Insurates Rates Credit Score – No

Having been an underwriter in the insurance industry for over thirty years, I’ve found more carriers rely on information from credit history as a method of determining acceptability of a client or the premium charged. I disagree vehemently. In my experience, when an application crossed my desk, even the perfect client can lose money for the carrier, with or without a favorable credit report.

While actuaries employed by the companies can quote statistics and studies, profitability is still a roll of the dice. Insurance is based on the law of large numbers. Basically, in layman’s terms, the law of large numbers means that the more people you are insuring, the easier it is to predict losses within certain parameters. If you use this basis, then credit reports have absolutely nothing to do with the law of large numbers. It’s simply Insurance 101 and credit reports are not viable if the law of large numbers remains a sound practice. I’ve found that actuaries take out the human equation, meaning they deal strictly with the numbers and those numbers are based on the inevitable law of large numbers.

Let’s visit the credit report topic and try to give the actuaries some defense. First of all, there are only a few major credit reporting agencies in the United States. All contain virtually the same data. How reliable are they? Usually, the reports are mostly sound, given recent history. However, how many clients have had to fight to remove strange or incorrect entries? Is there any recourse for an individual denied insurance based solely on an incorrect credit report? The Fair Credit Reporting Act says there is, but in the case of insurance, probably not. By the time an individual receives notice that they were denied insurance based on a negative report, they’ve usually moved on to find another market for insurance. I can honestly say that if a prospective insured advised their retail agent that the credit report was wrong, as an underwriter, the first words out of my mouth would be tactfully worded but basically, “Prove it.” Meanwhile, the prospective insured dukes it out with the credit reporting agency which could take months. In the case of auto insurance, they, like most, need it yesterday. They simply tell their retail agent to find another market, that won’t go to a credit reporting agency. These alternative markets that don’t utilize credit reports could result in higher premiums. They pay the price and the originating company never hears from them again, regardless to whether the issue has been cleared. Unfair? No doubt about it, it is unfair if the report is incorrect.

Further, I once visited a bankruptcy court and was surprised at what I learned. I talked with several attorneys and they quoted statistics about bankruptcy. They claimed that upwards to eighty percent of all bankruptcies was a result of medical bills. Do these outstanding medical bills reflect one’s insurability? I personally don’t think so. Let’s review the case of a couple on a fixed income and unfortunately one of them becomes ill. We all know the state of health insurance in our country so it’s easy to make the leap of what the couple’s medical bills are. On a fixed income, with literally no way to repay the balance of what is owed even after their insurance is taken out, they have no recourse but to file for bankruptcy. Does this reflect their driving standards or how they pay their mortgage? My opinion is that it does not.

It’s impossible for every company to know in great detail what each individual’s situation is. Each is different and the underwriter should rely on the retail agent for an accurate depiction of any given risk submitted. Communication is vital and the credit report should not be the basis of acceptability and premiums charged. It takes out the human quotient and after all, who created the industry of insurance, but humans? Let’s take the issue of whether the company should inform a prospective client about how their premium has been changed due to a credit score out of the picture. Credit histories should not reflect premiums charged, period.