insurance score from credit score

Hi Almeida,

Welcome onboard the Creditmagic forum. Glad to see you raising this topic on behalf of millions of consumers. To be frank I haven’t researched much on this until I saw your post. After doing a bit of 'google' I finally gathered some information on 'insurance scores'. And YES .. we do discuss credit score apart from other credit related topics like credit report, bankruptcy, identity theft, credit management to name a few.

Now lets get back to the topic ...

You said:

Now as I am related to the Insurance industry, there is a concept called insurance score which is fetched from the Credit scores of an individual and the cost of insurance depends on the insurance score.

But what I found is insurance scores are based on credit history information of an individual rather than his credit score. Based on the credit history insurers make a confidential ranking and award points similar to credit scores. Again the insurance scoring system used by various insurance companies may differ. For instance if an individual's insurance score is calculated on the basis of the model developed by Fair Issac (a fairly trusted name worldwide), a score of 760 or above is regarded as GOOD while a BAD score is below the 600 mark.

But what’s the point in awarding these points?

Like every business houses, insurance companies also try to make as much profit as they can. They try to avoid getting claims as much as possible. According to them the better the credit history of an applicant, the lesser the risk of getting a claim from him. Prior to the development of insurance scoring models, underwriters used to make decisions by simply looking at the data. This often questioned the degree of biasness of the whole process, as the same was prone to be erroneous. But now with the development of various scoring models underwriters need to feed data to the scoring system which in turn generates a score. This development enabled many drivers to be placed in preferred and standard rating classifications saving them money (source: iii.org). I also found some of the factors that affect the insurance score of an individual from this pdf document. Though it is applicable only for the state of Alaska, after going through a few other reliable sources (including iii.org) I may conclude that similar factors are largely taken into account while calculating the score. Yeah its true that not all states permit an individual's access to these factors. But again iii.org clearly states that

Insurers are required to inform consumers they are using credit information in the underwriting/ratemaking process. If that is a deciding factor in rejecting the application for insurance or another adverse decision, in accordance with the Fair and Accurate Credit Transactions Act of 2003 (FACT), the insurer must notify the individual that credit report information was used and may have to make a copy of the credit report available to the consumer free of charge.

Consumer reactions and my conclusion

As far as I figured out, people are not very happy with this system, as it tends to bifurcate people on the basis of their earning capability as well as their usage of credit. Hence a section of the society having bad or minimal credit history is getting victimized as insurance companies are charging higher rates. This evidently challenges the fairness of the whole system. Recent developments clearly shows states like Massachusetts, Delaware, Florida, Colorado are committed to ban the usage of credit history to predict insurance scores of applicants as also to calculate the rates.

To conclude, I feel there should be a fair amount of transparency in all systems especially those used in the financial sectors. If this fairness ceases to exist we should not adopt the system. Rather we should try to better it, simplify it for a better understanding and then adopt it.

It would have been better if you start a poll on this topic. To do so you need to be a registered member of our community (its free :)) and send a PM to the admin to do the needful. My post seemed to be a bit lengthy as I tried to dig deep to get a better insight. Please excuse me if I have missed something.

Eagerly waiting to see what others feel ..

Regards,
Richard

Hey Almeida,

I was going through all the topics posted till now in this lil forum and found yours to be a bit unique of its kind. A good one indeed and we need to discuss these matters as well. Anyways, which state do you belong to? Since am not an insurance person, I don’t have a detailed explanation about this whole scenario. But found some states have already enacted laws on restricting insurers from using credit history/scores of applicants in the screening process. I do get a feeling that some insurance companies used to or still uses this scoring system as a weapon to manipulate things up. If that is so, it violates the law. I feel fair amount of transparency should be there to add on to the overall improvement of our society. Department of Law of all the states should beef up its vigilance team to keep a cloze watch.

BTW thanks Richard for giving us an insight of insurance scores. Great post! :)

Cheers