Policy Documents

Use of Credit Scoring in Insurance

Matthew Glans –
February 29, 2008

Insurers have the unenviable responsibility of crafting rate and premium structures that allow both profitability for shareholders and fairness to consumers. In order for an insurer to remain viable against competitors, it needs to accurately measure risk and tailor rates accordingly. But maintaining accuracy in rate-making is important for consumers as well: Accurate rates ensure that one consumer does not end up subsidizing another's risky behavior.

A consumer's credit score is one of dozens of factors an insurer takes into account when determining the eligibility of, or premium for, an applying consumer. Credit-based insurance scoring assigns a numerical ranking based upon an individual's credit history. The insurance score is then used as a factor in determining the risk level of the applicant. Actuarial studies demonstrate a link between the number of claims filed by an individual and the level of credit reliability achieved by a consumer through careful management of personal finances.

Statistically these actuarial studies have shown a lower insurance score means a consumer is more likely to file a claim. Insurers maintain the use of credit scores streamlines the rate-making process, allowing better anticipation of claims and better management of risk. The end result is a better product for consumers.

But consumer rights groups argue scoring discriminates against minority and low-income applicants. Currently 24 states have enacted legislation limiting the use of credit scores in determining insurance rates.

The following articles address this issue from a variety of perspectives: the credit score controversy, the insurer, and most importantly the consumer.


Issue Update: Credit Scoring

http://www.iii.org/media/hottopics/insurance/creditscoring/
The Insurance Information Institute examines the credit scoring argument, highlighting efforts currently being undertaken in state legislatures, and argues against credit-scoring bans.

Credit-Based Insurance Scoring: A Simmering Debate
http://www.irmi.com/Expert/Articles/2002/Olson03.aspx
This article, written by Robin Olson for the International Risk Management Institute, examines the differing perspectives in the credit-scoring debate. The perspectives of insurance providers and the Consumer Federation of America are represented.

Credit-Based Insurance Scoring
http://www.aiadc.org/AIAdotNet/landing.aspx?docid=303972
The American Insurance Association examines the benefits of credit scoring from the perspective of insurers.

What's Credit Got to do With It?
http://www.iiminfo.org/consumers/InsuranceScoring/tabid/1723/Default.aspx
The Insurance Institute of Michigan explains the credit-scoring issue for individual citizens and provides a Q&A on the debate.

NAMIC: Wisconsin Senate's Approval of Credit-based Insurance Scoring Legislation Could Jeopardize Low Rates
http://www.insurancenewsnet.com/article.asp?a=top_pc&id=90774
The National Association of Mutual Insurance Companies (NAMIC) examines the possible effects of credit-based insurance on insurance rates in Wisconsin.

Need Credit or Insurance? Your Credit Score Helps Determine What You'll Pay http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm
The Federal Trade Commission's Facts for Consumers describes how credit scoring works, how consumers can improve their score, and the options available for individual applicants.

Overview of the Texas Credit Study http://www.iii.org/media/hottopics/additional/texascreditscoring/
Summarizes a report written by the Texas Department of Insurance. The report concludes there is a link between credit scoring and the accurate assessment of the risk of future claims.


For further information on this and other free-market topics, visit The Heartland Institute's Web site at http://www.heartland.org and PolicyBot™, Heartland's free online research database.

If you have any questions about this issue or The Heartland Institute, contact Legislative Specialist Matthew Glans at 312/377-4000 or mglans@heartland.org.