This is a complex issue; generally, credit scoring follows loss ratios, and that works for the majority of carrier. However, while it works for most, it does not work for all. I\’d hate to be in a position where I ran into credit problems, and then paid higher premiums as a result, even though I had a sparkling driving record.
There needs to be a genuine appeal process available for credit scoring to be used and accepted; it may get it right 80% of the time, but that is no excuse to shortchange, or even undercharge, the remaining 20%. I know from personal experience, as a physician billing that should have been covered by my health carrier was turned in to a collection agency 3 years after the fact; my rates went up 20% overnite. Once we found out why, we contested the collection, but the original insurer wouldn\’t budge, so we switched companies and were fortunate to find a rate much lower than the first company. Not everyone gets lucky with finding a second carrier.
Since people are being charged rates that in some cases are not connected to their driving or loss records, look for this practice to be changed by the courts. Carriers are letting credit records do their underwriting; it may work well for them, but it doesn\’t set a fair playing field for all policyholders.
I don\’t believe I disagreed that credit was a \’predictor\’; however, simply because something is a predictor, does not imply it is correct in 100% of cases. Credit is not foolproof and results in both overcharges and undercharges. I know of companies who will give you a good rate, even if you have multiple tickets and a DUI, so long as you have good credit. Where do you think they are balancing that undercharge?
All I stated is there should be a valid appeal process, so someone who is an excellent/good risk has the opportunity to prove that and not be penalized by making a prior poor financial decisions.
Should there be an appeals process for the driver with a lot of traffic tickets but with no accidents?
What about for a driver who is male, single, and under 25?
If you have an appeals process for one component in a rating model, why not for all of them? Why is credit more special?
If you agree that credit is a predictor, how can you advocate an appeals process? I\’m not trying to be condescending, but you don\’t understand the concept of predictor, if you\’re advocating an appeals process.
You\’re not going to make a case that simply because something generally predicts an outcome that it should be looked at as the same as the outcome.
I\’m well aware of the credit role and what it means to the majority of insurers, however, you have not answered why it is ok to overcharge the driver with no losses and poor credit while it\’s ok to undercharge the driver with good credit and a poor DRIVING record. Sorry, but a DRIVING record is a much more reliable indicator than credit.
Credit is a great measure, but it cannot be the only measure, and and it cannot be absolute. Sorry, you and I will not agree here. If you want to add appeals for what color of car, etc, that\’s fine with me, but credit is not an absolute measure of risk. Yes, it\’s a measure that many carriers have used to become more profitable, but that does not make it an ethical measure for a regulated business.
Public policy determines whether race based underwriting/rating can be used if it was statiscally valid. Gender based rating is generally considered statiscally valid, but some states don\’t allow it. Age based rating is generally considered statiscally valid, but some states don\’t allow it (allowing similar years driving experience).
Credit based rating is generally considered statiscally valid by those who have looked at the numbers, but society and public policy must decide whether that is a factor that can be used.
And for those who say that having bad credit doesn\’t mean that they\’re a better driver, there are a ton of rating variables that have nothing to do with driving… homeownership, paying the premium in full, having prior insurance, quoting the new business more than x days in advance, being a good student, et al, but all of those have discounts related to them that are statiscally supported.
Technically even the car you drive may not indicate what kind of driver I am. If I drive a Ford Taurus, am I a safer driver than if I drive a Corvette? No one knows, but even without looking at the statistics do you assume that a Corvette driver and a Taurus driver have the same driving habits? They may, but statistics for the general population would reflect otherwise. Should I charge the same liability rate for both vehicles? In the past, many companies did.
But you and I do agree! I agree that Credit is not absolute. But I also agree that traffic tickets are not absolute, nor is age, nor is marital status, nor is zip code.
Not one of these things is absolute. They are all predictors. Why, then, is credit singled out as being unfair? All the factors listed above are predictors, yet credit is the one being harped upon.
No one is being overcharged here. That\’s the point. Driving record is only one component in the formula. credit is only one component.
Remember, insurance companies are in the business of minimizing risk. Risk here is defined as payouts. Credit is a huge factor correlated to claims payouts. So if they surcharge a bad credit risk with good driving record, so be it! They\’re minimizing claims payout risk! No one is being over charged!
Everyone is being charged according to the risk they present to the insurer. This risk is a claims payout.
Some folks take this banter a little too seriously; I\’m not out to insult anyone, but I don\’t see the need to insult me; I have a pretty good understanding of the importance of credit scores.
I\’m not advocating them to be disallowed.
But I do have concern that we are using credit, which is a non driving factor, as the \’big factor\’ when setting rates. Sorry, I realize carriers can lump most of their customers by that factor, but we\’re talking about a regulated business. When a business is regulated, it has duties beyond simply making profit. If a person has a dui, traffic tickets, prior losses, or buys a vehicle with a high rate of incident, then those are statistical DRIVING factors.
Credit is not a driving factor. Perhaps we\’ll find out that folks who eat at buffet\’s are 30% more likely to have losses than those who are vegetarian; the argument can be make that should be allowed as a rating factor it there was a reliable way to measure it. It could work, however, that is not a driving factor, it is a diet factor that is correlating to driving losses. That is the simple reason I believe there should be an review/appeal process when insurance is denied, or rates increased, simply due to credit factors.
I\’m not rooting for the court to overturn credit scoring, it benefits the insurance industry, which in turn benefits me. But the fact that we\’re using something that is not driving related leaves me to believe the court will not leave the practice untouched. Maybe I\’m wrong, but we\’ll have to see how the folks in the robes rule.
I have found all the postings very interesting and thank you for all your insight. First, when did we consider 80% results anything but barely average ( barely will get you into a community college). Predicting snow does not mean do not go to work. Just because it has worked and made money for one company, does not mean it is right, (look at stock options).Lastly, is it right to use unrelated data to predict an unrelated outcome, even if it works 80% and makes profit, no, its not. Let me give you a very basic comparison. Two students are applying for scholarships in science. Student A has an A GPA, won science awards,all the clubs and scored a 680 on the math part of his SAT. Student B has a B GPA, no science awards or clubs, and 700 on his math SAT. Which student deserves a reward (scholarship)in this field? It is a stastical fact that those students above 700 in math are predicted to do better in science. If you honestly believe that predicting success is better than rewarding merit, than I give up. An 80% successful prediction because it makes money is not right. The End
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Here are some links. Copy and paste into a browser.
American Academy of Actuaries:
http://www.iii.org/media/hottopics/insurance/creditscoring/ (This one mentions other studies.)
Casualty Actuarial Society:
http://www.casact.org/pubs/forum/00wforum/00wf079.pdf
Insurance Institute Study:
http://server.iii.org/yy_obj_data/binary/729782_1_0/Credit.pdf
Univ of Texas Study:
http://www.insurancecouncil.org/news/2003/UTcreditstudy.pdf
That\’s all for now. Let me know what you think. Read the C.A.S. study in particular.
This is a complex issue; generally, credit scoring follows loss ratios, and that works for the majority of carrier. However, while it works for most, it does not work for all. I\’d hate to be in a position where I ran into credit problems, and then paid higher premiums as a result, even though I had a sparkling driving record.
There needs to be a genuine appeal process available for credit scoring to be used and accepted; it may get it right 80% of the time, but that is no excuse to shortchange, or even undercharge, the remaining 20%. I know from personal experience, as a physician billing that should have been covered by my health carrier was turned in to a collection agency 3 years after the fact; my rates went up 20% overnite. Once we found out why, we contested the collection, but the original insurer wouldn\’t budge, so we switched companies and were fortunate to find a rate much lower than the first company. Not everyone gets lucky with finding a second carrier.
Since people are being charged rates that in some cases are not connected to their driving or loss records, look for this practice to be changed by the courts. Carriers are letting credit records do their underwriting; it may work well for them, but it doesn\’t set a fair playing field for all policyholders.
No, u/w is not as simple as checking credit. However it is a component.
I will agree that credit shouldn\’t be a factor in accepting/denying coverage.
However, it should be a component in rating. Please see the posts in this discussion called \”Predictor!\”
I don\’t believe I disagreed that credit was a \’predictor\’; however, simply because something is a predictor, does not imply it is correct in 100% of cases. Credit is not foolproof and results in both overcharges and undercharges. I know of companies who will give you a good rate, even if you have multiple tickets and a DUI, so long as you have good credit. Where do you think they are balancing that undercharge?
All I stated is there should be a valid appeal process, so someone who is an excellent/good risk has the opportunity to prove that and not be penalized by making a prior poor financial decisions.
Should there be an appeals process for the driver with a lot of traffic tickets but with no accidents?
What about for a driver who is male, single, and under 25?
If you have an appeals process for one component in a rating model, why not for all of them? Why is credit more special?
If you agree that credit is a predictor, how can you advocate an appeals process? I\’m not trying to be condescending, but you don\’t understand the concept of predictor, if you\’re advocating an appeals process.
You\’re not going to make a case that simply because something generally predicts an outcome that it should be looked at as the same as the outcome.
I\’m well aware of the credit role and what it means to the majority of insurers, however, you have not answered why it is ok to overcharge the driver with no losses and poor credit while it\’s ok to undercharge the driver with good credit and a poor DRIVING record. Sorry, but a DRIVING record is a much more reliable indicator than credit.
Credit is a great measure, but it cannot be the only measure, and and it cannot be absolute. Sorry, you and I will not agree here. If you want to add appeals for what color of car, etc, that\’s fine with me, but credit is not an absolute measure of risk. Yes, it\’s a measure that many carriers have used to become more profitable, but that does not make it an ethical measure for a regulated business.
Public policy determines whether race based underwriting/rating can be used if it was statiscally valid. Gender based rating is generally considered statiscally valid, but some states don\’t allow it. Age based rating is generally considered statiscally valid, but some states don\’t allow it (allowing similar years driving experience).
Credit based rating is generally considered statiscally valid by those who have looked at the numbers, but society and public policy must decide whether that is a factor that can be used.
And for those who say that having bad credit doesn\’t mean that they\’re a better driver, there are a ton of rating variables that have nothing to do with driving… homeownership, paying the premium in full, having prior insurance, quoting the new business more than x days in advance, being a good student, et al, but all of those have discounts related to them that are statiscally supported.
Technically even the car you drive may not indicate what kind of driver I am. If I drive a Ford Taurus, am I a safer driver than if I drive a Corvette? No one knows, but even without looking at the statistics do you assume that a Corvette driver and a Taurus driver have the same driving habits? They may, but statistics for the general population would reflect otherwise. Should I charge the same liability rate for both vehicles? In the past, many companies did.
But you and I do agree! I agree that Credit is not absolute. But I also agree that traffic tickets are not absolute, nor is age, nor is marital status, nor is zip code.
Not one of these things is absolute. They are all predictors. Why, then, is credit singled out as being unfair? All the factors listed above are predictors, yet credit is the one being harped upon.
No one is being overcharged here. That\’s the point. Driving record is only one component in the formula. credit is only one component.
Remember, insurance companies are in the business of minimizing risk. Risk here is defined as payouts. Credit is a huge factor correlated to claims payouts. So if they surcharge a bad credit risk with good driving record, so be it! They\’re minimizing claims payout risk! No one is being over charged!
Everyone is being charged according to the risk they present to the insurer. This risk is a claims payout.
Some folks take this banter a little too seriously; I\’m not out to insult anyone, but I don\’t see the need to insult me; I have a pretty good understanding of the importance of credit scores.
I\’m not advocating them to be disallowed.
But I do have concern that we are using credit, which is a non driving factor, as the \’big factor\’ when setting rates. Sorry, I realize carriers can lump most of their customers by that factor, but we\’re talking about a regulated business. When a business is regulated, it has duties beyond simply making profit. If a person has a dui, traffic tickets, prior losses, or buys a vehicle with a high rate of incident, then those are statistical DRIVING factors.
Credit is not a driving factor. Perhaps we\’ll find out that folks who eat at buffet\’s are 30% more likely to have losses than those who are vegetarian; the argument can be make that should be allowed as a rating factor it there was a reliable way to measure it. It could work, however, that is not a driving factor, it is a diet factor that is correlating to driving losses. That is the simple reason I believe there should be an review/appeal process when insurance is denied, or rates increased, simply due to credit factors.
I\’m not rooting for the court to overturn credit scoring, it benefits the insurance industry, which in turn benefits me. But the fact that we\’re using something that is not driving related leaves me to believe the court will not leave the practice untouched. Maybe I\’m wrong, but we\’ll have to see how the folks in the robes rule.
I have found all the postings very interesting and thank you for all your insight. First, when did we consider 80% results anything but barely average ( barely will get you into a community college). Predicting snow does not mean do not go to work. Just because it has worked and made money for one company, does not mean it is right, (look at stock options).Lastly, is it right to use unrelated data to predict an unrelated outcome, even if it works 80% and makes profit, no, its not. Let me give you a very basic comparison. Two students are applying for scholarships in science. Student A has an A GPA, won science awards,all the clubs and scored a 680 on the math part of his SAT. Student B has a B GPA, no science awards or clubs, and 700 on his math SAT. Which student deserves a reward (scholarship)in this field? It is a stastical fact that those students above 700 in math are predicted to do better in science. If you honestly believe that predicting success is better than rewarding merit, than I give up. An 80% successful prediction because it makes money is not right. The End