Re: Credit scoring and insurance premiums
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
RE: Credit scoring and insurance premiums
(Still not finished with year end work at work ...) Recently finished Prof. Caplan's fine Stigler-Becker vs Myers-Briggs paper. I believe strongly in MBTI (MB Type Indicator) (I'm an NTP, E/I). I like the Five Factor Model addition, but not name, of Neurotic, and don't like the names of the other 2 FFM that are different. However, the Conscientiousness category (more J, not P) of personality traits might be at work here -- other things seemingly equal, low scorers might be worse credit risks AND have higher losses. I strongly favor freedom (oppose restrictions) on categories insurance companies can use, ESPECIALLY those somewhat behaviourist: it's not your fault if you're a man instead of a woman under 25 -- it IS your fault that you didn't pay your credit card. Or missed a payment and paid later. etc. Tom Grey
RE: Credit scoring and insurance premiums
It makes sense to me that someone with credit problems would be willing to take more risks and thus be more of an insurance risk. The behavior that got them to be a credit risk is probably correlated to behavior that would make them an insurance risk. You drink to much and lost your job or did not get promotedwell you drink to much and drive! jdd John Driessnack, Lt Col, USAFProfessor, System Program ManagementDefense Systems Management CollegeBldg 205, Rm 115BPhone 703-805-4655 Admin Office 3670 [EMAIL PROTECTED] 01/24/02 09:13AM (Still not finished with year end work at work ...)Recently finished Prof. Caplan's fine "Stigler-Becker vs Myers-Briggs"paper.I believe strongly in MBTI (MB Type Indicator) (I'm an NTP, E/I). I like theFiveFactor Model addition, but not name, of "Neurotic", and don't like the namesof the other 2 FFM that are different. However, the "Conscientiousness" category (more J, not P) of personalitytraits might be at work here -- other things seemingly equal, low scorersmight be worse credit risks AND have higher losses.I strongly favor freedom (oppose restrictions) on categories insurancecompanies can use, ESPECIALLY those somewhat behaviourist: it's not yourfault if you're a man instead of a woman under 25 -- it IS your fault thatyou didn't pay your credit card.Or missed a payment and paid later. etc.Tom Grey
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
