Commentary: Credit Histories Benefit Consumers

It is time to set the record straight and dispel some of the myths being advanced in Texas and across the country about why insurance companies use credit history. The truth is that credit history is a valid predictor of insurance losses, and that by considering credit history along with other factors, insurers can make insurance more available and reward customers who are less likely to incur losses with lower premiums.

Credit history is only one of many factors used to help determine the cost of auto and homeowners insurance. Most insurers consider a variety of factors such as experience behind the wheel, whether a vehicle is being driven in an urban or rural setting, driving record and the type of vehicle being driven.

In the case of homeowners insurance, factors other than credit history include the condition of the home, proximity to fire protection, whether the home is located in a high – or low-crime area and the type of construction.

Insurance scoring models do not consider ethnicity, religion, marital status, handicap, address, nationality, age, income or public assistance sources of income. They are simply not factors. The Fair Credit Reporting Act, which all insurance companies are required to follow, provides strict guidelines for the use of credit in insurance rating and underwriting.

The link between credit history and loss potential has been studied extensively. The insurance market is intensely competitive. Any company that used any tool that did not accurately predict risks would find itself losing money.

A national insurance trade organization conducted an analysis of income groups ranging from less than $15,000 to more than $125,000 annually. The results demonstrated that low income does not equate to low credit scores. In reality, the lowest income group had better scores than the higher income group, according the study.

Restricting the use of credit histories could have the effect of making customers with good scores, some of whom could be in low-income households, pay more to subsidize some affluent people who pose a greater risk.

Insurers have found that credit histories help them write more policies and allow consumers less likely to have a loss to pay less than they would otherwise. Companies have reported that they are able to accept some customers that would have been denied coverage using more traditional underwriting criteria. It is rather difficult for those who oppose the use of credit to present a compelling argument when the evidence points out that many policyholders who are less likely to incur losses can enjoy lower premiums.

Insurers must collect enough premium to cover their expected losses. We believe that those who are less likely to have a loss should bear less of the burden, and using credit history as one of many variables helps insurers achieve that goal.

Jerry Johns is president of Southwestern Insurance Information Service, a 49-year-old insurer trade association based in Austin, Texas.

Topics Carriers Profit Loss