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Industry Issues | Credit Scores
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Research Studies on the Issues
Overview of Major Studies on the Relationship between Credit and Risk of Loss
Since the mid-1990s there have been numerous studies examining the connection between credit information and the risk of loss. Insurers have found that using insurance scores as a factor in the underwriting process helps them to more accurately price and actually write more policies. This information helps insurance companies determine a fair premium for each consumer that is related to his or her risk of loss.
Experience has shown that policyholders with positive credit information are less likely to incur losses. Combined with familiar factors such as years of driving experience, previous crashes, and the age of your vehicle or home, insurance scores are another way for insurers to differentiate between lower and higher insurance risks.
Studies
The following provides a summary and links to various studies:
Arkansas Insurance Department Study
As required by the Legislature, the Arkansas Insurance Department compiles reports from each insurance company using credit as a component in determining an insured’s premium. A compilation of these reports published in July 2010 indicated that a little more than half of the insurers writing personal lines insurance utilize consumer credit. The data also indicates that 88 percent of consumers whose premium involved a credit component either received a lower premium or their premium was unaffected. Overall 39 percent of consumers received some decrease in their premium as opposed to only 12 percent who received some increase in their premium.
Texas Department of Insurance Study
The Texas Department of Insurance released a report entitled “Use of Credit Information by Insurers in Texas” to members of the state legislature December 31, 2004 and a supplemental report January 31, 2005.
Summary of the Report’s Findings and the Commissioner’s Analysis:
- There is a strong relationship between credit history and claims experience. The claims experience of the 10 percent of consumers with the worst credit histories was almost double the claims experience of the 10 percent with the best credit histories.
- The use of credit history by insurance companies is not unfairly discriminatory. Credit history is not based on race, nor is it a precise indicator of one’s race.
- For automobile insurance, credit history is comparable in value as a predictor of claims to where the policyholder lives and his/her driving record. Only the combined factors of age, marital status, gender and vehicle usage is more important.
- For both personal auto liability and homeowners, credit history is related to claim experience even after considering other commonly used rating factors such as age. By using credit history, insurers can better classify and rate risks based on differences in claim experience.
University of Texas Study
In March 2003, the University of Texas McCombs School of Business Bureau of Business Research issued a study of the relationship between credit history and insurance losses. The study concludes that there is a significant relationship between the credit score of the policyholder and the losses incurred for that policy. In general, lower credit scores were associated with larger losses.
Over the entire data set, the average loss per policy was $695, but for those policies in the lowest 10 percent of credit scores, this average loss was $918, whereas within the highest credit score group, the average loss per policy was $558. Thus, the average loss per policy is higher for the lowest credit score groups and lower for the higher credit score groups.”
EPIC Actuaries Study
In June 2003, EPIC Actuaries, LLC issued a study based on an analysis of losses and credit information. The EPIC study found a strong correlation between credit-based insurance scores and risk of insured loss. The study concludes that insurance scores are correlated with the propensity for loss. This connection is primarily due to a correlation between insurance scores and claim frequency, rather than a correlation between insurance scores and the severity of the average claim. The EPIC study demonstrated that insurance scores are among the three most important rating variables used by insurers. Insurance scores were found to be a better predictor of future risk than driving records. The study found that policyholders with the lowest insurance scores cost insurers 33 percent more to insure on average, while those with the highest scores cost auto insurers 19 percent less to insure.
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