According to a recent report, one of the most hotly debated underwriting factors in U.S. auto insurance is an applicant’s credit history, with some major American insurers reporting a 116 per cent fluctuation in premium on credit data. But would drivers here benefit from underwriters including credit history when calculating auto premium?
“The short answer is no,” says Randy Carroll, CEO of the Insurance Brokers Association of Ontario. “In 2005, the Ontario government banned the use of credit scoring to rate and underwrite auto insurance (Regulation 664). Because auto insurance is a mandatory product and because a person’s credit score is not related to the insured risk (as opposed to accident record, tickets, etc.), it was deemed to be unfair and not in the public interest.”
Despite this, some insurers circumvented this prohibition by screening consumers based on their credit score.
“In 2010, as part of the new auto reforms, the government listened to advocacy from the IBAO and put a stop to these ‘objectionable quoting practices,’” Carroll told Insurance Business, “banning the practice entirely at every stage of the auto insurance transaction.”
Proponents argue that most Canadians would benefit from credit-based insurance ratings.
Ontario banned the use of credit scores to classify auto insurance risks in 2005. Then in 2011, regulators in Newfoundland and Labrador prohibited insurance companies from refusing to provide fire and property insurance based on credit information.
Just recently, the New Brunswick Ministry of Justice and Consumer Affairs drafted regulations that will forbid both auto and home insurers from screening out applicants with weak credit histories (continued.)
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In Quebec, credit scores are used to underwrite both auto and property insurance. According to the Canadian Association of Direct Response Insurers (CADRI), credit scoring hasn't negatively impacted either the availability or affordability of insurance in that province.
Researchers at the consumer finance consultancy firm WalletHub looked into how, where and why credit matters to U.S. auto insurers, and just which carriers are relying on the underwriting factor the most.
WalletHub researchers evaluated the top five auto insurance carriers in the U.S. by creating two hypothetical consumers, one of whom has excellent credit and the other, who has no credit. All other factors remained the same.
Allstate seems to be the insurer that leans most heavily on credit data. The report reflected a 116 per cent fluctuation in premiums, while
State Farm—the least credit-reliant—fluctuates just 45 per cent when it comes to credit score.
Farmers Insurance was the second-most credit reliant, with an 83 per cent fluctuation, followed by Geico (56 per cent) and Progressive (47 per cent).
In terms of transparency, researchers determined Progressive was most up-front about their use of credit score as a rating factor, while
Liberty Mutual ranked last.
Geography also mattered when it came to credit history and an insured’s bottom line. While credit score had an average 65 per cent differential in cost nationwide, some states relied on the underwriting factor more than others. (continued.)
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Credit data had the most impact in the District of Columbia, with a whopping 126 per cent fluctuation, and the least in Vermont (18 per cent). Other highly credit-reliant states include Wyoming (114 per cent), Indiana (110 per cent) and Maine (109 per cent).
On the other end of the spectrum are Montana (24 per cent), New Mexico (26 per cent) and North Carolina (26 per cent).
California, Hawaii and Massachusetts were not included in the lineup as state laws prohibit some factors, like credit history, from being incorporated into auto insurance ratemaking.
The use of credit history as an underwriting factor is very hotly debated among those in the industry. If you listen to J. Robert Hunter, Director of Insurance for the Consumer Federation of America and former Texas Insurance Commissioner, all underwriting variables other than driving-related factors are unfair.
“Actuaries must look for some logical connection to risk,” says Hunter. “Good classifications have both correlation and a good thesis—they need to logically relate. Let’s get rid of these factors that make rates go up for poor people for the benefit of the rich.”
How credit scores affect Canadian premiums
The Canadian Council of Insurance Regulators (CCIR) set up the Credit Scoring Work Group to gather research and feedback on credit-based underwriting practices from major insurance industry players, as well as from Canada's credit reporting bureaus, Equifax and TransUnion. (continued.)
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One submission from George Hardy of the Co-operators dated August, 2011, states that "66 per cent of Co-operators clients enjoyed lower home insurance rates because of their credit score."
Only 28 per cent of credit-rated applicants were assessed higher premiums, says Hardy, while rates for the remaining 6 per cent stayed the same. “The removal of credit scoring as a rating tool would result in increased premiums for the majority of our clients.”
A recent study from the Financial Consumer Agency of Canada (FCAC) shows that 75 per cent of Canadians have a respectable credit score of 700 or higher. Proponents of using credit scores in insurance decisions say that the majority of Canadian policyholders would receive premium discounts if their insurance rates were based on credit ratings.
But for Carroll, the use of credit rating to price home and other personal property insurance is detrimental to customers.
“The IBAO believes that the use of credit scoring to price home and other personal property insurance hurts our consumers. We believe the practice to be unfair, not transparent and inappropriate as a rating tool,” he says. “Credit scores are a factor that consumers have very little control over – most are unaware what their score is. Many insurers are using credit scoring to significantly increase home and other property insurance premiums even though credit scoring has nothing to do with the insured risk.”
A link between claims and poor credit rating?
Intact Insurance analyzed data from 2007 to 2009 and found that personal property policyholders with the lowest credit scores had 50 per cent more claims than those with average scores.
Reinforcing the data from Intact, Baron Insurance Services conducted an independent study based on policyholder data from five major Canadian insurers. That analysis concluded that superior credit scores strongly match with lower claim frequency and costs.
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