The Credit Score Conundrum

Is the use of credit histories in insurance rating good, bad or indifferent?

In general, insurers favor the practice. They say it makes for more accurate underwriting. Indeed, a number of studies, including an exhaustive one recently released by the Texas Department of Insurance, bear them out. The practice was found to be actuarially sound. People who are financially responsible tend to have fewer claims.

Still, individuals who purchase insurance policies for their cars and homes mostly don’t like it. What’s their credit history got to do with they pay for car insurance, they ask? While they may understand that, statistically, there is a relationship between financial responsibility and claims history as the studies suggest, their reaction is more personal and subjective. As in, so what?

And, consumers are growing increasingly wary of the fact that big corporations–not just insurance companies by any means–and big government have it all over the little guy in terms of being able to access any kind of information they want about an individual.

The recent revelations regarding the theft of personal information–including credit reports, Social Security Numbers, driver’s license numbers–of nearly 150,000 individuals across the United States from ChoicePoint Inc., which provides insurance scores and scoring models to insurance companies, won’t do anything to restore consumers’ confidence in the security of their personal information.

Meanwhile, the Texas Legislature thought they had the credit/insurance score conundrum figured out after passing reforms in 2003 that placed limits on insurers’ use of credit histories in order to protect individuals experiencing “extraordinary life circumstances.” But a number of bills have been introduced in the Texas House that would either ban the practice or severely curtail it.

Oklahoma and Arkansas lawmakers are contemplating credit and insurance-related measures during their spring legislative sessions, as well. At press time, the Arkansas House had already passed a measure banning the use of credit as a factor in rating auto insurance premiums.

Insurers are in a tight spot over the insurance scoring issue. They have the responsibility to their shareholders and policyholders to underwrite as accurately and efficiently as they can. Therefore, insurers need to be able to reassure their customers that their credit information, if it is used, will be used fairly and consistently, and that it will be secure.

That’s not an easy thing to do.

Topics Texas