Insurance Handbook - Alaska Department of Community and ...

Insurance Topics Updates at www.iii.org/issues_updates
Credit Auto Insurance Scoring
Equal Opportunity on how the use of credit information may affect the availability
and affordability of property/casualty insurance, whether the use of certain
factors by credit scoring systems could have a disparate impact on minorities
and, if so, whether the computer models used could be modified to produce
comparable results with less negative impact. The study is expected to be finalized
sometime 2010.
In a similar study, the FTC found that auto insurers’ use of insurance credit
scores leads to more accurate underwriting of auto insurance policies in that
there is a correlation between insurance scores and the likelihood of filing an
insurance claim. The FTC report, Credit-Based Insurance Scores: Impacts on
Consumers of Automobile Insurance, released in July 2007, also states that
credit scores cannot easily be used as a proxy for race and ethnic origin. In other
words, credit scoring predicted risk for members of minority groups in much the
same way that it predicted risk for members of nonminority groups.
The Fair and Accurate Credit Transaction Act of 2003 directed the FTC to
address the issue of whether the use of credit had a disparate impact on the
availability and affordability of insurance for minorities. Based on a poll of consumers,
the General Accountability Office has recommended that the Treasury
and FTC take steps to improve consumers’ understanding of credit scoring and
how credit histories are used, targeting in particular those with less education
and less experience in obtaining credit.
The Federal Reserve also studied the use of credit scoring. Although looking
at credit scoring to quantify risk posed by a borrower rather than an applicant
for insurance or a policyholder, the Federal Reserve said in a report issued at the
end of August 2007 that credit scores were predictive of credit risk and were not
proxies or substitutes for race ethnicity or gender, underscoring the FTC study.
Insurance Scores: Insurance scores are confidential rankings based on credit
history information. They are a measure of how a person manages his or her
financial affairs. People who manage their finances well tend to also manage
other important aspects of their lives responsibly, such as driving a car. Combined
with factors such as geographical area, previous crashes, age and gender,
insurance scores enable auto insurers to price more accurately, so that people
less likely to file a claim pay less for their insurance than people who are more
likely to file a claim. For homeowners insurance, insurers use other factors combined
with credit such as the home’s construction, location and proximity to
water supplies for fighting fires.
Insurance scores predict the average claim behavior of a group of people
with essentially the same credit history. A good score is typically above 760 and
40 I.I.I. Insurance Handbook www.iii.org/insurancehandbook