In the April issue of InterBusiness Issues, JR Runkel of the Fortner Insurance Agency outlined the debate regarding an insurance company's ability to use credit scores when pricing insurance. Here are some highlights on the debate, according to the Texas Coalition for Affordable Insurance Solutions (TCAIS):
- A study, mandated by the Texas legislature, found consumers with bad credit histories are as much as twice as likely to file an insurance claim as those with the best credit.
- In auto insurance, the study found credit history is a better predictor of claims than most other factors, including driving record.
- Consumer advocates seized on the Texas study's finding that the worst credit scores tend to be among younger, lower-income, African-American, and Hispanic consumers.
- Joseph Annotti, a spokesman for the Property Casualty Insurers Association of America in Chicago, said price breaks are provided to those with good credit history, regardless of their ethnic background. "This issue for us has always been about risk, not race," he said.
- If Texas bans insurers from using credit scores, Texas Insurance Commissioner Jose Montemayor suggested a gradual phase-out, warning the switch would mean costlier premiums for all Texans, especially low- and moderate-income consumers who are deemed low risks. He worries that in that event, insurers will be pickier about whom they insure and charge higher rates.
Lawmakers eventually will settle this debate, but while they work on it, look "upstream" to a part of the scenario in which you can actually effect change. Studies have shown there's a strong correlation between someone with poor credit history and the likelihood to file an insurance claim. Financial literacy should improve credit scores. It follows that improved credit scores should reduce the number of insurance claims.
For insurance and financial service companies, two keys to success are loss mitigation and creating demand. When people better manage their finances, there should also be an increase in the demand for financial services products. Therefore, equipping tomorrow's workforce with financial literacy is perhaps the best answer to the insurance company/credit score usage question. It certainly is a more proactive response.
Junior Achievement (JA) is an established avenue in which to effect positive change in the next generation and their credit score. JA uses hands-on experiences to help young people understand the economics of life. The financial literacy the Junior Achievement curriculum teaches should help reduce the likelihood of insurance claims. JR Runkel of Fortner Insurance understands that, which is why he's a JA Classroom Consultant.
JA fits in perfectly with the mission of the two large insurance and financial services companies in nearby Bloomington/Normal: State Farm and COUNTRY Insurance & Financial Services.
Junior Achievement is an investment not only in the students and their future, but in the achievement of the missions of these two local companies. IBI
