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The Use of Credit Information in the Underwriting Process

Many insurers include credit information as one of several factors in determining a person's likelihood of filing an insurance claim in the future. This activity has been a part of the underwriting process for many years. This process provides companies that write homeowners, auto and commercial insurance with an objective and statistically accurate way to underwrite an applicant or policyholder.
 
This measurement -- called an insurance score -- is one of many selection criteria that underwriters can use to evaluate risk exposure and determine insurability. Here are the facts.
 
  • The practice of using insurance scores has been permitted since 1970 when the U.S. Congress passed the Fair Credit Reporting Act, which clearly and expressly permits the use of credit reports for insurance purposes.  
  • An insurance score is a predictive tool of future loss, and it reflects credit payment patterns and considers items such as outstanding debt, payment history, bankruptcies, types of credit in use and the number of new applications for credit.
  • This particular tool does not discriminate against any specific groups as it uses only objective credit-related data. Characteristics NOT included in determining insurance scores include: age, income, military rank, race, gender, marital status, and religion.
  • Insurance scores are just one of several factors used in the underwriting and rating process.
  • Independent studies and experience proves that individuals with lower insurance scores are much more likely to incur losses than those with higher insurance scores. Using a person's insurance score as a factor in underwriting allows insurance companies to price policies more fairly and accurately, which is why the use of insurance scores is now an industry norm.
 
Prohibiting the use of this tool may cause people less likely to have a claim to pay more for insurance than they should and those with a greater likelihood to have a claim to pay less than they should. This means that people who have fewer claims will subsidize the rates of those who have more. This is clearly unfair.
 
Insurance scoring is revenue neutral. That means that premium reductions received by those with the best insurance scores offsets the increases given to those with the worst scores.
 
  • Income is not a factor in insurance scoring. In 1999, the American Insurance Association conducted an analysis of income groups ranging from less than $15,000 to more than $125,000 annually. The results demonstrate that it is both inaccurate and unfair to assume that low income equates to bad credit. In fact, the lowest income group had a better score than the higher income groups.
  • The Virginia Bureau of Insurance issued a study in 1999 using a sample of insurance bureau scores for each of 956 ZIP codes in Virginia and tied the study to the 1989 Census Bureau statistics. The conclusion was that neither income nor race is a predictor of insurance scores in Virginia.
  • A 2001 study by Conning & Company presents an example of how insurance scoring benefits most consumers. Once again, the study supports the fact that insurance scoring helped more people than were negatively impacted.
  • Studies by Arthur Andersen and the Insurance Research Council have found the data in credit reports is much more accurate than data in motor vehicle records. Arthur Andersen found that only two percent of the 15,000 credit reports studied contain disputed information. Consumers also have a clearly defined review process to ensure the accuracy of their credit report.
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This information is presented by the Georgia Insurance Information Service, supported by property and casualty insurance companies doing business in Georgia that write more than 70 percent of the auto, homeowners and renter policies in the state. GIIS is a not-for-profit and non-lobbying trade association dedicated to providing the public and others with a better understanding of property and casualty insurance issues.
 


 

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