The use of Credit Scoring on Insurance Premiums – Yes

Credit Scoring, also known as Financial Rating or Insurance Scoring is used differently depending on the state. Most state laws that allow credit scoring limit its use only as a discount on a policy. Even though the use of insurance scoring is common practice among insurance companies there are issues and drawbacks to its use. The use of credit scoring can be argued either way, but its disclosure should be and probably is required in most instances.

There are a few states that allow credit scoring to be used as a factor in the final premium. This number is shrinking as more states pass laws to either do away with credit scores or limit them to discounts only on a policy. Many states, including here in Michigan, allow the use of credit scoring but only as an additional discount on a policy. Normally, this wouldn’t be a bad idea, but insureds with low scores are always going to pay a higher premium. Higher premiums usually allow an insurance company to earn more profit. That being said, insurance companies are regulated quite heavily for the rates they use to base premiums. Generally they are not out to gouge their customers, although it may seem that way to some people.

One issue that arises with using credit scores is the discrepancy between credit reporting agencies and how the insurance company uses the score. Insurance companies that use credit scoring as a discount may convert the actual score to a tier type of system. The only drawback to this type of system is when one company may indicate a score as superior and another company as good. The insurance industry strongly advocates the use of credit scoring and point to statistics that show people with lower scores file the most claims. Luckily, most insureds nowadays tend to shop around for the best rates. So, if they are unhappy with the price form one company they can look at another.

The use of credit scoring and its affect on an insured’s premium can vary greatly depending on the state and how an insurance company uses the score. With the internet insurance can be quoted and bought in many ways. One of the the most common though is through an insurance agent. The agent should be the one telling the insured how their credit score is being applied to the premium. The insurance industry spends a lot of time to advocate the use of credit scoring and has no incentive to not inform customers of its use.