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Whether we like it or not, credit scoring is here to stay. The following article gives us a brief glimpse from the companies perspective.

HELPING YOU UNDERSTAND THE USE OF CREDIT SCORING

The goal of every insurance company is to correlate rates for insurance policies as closely as possible with the actual cost of claims. If insurers set rates too high they will lose market share to competitors who have more accurately matched rates to expected costs. If they set rates too low they will lose money. This continuous search for accuracy is good for consumers as well as insurance companies. The majority of consumers benefit because they are not subsidizing people who are worse insurance risks — people who are more likely to file claims than they are. The computerization of data has brought more accuracy, speed and efficiency to businesses of all kinds. In the insurance arena, credit information has been used for decades to help underwriters decide whether to accept or reject applications for insurance. Now advances in information technology have led to the development of insurance scores, which enable insurers to better assess the risk of future claims. An insurance score is a numerical ranking based on a person’s credit history. Actuarial studies show that how a person manages his or her financial affairs, which is what an insurance score indicates, is a good predictor of insurance claims. Insurance scores are used to help insurers differentiate between lower and higher insurance risks and thus charge a premium equal to the risk they are assuming. Statistically, people who have a poor insurance score are more likely to file a claim. Insurance scores do not include data on race or income because insurers do not collect this information from applicants for insurance.

 

Source: Insurance Information Institute

Posted 11:35 AM  View Comments

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