Insurers have the unenviable responsibility of crafting rate and premium structures that allow both profitability for shareholders and fairness to consumers. To remain viable against competitors, an insurer needs to measure risk accurately and tailor rates accordingly. 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.
This issue has come to the forefront in Iowa, where new state insurance advocate Angel Robinson is beginning the process of examining how applicant eligibility is determined and the role credit scores should play in the eligibility decision. While the evaluation process is appropriate, a full-scale ban on credit scoring should be avoided. Such bans do not benefit consumers.
Credit-based insurance scoring assigns a numerical rank based on an individual’s credit history. Actuarial studies have demonstrated 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, finding that a customer with a lower credit-insurance score is more likely to file a claim.
Insurers say the use of credit scores streamlines the rate-making process, allowing better anticipation of claims and better management of risk. The result is a better product for consumers.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
