Using credit scores in insurance

In the past decade, the use of insurance credit scores in pricing personal automobile and homeowner’s insurance policies has become increasingly prevalent.  The subject has been a hot topic from the start, and remains so today.

An insurance company which uses credit information in pricing may receive a potential or current insured’s “insurance credit score” from a third-party vendor, or may have its own model for assigning an insured to a credit category based on certain financial information.  Based on this credit score or category, a factor is applied to the insured’s premium, making it higher or lower.

Arguments in favor or against the use of this rating variable abound.  Some of the arguments advanced by advocates of its use include:

• Insurance credit score has been demonstrated to be correlated with loss experience.
• The use of credit score or category as a rating variable is no different than the use of gender or age in personal auto as a rating variable. 
• If an insured characteristic is demonstrated to correlate with loss experience, it is actuarially sound to include this characteristic in pricing so that insureds with higher credit scores do not subsidize insureds with lower credit scores.

Some of the arguments advanced by those opposed to the use of credit information include:

• Any cause and effect relationship between credit score or category and loss experience is conjectural at best and has not been fully explained.
• The models used by third party vendors are typically “black boxes.”
• Charging an insured a higher premium at a time when he or she is experiencing financial difficulty seems unfair or even discriminatory.

Casualty actuaries named the credit score debate as one of the top ten casualty actuarial issues in 2010.  Some recent developments on the credit scoring issue include:

• The United States House of Representatives debated whether the use of credit scores should be allowed in insurance rating.
• The National Association of Insurance Commissioners (NAIC) drafted a credit scoring model law regarding regulation of credit scoring companies.
• The Maryland legislature rejected a bill that would have banned the use of credit scores in the rating of personal auto insurance.

What do you think?  Should the use of insurance credit score be allowed but tempered, fully advocated, or rejected?