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Industry Issues | Credit Scores
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FTC Finds Insurers’ Use of Credit Information Helps Consumers
The Federal Trade Commission’s (FTC) study of automobile insurers’ use of credit has reaffirmed the strong connection between credit information and the risk of loss and has determined that its use helps to increase the availability and affordability of insurance for most consumers.
The Fair and Accurate Credit Transaction Act (FACT Act) of 2003 which permanently reauthorized the Fair Credit Reporting Act preemptions, called for a study on the financial services industry’s use of credit scores and credit-based insurance scores. The FTC’s study was designed to explore the effect that credit information has on the availability and affordability of insurance. The study considered the statistical relationship between credit information and the risk of loss. It also examined the extent to which, if any, the use of credit scoring models, credit scores, and credit-based insurance scores affect the availability and affordability of insurance by racial and ethnic minority groups and low-income groups.
Using credit information makes underwriting and pricing more accurate and results in many consumers paying less for their automobile and homeowners insurance policies. Consumers want to pay a fair price for insurance that matches their risk of loss. To achieve the goal of pricing based on an individual’s risk of loss; insurers simply want to use the most accurate, statistically valid tools available and credit information has proven to be one of the best predictors of loss. With these findings, legislators and regulators should be very comfortable with insurers’ use of insurance scoring.
Resources
FTC Releases Report on Effects of Credit-Based Insurance Scores
PCI News Release: FTC Finds that Insurers’ Use of Credit Information Helps Consumers
What's At Stake for Consumers
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