why do auto insurance need credit check

credit check means we need credit

but i dont need credit from an insurance co.

I can pay it in full at begining, why would they still insist on it?

it's part of their risk assessment model.

why do they need credit checks for cell phones? same concept...

Insurance companies must have models on FICO scores vs. insurance claims/payouts.

rigor said: people with bad credit tend to wreck alot, burn their cars or have them stolen.

difference between a 700 and 750 is quite amazing in price.

not all states allow this entirely but most do.

The reason some states won't allow it is because it's not true. It's simply another thing the insurance companies

do to increase their profits at your expense.

I wish insurance companies could use credit scores in my states. Why should I pay the same rate as a deabeat when numerous studies have shown that people with bad credit are more likely to file claims?

nycll said: Which states don't allow it?I'm interested in this too. Years ago I worked for a company programming software modules that calculated auto insurance quotes for people (based on the insurance carrier's publicly disclosed rating tables and formulas that they filed with the state's DOI), and it was pretty common for them to factor in credit scores. I don't remember any state specifically prohibiting this.

To answer the OP's question, I think the reasons why an insurance company would be interested in a credit score are pretty obvious. A credit history is one of the only ways that you can quantify how "responsible" somebody is.

barefool said: rzyzzy said: The reason some states won't allow it is because it's not true. It's simply another thing the insurance companies do to increase their profits at your expense.You should refrain from making definitive statements without evidence. Insurance companies have proven, through statistical studies, that risk is correlated with credit score. That's why regulators let them use credit in the rating algorithm.

And rates aren't increased by using credit scores. Rates are simply adjusted corresponding with risk. People with high credit scores actually pay lower premiums due to their lower risk. It's a good thing.

I would advise you not to make statements without evidence as well. I had a personal experience with this, and my rates went up - the reason given by my agent at the time was that my credit score had dropped.

The only thing the insurance companies have proven is that they are greedy, opportunistic, and anti-competitive, unless the government holds them back.

EVIDENCE

It's six pages, so I've pasted a relevant section below. Bottom line - you've been fed some kool-aid. Since you believe your score is fine, this issue doesn't matter. When it affects you, then it will become a problem.

See the facts below....

The Attorney General’s office finds it problematic for three reasons:
1. There is little or no transparency in the insurance industry. Consumers have no way of knowing which specific factors are being used to determine their insurance premiums. In the case of a “credit score,” these numbers may be based on a credit report, but are not identical to those reports. Simply reviewing a credit report will not offer a consumer a clear picture of what factors an insurance company has used to set that score.
2. There is little rational and independently verified correlation between a poor credit rating and a poor driving record.
3. Credit reports are notoriously error-ridden. Using an inaccurate report to determine an insurance premium is unwise and unfair.

If you don't agree with this, that is your perogative - however for every correct and accurate credit report, there is a gamer willing to do "bumpage" or the usual creditboard tricks to falsely increase their scores. And more than a few people, including myself have been dinged for things we didn't do, and we've had NO LUCK in removing inaccurate derogatory information from our reports.

rzyzzy said:
2. There is little rational and independently verified correlation between a poor credit rating and a poor driving record.

If there was high correlation between credit scores and driving record then there would be no reason whatsoever to factor both into figuring out insurance rate.

The auto insurance business is highly competitive. If you don't want your credit checked, refuse to give consent and find an auto insurer that doesn't factor in credit scores. There are companies out there that don't use credit scores.

rzyzzy said: 1. There is little or no transparency in the insurance industry. Consumers have no way of knowing which specific factors are being used to determine their insurance premiums.The specific factors used to determine insurance premiums are a matter of public record. Insurance companies are required to file their rating manual, including their actuarial tables and rating formulas, and they are available to anybody that wants to go spend a day at their state's dept of insurance office to photocopy them. How else do you think that places like Geico can provide quotes from competitors?

WalStMonky said: It might be that they've noticed that irresponsible people do irresponsible things. If you think the payment due date doesn't apply to you you might decide the stop sign doesn't really apply to you either.Indeed. The "but I'm only irresponsible with my money!" argument rings a bit hollow.

nycll said: Which states don't allow it?
California doesn't. I think Minnesota doesn't.

rzyzzy said: rigor said: people with bad credit tend to wreck alot, burn their cars or have them stolen.

difference between a 700 and 750 is quite amazing in price.

not all states allow this entirely but most do.

The reason some states won't allow it is because it's not true. It's simply another thing the insurance companies

do to increase their profits at your expense.

This is an interesting point. The average consumer does not have the ability to actually refute these claims, and people have been conditioned to be punished for having lower credit scores, so the insurance companies are just piggybacking on this to increase profits, because they know people with bad credit will not or can not do anything about it.

I would like to see someone independent of the insurance industry do a study about the correlation or lack of correlation between accident rates, and Fico Score.

I had a time in my life where my credit was not good. I have never had a time in my life where I got into car accidents, got a lot of tickets, or anything else actually indicative of someone who might be a more at risk driver.

Obviously my sample size is one. But I know why the items on a credit report can be used to judge your credit worthiness. I can't see what they have to do with driving a car.

I think its a part of their risk assessment strategy. Nothing more.

knacksac said: A big problem with lay people using graphs and statistics is that they frequently have no idea how to properly interpret them. Sure that graph makes it look like people with higher credit scores have lower claims, but that is not adjusted for all the other factors you have listed below. Perhaps people with bad credit tend to drive less safe cars, that would explain your nice little graph. (Graph 5 does show what I am talking about)
It's very likely that the people at the Michigan AG's office who were giving arguments against using credit scores understood this.


Right, and people doing statistical research for insurance companies are just a bunch of high school drop outs, who have no idea what they are doing
I tend to think, it is really the other way around. The lawyers are rarely accomplished statisticians, they have other skills.
In particular, his argument about lack of evidence of correlation between credit scores and driving records makes me think, that not only he does not know what he is talking about, but doesn't really even care. He is making a political argument for "lay people", 90% of whom don't even know what "correlation" means anyway.

And in the end, this is a social choice, do we want to allow insurers to do this?

Exactly. So, these political clowns should stop pretending this is about science which they don't know squat about.
It clearly is a scientifically sound assumption that credit scores are relevant to insurance rate. If insurance companies just wanted to find a way robbing you of your money, they could come up with lots of less controversial and more effective ways. They could lie about correlation between your income and insurance claims for example. "People in the highest tax bracket file more claims". Or smokers ... Or "minorities file less claims". Do you think, the AG would give a damn then?

knacksac said: Sure that graph makes it look like people with higher credit scores have lower claims, but that is not adjusted for all the other factors you have listed below.Believe it or not, they've already thought of that. This link contains an actuarial study using multi-variate analysis to isolate the correlation of credit score and claim frequency and severity.It's very likely that the people at the Michigan AG's office who were giving arguments against using credit scores understood this.Hardly. Until 1996, Michigan had a law stating that any insurance rating territory could not vary in price from a contiguous rating territory by more than 10%. And that you could not refuse to sell in a particular territory. And the numbers of territories were limited. So rather than charging drivers in the ghetto of Detroit appropriately high rates, while charging drivers 30 miles away in the suburbs appropriately low rates, insurers had to try to reverse engineer rates that were either appropriate in the suburbs and much too low in the city, or appropriate in the city and much too high in the suburbs, or too low in the city and too high in the suburbs.

Was there any mathematical reasoning for this law? Of course not. Did the law protect consumers by lowering the average overall rate in the state? Of course not. It was political posturing by people who didn't understand insurance. It's a fairly common occurrence among politicians.State AG's are there to protect consumers, they probably know what they are talking about.Again, not likely. AGs don't have to delve into the actuarial nuances of insurance rating to protect consumers. The free market will do that quite nicely. If AGs really had this passion for consumer protection, why is late night television riddled with commercials for pills to lose weight, gain size or sexual stamina for men, or all other claims that anyone with half a brain knows are false. Instead of AGs aggressively going after these companies selling products that can actually kill people, they are trying to socialize insurance rating.In fact, I'd bet if insurers had the choice they would only cover drivers that have never had accidents driving grannymobiles with 750 FICOs. It shouldn't work like that, and government mustn't let insurers get away with it.Again, no need. The market will do it for them. Many auto insurers specialize in high risk drivers. They are called non-standard insurers. Most small companies specialize in these drivers. A company that writes $10 million in premium can't really compete against State Farm, that writes about $30 billion in auto premium. So the small company looks for a market where State Farm isn't much of a player, like the high risk, non-standard market.

This study concludes that there is literally no need for insurance pricing regulation in this country.

computerquest said: There are so many strange things about insurance...the credit score is part of the rate formula, not the whole thing.

My newest insurance question: why does the new life insurance company want to know what my spouse makes and how much life insurance my spouse has? They will not process the application without it.motive

ap007 said: credit check means we need credit

but i dont need credit from an insurance co.

I can pay it in full at begining, why would they still insist on it?

It's like being married or not, owning your home or not, or your gender. Taken on a small sample, those aren't very reliable indicators of risks but insurance companies do statistics on how those correlate to number of claims, claim amounts, etc ... (basically how risky you are as customer). Credit score is one that was recently found by most insurers to bear relevance.

As far as those models not being transparent, totally true. Insurers can come up with whatever scheme they want to calculate a premium. If you don't like it, shop around and find a better deal than current insurer. Most insurers will tell you why your premium went up, especially if it's based on advertized metrics like credit scores. If it's based on changes in their formula that they don't care to give details on, kinda sucks but again if people shop around it'll prevent the insurers from doing arbitrary increases in premiums.

If your credit score is shot because of errors, it's partially your fault if it remains that way. Everyone has 3 free credit reports per year so enough to get one ahead of each renewal of their semi-annual insurance payments. Fight it with creditors and credit reporting agencies. You have plenty of (potentially money making) opportunities to do so provided by the FBA and FCRA. It shouldn't become an excuse for complaining about insurer's pricing policies. If you believe that they are erroneous items on your record that will take time fixing, talk to you insurance agent telling them that you're contesting errors on your credit record and would like to keep your previous customer risk assessment category until those are fixed. If you've been a good customer, you could get 6 month deferral in risk assessment changes. Even if they deny that, recontact them to demand a risk rescoring as soon as the errors are fixed.

If someone thinks it's a great idea not to allow insurance companies to determine risk however they want, then I encourage him to start his own insurance company and not use the risk factors he sees as wasteful.

Tcope, why would an insurance company care about the chance of someone being in an accident? They don't. They care about someone filing a claim. Accidents only matter to the extent that they lead to claims. Insurers don't care about whether insureds suffer losses. They care about claims. That's it. Insurers don't pay for accidents. They don't pay for losses. They pay for claims.

An accident of one of their insureds isn't an expense.
A loss of one of their insureds isn't an expense.
A claim by one of their insureds is an expense.

Companies care about revenue and expenses. Accidents and losses are only relevant to the extent that they lead to claims. If a group of people is more likely to have accidents which leads to increased claims, that is a valid reason to impact rates. If a group of people is not more likely to have accidents, but this group is more likely to file a claim, it also is a valid reason to impact rates.

I have no idea of the impact of credit scores and claims. Regardless, it is this correlation that matters and not the correlation between credit scores and accidents.