Industry Issues | Preserving Underwriting Freedom

Overview of major studies on the relationship between credit and risk of loss

Since the mid-1990s there have been numerous studies examining the connection between credit information and the risk of loss. Insurers have found that using insurance scores as a factor in the underwriting process helps them to more accurately price and actually write more policies. This information helps insurance companies determine a fair premium for each consumer that is related to his or her risk of loss.

Experience has shown that policyholders with positive credit information are less likely to incur losses. Combined with familiar factors such as years of driving experience, previous crashes, and the age of your vehicle or home, insurance scores are another way for insurers to differentiate between lower and higher insurance risks.

The following provides a summary and links to various studies:

Arkansas Department of Insurance: Use and Impact of Credit in Personal Lines Insurance, June 2017
The department study shows that of all personal lines policies written or renewed in 2016, 80 percent of consumers whose premium involved a credit component either received a lower premium or their premium was unaffected. Overall 54.5 percent of consumers received some decrease in their premium as opposed to only 19.8 percent who received some increase in their premium.

Policies decreasing in premium due to insurance scoring outnumbered policies increasing in premium by nearly 3 to 1. These numbers are consistent with what has been found over the 12 years this report has been compiled.

Georgetown University Law Center: Do Credit-Based Insurance Scores Proxy for Income in Predicting Auto Claim Risk?, October 2015
This new study, published October 2015, is co-authored by a National Association of Insurance Commissioners funded consumer liaison and it concludes that credit-based insurance scores do not act as a proxy for income. In addition to empirical analysis, the study provides an overview of current regulation of the use of credit-based insurance scores as well as previous studies of their use.

Iowa Insurance Division: Use of Credit Scores by the Insurance Industry: Iowa Consumers' Perspective, December 2009
Survey of Iowans’ knowledge and attitudes regarding credit-based insurance scores conducted on behalf of Iowa’s Consumer Advocate. The report finds that consumers’ attitudes about insurance scoring do not comport with reality that insurance scoring is an effective predictor of risk. The authors recommend blocks of insurance education at the high school level on both insurance and the impact of credit scores in general.

Texas Department of Insurance: Use of Credit Information by Insurers in Texas, January 2005
The Texas Department of Insurance released a report entitled “Use of Credit Information by Insurers in Texas” to members of the state legislature December 31, 2004 and a Supplemental Report January 31, 2005.

Summary of the Report’s Findings and the Commissioner’s Analysis:
  • There is a strong relationship between credit history and claims experience.
  • The use of credit history by insurance companies is not unfairly discriminatory. Credit history is not based on race, nor is it a precise indicator of one’s race.
  • For automobile insurance, credit history is comparable in value as a predictor of claims to where the policyholder lives and his/her driving record.
  • For both personal auto liability and homeowners, credit history is related to claim experience even after considering other commonly used rating factors such as age. By using credit history, insurers can better classify and rate risks based on differences in claim experience.

Federal Report:
Federal Trade Commission: Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, July 2007
The report to Congress by the Federal Trade Commission said “Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums.”