Insurance and Credit Scores

Increasingly, insurance companies are using credit scores to determine your premium. Do you think this is right?

I know there are readers who are concerned. Recently, a reader asked about insurers who don't use credit scores. Obviously, people are aware of the practice and are hoping to avoid it. When I did my research to answer this question, I was surprised to find that there are very few insurers left who do not consider credit scores when underwriting insurance policies.

Personally, I have some real concerns about using credit scores to determine insurance eligibility. In part, I think it penalizes people who are already struggling with financial problems, and layers even more costs on them at a time when they can least afford it. It could make insurance too pricey for these same people who most need the protection in case of a disaster. For that reason alone, I'd like to see it changed.

However, I also am concerned for another reason. Insurance companies say that credit scores are a good predictor of claims behaviour. Lower credit scores correspond to higher claims history and so those with lower credit scores are higher risk. But do we really want insurance companies to look at factors unrelated to insurance (like credit scores) when determining how much to charge for insurance?

My recent post on astrological signs and driving record is a case in point. What if insurers decided that there was a "trend" in the data that suggested that your birthday actually had an impact on your claims history? Should insurers be allowed to start using that as part of their underwriting criteria? Obviously, most people would say no. But what is the difference between this and using credit scores?

That's my concern.

I have another issue that is more academic but also problematic: what if the real issue isn't credit score at all? What if a person's credit score is only an indicator of something else that is the real criteria that insurers should be looking at? For instance, insurers don't just look at my weight to determine if I'm healthy: they also look at my height and gender and so on. Otherwise, they could decide that anyone who is over 200 pounds is unhealthy.

While that might be true for many, it certainly wouldn't be true overall. In fact, 200 pounds could be a perfectly healthy weight for a man over 6 feet tall. But, if an insurer deals more with women than men, using a criteria of 200 pounds as a higher risk factor might appear to make sense.

So, if claims are higher for people who have lower credit scores, is it really some other criteria which indicates the higher claims history? I'm wondering about that too.

Monique L. Attinger
Posted by on January 15,2007 at 2:34 PM
Thanks for the tip, Don! I'm going to follow up on this, to see if Oregon has passed any legislation. At the moment, the Department of Insurance site isn't letting me get on and check things out, but once I can -- I'll post a comment back here on anything I find.
Posted by Don Osborn on January 15,2007 at 1:31 PM
In the fall of 06 election in Oregon, there was a ballot measure to disallow credit scores to be for underwriting, on the basis that it was descriminatory.  It was expected to pass.  Let's hope it did.
Don Osborn
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