumers they are using credit
information in the underwriting process and to determine rates. If a
consumer’s credit score is the determinant in rejecting an application for
insurance or another adverse decision, the consumer must be notified. In
accordance with the Fair and Accurate Credit Transactions Act of 2003
(FACT), a copy of the consumer’s credit report must be made available
to the consumer free of charge.
Studies by ConsumerReports.org (August 2006)
Studies done by ConsumerReports.org found “erratic results” when
credit scoring models were used by insurance companies.
- ““For example, if insurance scores were neutral, our hypothetical
customer would pay roughly the same annual premium at
Nationwide and GEICO, about $1,150. But if the driver received
the worst possible insurance scores, the premium would increase
29 percent to $1,468 at GEICO and 47 percent to $1,706 at
Nationwide. At Birmingham Fire, scoring from best to worst
increased the premium by $3,166.
Such variations raise questions about whether scoring closely
customizes price to each driver’s loss risk, as insurers contend.
How precise can scoring be when our hypothetical customer with
the best score gets a 31 percent discount on his annual premium
at Progressive but only a 19 percent discount at Birmingham Fire?
Or when USAA charges our hypothetical customer with the worst
score 32 percent extra, why is State Farm charging him 108
percent more?
Leslie Kolleda, a spokeswoman for Progressive, says that the
variation in pricing has “nothing whatsoever to do with credit
scores” and is typical of insurer-to-insurer price differences.
Progressive’s comparison of 90,000 multicompany premium quotes
in 2002 showed a $524 difference, on average, on six-month
policies.”
But some state regulators still have doubts. “You can’t say this is the best
predictor we have, but at the same time we all do it completely
differently,” says Joel Ario, the insurance administrator of Oregon. “Either
there’s a core to this or it’s a farce.””
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Car insurance and your credit scores should be two separate issues.
Unfortunately it has become a common practice for big corporations to pull
consumers' credit reports for just about any reason.
Unfortunately it has become a common practice for big corporations to pull
consumers' credit reports for just about any reason.
This practice has invaded
the car insurance industry
and bad credit can mean
you pay higher insurance
rates and may even result
in a denial of coverage.
In the past insurance
companies considered
driving record, age, type
of automobile and the
number of insurance claims
to determine who to insure.
The last decade has
brought about a change in
the insurance industry.
the car insurance industry
and bad credit can mean
you pay higher insurance
rates and may even result
in a denial of coverage.
In the past insurance
companies considered
driving record, age, type
of automobile and the
number of insurance claims
to determine who to insure.
The last decade has
brought about a change in
the insurance industry.
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