The debate has been on now for over a decade: Should insurance companies be allowed to use a form of credit scoring when pricing insurance? Most people have strong opinions about this question. The issue is a topic on the agenda of our lawmakers in Illinois and in other states around the country.
In the past, insurance companies have used rating factors like Motor Vehicle Reports (MVRs), Comprehensive Loss Underwriting Exchange (CLUE) reports, and past loss history. Even the insurance advisor's personal statement about a potential client is a major factor in the pricing model. This was working for the most part, but as any good industry does, insurance companies continued to strive to increase profitability and reward customers who provide a good return on their investment to a company.
An individual's or business' credit history was starting to be tested as a possible rating factor on top of the above mentioned. Many companies began internal studies in the early 1990s to determine how their current customer base would prove or disprove this theory. Companies claim to have found overwhelming evidence that higher credit meant lower losses and, obviously, lower credit meant higher losses. Companies started building their models and implementing them in the late 1990s. The industry was split, and many companies chose not to weigh this rating factor as highly as past, proven factors. This created an adverse selection process that began to concern the companies not using credit based rating. This has caused most companies to adopt a credit-based scoring model.
The largest argument that's being conveyed by the media today is that this is a discriminatory action by the insurance companies. The message is that the models affect the population in different ways and aren't exactly the same per segment-a "disproportionate impact." I'll leave this debate for lawmakers and the insurance companies for this article.
What we know today is that credit is being used to determine your pricing on many portions of your insurance portfolio. It's used on your personal car insurance, homeowner's policy, and even an artisan's commercial contractor's package (property and general liability). I advise you to spend a moment reviewing your credit history and make sure it's accurate sooner rather than later. Contact your local insurance professional to assist in the best method to go about this review that may help lower your insurance costs. IBI