Credit Scores: Credit-Based Insurance Scores Page: 2 of 6
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Background on Insurance Scoring
An insurance score, a type of credit score, is a number produced by a proprietary
computer scoring model that analyzes a person's credit history information, such as
payment history, collection, balances, and bankruptcies. While credit scores are used by
lenders to help them decide whether to offer a person a loan, insurance scores are used by
insurers to determine what level of risk a person represents. The information used in
credit and insurance score models is obtained principally from credit reports, generated
by the three major national credit reporting agencies (CRAs): Equifax, Experian, and
Trans Union.1 CRAs are subject to the consumer protections set forth in the Fair Credit
Reporting Act (FCRA).2 Credit scores have been used widely for some time in credit-
related businesses such as banks, home mortgage lenders, and credit card issuers, but the
use of insurance scores by insurers is relatively new. FCRA allows CRAs to furnish a
credit report without the consumer's permission to an insurer when the report is to be used
in connection with the underwriting of insurance. However, FCRA also provides that
when any users of credit information from CRAs use such information to take action that
is adverse to the consumer, then notification of that action must be given to the consumer.
Over the past several years, insurers increasingly have included credit information
from credit reports as factors in insurance underwriting, especially in personal lines of
insurance such as automobile and homeowners insurance. There is some indication,
however, that credit information may also have some relevance in commercial lines of
insurance.3 It has been estimated that 90% of property insurers now use credit
information in some way in their underwriting decisions.4 Insurers maintain that there is
a clear statistical connection between a person's insurance score and the likelihood of that
person filing claims, as well as how expensive such claims might be. Thus, even though
a good insurance score does not necessarily mean a person is a good driver or a more
responsible homeowner, insurers contend that their research has shown that persons with
better insurance scores generally file fewer insurance claims and have lower insurance
losses. Insurers maintain that as a result of using insurance scores, they can charge lower
premiums or give discounts to many customers who otherwise would pay more for
insurance, and are also able to offer coverage to more consumers. Many insurers have
developed their own scoring models, while others contract with third parties to obtain
their insurance scores. Either way, insurers say the link between insurance scores and
insurance losses is clear, and point to two possible explanations. The first explanation
relates to stress - that people under stress are more likely to have auto accidents, and
financial problems are a known cause of stress. The second explanation relates to risk-
taking behavior - that people have different aversions to risk, and people with poor
insurance scores are more likely to engage in risky behavior and, therefore, more likely
to incur losses.
1 For additional information on credit scores, see CRS Report RS21298, Credit Scores:
Development, Use and Policy Issues, by Pauline Smale.
2 P. L. 91-508, tit. 6, 84 Stat. 1128, 15 U.S.C. 1681 et seq.
3 Richard Dorman, "The Evolution of Credit Scoring," Journal of the Society of Insurance
Research, Winter, 2002, p. 129.
4 Albert B. Crenshaw, "Bad Credit, Big Premiums," Washington Post, June 18, 2002, p. El,
citing Robert P. Hartwig, chief economist of the Insurance Information Institute.
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Credit Scores: Credit-Based Insurance Scores, report, January 19, 2005; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc817578/m1/2/?rotate=90: accessed December 15, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.