I don't have particular expertise in this topic, but it has been a matter of
some controversy within the insurance industry for at least 5 years.  The
general line of argument from industry supporters is that poor credit scores
are correlated with high insurance losses, even after classifying people for
other variables that should predict insured losses (like their age and sex
for auto insurance).  The counter coming from consumer advocates and
regulators is that i) it's unfair to penalize people on insurance rates just
because they have a bad credit history, and ii) there's no obvious causal
mechanism at work, and so it's not right to charge more.

I'll remain agnostic on the issue of whether or not there is a correlation,
because I haven't studied the data.  I might point out, though, that when
you have a large number of insurers, with lots of money at stake, all
claiming to have checked the data, and finding that there are correlations,
that there's probably something there.

It seems to me that if there is a correlation, the market would pretty
quickly start using credit scores as a variable, and those companies that
chose not to use it would be adversely selected against in getting
customers.  If there isn't a correlation, then there would be no strong
movement in the market towards using it as a variable.

Of course, the problem is that markets aren't allowed to work too well in
property/casualty insurance in the US.  Each state regulates insurance,
ranging from fairly light regulation (you have to tell the regulators what
rates you'll charge and how you'll classify people) to virtually total price
control, with little ability to turn away risks you don't like.

There's an actuarial paper on credit scoring (which I haven't read, so can't
vouch for quality) at www.casact.org/pubs/forum/00wforum/00wf079.pdf  and a
powerpoint slide version of a talk based on the paper at
http://www.casact.org/coneduc/ratesem/rate2000/handouts/cpp49monaghan.ppt

Gary Blumsohn

----- Original Message -----
From: "James Haney" <[EMAIL PROTECTED]>
To: <[EMAIL PROTECTED]>
Sent: Wednesday, January 23, 2002 10:08 PM
Subject: Credit scoring and insurance premiums


> I just saw an article in Business Week discussing the growing use of
> credit scores over the past couple years to determine auto and
> homeowners' insurance premiums.  This practice has become controversial
> because it has sometimes meant hefty premium increases for people who
> don't seem to be particularly bad insurance risks.
>
> Does anyone on this list have info/opinions on this issue?
>
> Many thanks,
> James Haney
>
>

Reply via email to