I don’t understand what my credit rating could possibly have to do with my auto insurance. Please explain.
Total Comments: 1
Posted: Wed May 26, 2010 03:37 pm Post Subject:
Great question and one I hear quite often. Many insurance companies, not all, have adopted the use of an individual’s credit rating as a tool to determine eligibility and/or rates for auto insurance. This is outlawed in some states though.
To answer your question though, those insurance companies that have incorporated this into their rating/underwriting procedures will tell you there is a direct relation between credit scores and the amount paid out for claims, not necessarily the number of claims filed. In other words, studies show that a person with a lower credit rating doesn’t necessarily file more claims, but for those claims filed, the amount paid out is higher. In addition, the portions of coverage that the higher claim payments are being made on are typically those that are easily exaggerated.
Let’s go back for a minute. What is the goal for an insurance company? To determine a reasonable, affordable, and competitive amount to charge a group of people to cover future claims while making a profit at the same time. To determine what “future claims” are going to cost, insurance companies rely on past statistics and trends. So, when an insurance company can run numerous reports and come up consistently with the same trend, they want to use this as a tool. And these studies that have been conducted independently by insurance companies and by state legislatures show an undeniable trend between low credit scores and the severity of claims.
One can only speculate the reason for this trend.
Again, not all insurance companies have adopted this philosophy nor do all states allow the use of credit in insurance rating.
Posted: Wed May 26, 2010 03:37 pm Post Subject:
Great question and one I hear quite often. Many insurance companies, not all, have adopted the use of an individual’s credit rating as a tool to determine eligibility and/or rates for auto insurance. This is outlawed in some states though.
To answer your question though, those insurance companies that have incorporated this into their rating/underwriting procedures will tell you there is a direct relation between credit scores and the amount paid out for claims, not necessarily the number of claims filed. In other words, studies show that a person with a lower credit rating doesn’t necessarily file more claims, but for those claims filed, the amount paid out is higher. In addition, the portions of coverage that the higher claim payments are being made on are typically those that are easily exaggerated.
Let’s go back for a minute. What is the goal for an insurance company? To determine a reasonable, affordable, and competitive amount to charge a group of people to cover future claims while making a profit at the same time. To determine what “future claims” are going to cost, insurance companies rely on past statistics and trends. So, when an insurance company can run numerous reports and come up consistently with the same trend, they want to use this as a tool. And these studies that have been conducted independently by insurance companies and by state legislatures show an undeniable trend between low credit scores and the severity of claims.
One can only speculate the reason for this trend.
Again, not all insurance companies have adopted this philosophy nor do all states allow the use of credit in insurance rating.
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