Credit Based Scoring and Insurance

Insurance companies use other important sources of information besides an application to determine if a person qualifies for a policy. For auto coverage, motor vehicle reports are ordered. For home coverage, physical inspections may be needed. Another tool that is widely used for underwriting is credit-based scoring. Use of this item is currently controversial and its origin lies in the commercial use of credit histories.

Banks and other lenders have long used credit history in their lending process. In recent years, it has been found that certain elements of a person’s credit history can be used as an indicator of whether that person is likely to suffer insurance claims. Credit-based scoring is a process that creates a numerical score that is developed from information such as amount of debt, number of credit cards held, pattern of payments, defaults, etc. A benchmark score is established and is then used to help determine the acceptability of insurance applicants. Credit-based scores are also used by insurers to help decide what should happen with current customers. For instance, a company may choose to increase or decrease the premium charged for current coverage or change the level of coverage provided.

In credit-based scoring, the higher the score, the less likely the chance that a person will experience insurance losses. Therefore, if your credit history, such as outstanding losses, bill payment history and type of credit results in a high score, it is much more likely that your insurance application will be approved. Credit-based scoring is controversial. There is much information that proves a strong relationship between a credit-based score and a person’s likelihood of being a profitable customer. In other words, there is a high correlation. However, insurance consumers and regulators have demanded more information that demonstrates cause and effect.

Insurers are enthusiastic about the use of credit-based scoring. It is hailed as an aide to improve their pricing and profitability. However, there is a reluctance to provide details on how scores are developed. Companies have claimed that the information is considered confidential. Insurers fear that revealing details on credit-based scores would result in losing valuable information to competitors. Currently, while some states have approved the use of credit-based scoring, other states are either challenging its use or granting approval after establishing guidelines for its use.

If you have been affected by a credit-based score, you’re entitled to know. You can also get information on how to be sure that your credit history is accurate. An insurance professional is a good source to help you with questions on how your credit may be affecting your insurability.