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Tony Ondrusek is founder and publisher of Insurance & Financial Advisor and IFAwebnews.com.

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Neighbor “A” is 45 years old, drives a late-model car, has no citations or accidents on his record, and promptly pays his bills.

Likewise, Neighbor “B” is 45, has the same car and no accidents or citations. However, Neighbor B might have a bit higher of a mortgage, or possibly spends a little too freely and little too often with his credit card.

So guess who pays a higher auto insurance premium?

Over the years, carriers have used various criteria to determine premiums. In many states, redlining (using geographic data) has been outlawed. And given that much of the other criteria used in auto underwriting is not directly related to an insured’s auto ownership or driving record, what is an insurance company to do?

At least one expert thinks that using a person’s credit score is a good way to determine insurability. Click here to see the story.

But how fair is it? While my personal credit rating is high, and I have little on my traffic or accident record, I am not sure if I am less of a risk than a friend who might be stretched a little more thin because of financial commitments or purchases.

I’m not making a judgment call either way, but surely there must be some way that both consumers and carriers can come together on underwriting that will make everyone happy.

The person or company who finds that “golden” equation deserves the “golden” prize.

3 Responses

1. TomT Says:
   November 10th, 2009 at 9:49 am

   Rate making works in the context of the law of large numbers. As is always the case, an anecdote within the set will appear contrary to the overall conclusion. Overall, credit scoring has proven to be a very reliable rating metric. It may not be politically popular, but it is reliable. Any time we force rating on political criteria instead of what is actuarially reasonable and sound, we effectively tax the better risks to subsidize those who are higher risks. Perhaps public policy requires that, but sound rating does not.

2. Craig Says:
   December 1st, 2009 at 4:47 am

   Tom…

   Sure, the story is anecdotal. But should we allow a system that makes something like that happen? Insurance companies were doing just fine, profit wise, when they based decisions on individual factors, like driving history, vehicle choice, and neighborhood crime data.

   At some point, actuarial data serves only to fatten the bottom line of the insurance companies. If we are indeed “in good hands”, and our insurer is “like a good neighbor.” Shouldn’t they be concerned that their customers are not treated like cattle?

   I don’t have a perfect solution. But I do know that in places like Metro Detroit, people with good driving records who happen to have lost jobs are getting hit with big increases right now. These are responsible people. Shouldn’t they at least be afforded some individual circumstantial consideration?

3. Nick G Says:
   April 2nd, 2010 at 11:27 am

   All of the data claiming that Credit Scoring is an accurate indicator of risk has been based on data that is before the current recession. So many job losses have resulted in hundreds of thousands that have lost jobs. These are people who, through no change in their driving habits, have become greater risks according to the insurance companies. Much greater risks, as their credit problems mount. The feasibility of credit scores tied to risk needs to be re-analyzed for the current reality of hundreds of thousands of job losses. The current system kicks these people when they are down. Maybe, the people who are backing credit scoring for insurance rate setting should loose their jobs for 6 to 12 months and then see how they feel about it.

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