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PCI Credit-Based Insurance Scoring Benefits for Consumers

Posted on 20 Jul 2010

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The Property Casualty Insurers Association of America (PCI), Northwest Insurance Council (NWIC), American Insurance Association (AIA) and National Association of Mutual Insurance Compaines (NAMIC) are reassuring Washington state consumers and policymakers that credit-based insurance scores are accurate, fair and continue to provide savings for most consumers on their home and auto insurance.

In response to a consumer alert issued last week (July 13) by state Insurance Commissioner Mike Kreidler, PCI, NWIC, AIA and NAMIC are reminding consumers and policymakers that the major consumer reporting agencies such as FICO report that average scores remain steady and that credit-based insurance scores are not necessarily adversely impacted by changes in a consumers’ lending credit situation.

“Credit-based insurance scoring is a fair, long-established tool that saves the typical insurance consumer anywhere from 30 to 59 percent on auto insurance due to the proven correlation between insurance scores and risk,” said Kenton Brine, PCI’s assistant vice president, state government relations. “The Federal Trade Commission, St. Ambrose University, the Texas Department of Insurance, and independent actuaries have all released studies in recent years confirming that credit-based insurance scores are predictive of risk.”

While credit scores and credit-based insurance scores are both based on information from a consumer’s credit history, credit-based insurance scores only reflect credit-related information that helps an insurer determine a consumer’s likelihood of loss. So, while a person’s credit score might rise or fall based on changes in their spending or bill-paying habits, that doesn’t necessarily mean that person will see a corresponding rise or decline in their insurance score. That explains why, as the credit analysis firm FICO noted in June, average insurance scores have remained relatively stable as of April of this year (as they have throughout the recession).

“In addition to the differences between the two types of scores, Washington is among most states in imposing restrictions on the types of information that may be used to calculate insurance scores,” said Karl Newman, NWIC’s president. “For example, while an overdue medical bill sent to a collection agency can negatively impact a consumer’s credit score, it will have no impact on the consumer’s insurance score because Washington law prohibits insurers from including it when calculating an insurance score.”

“The vast majority of states have recognized the usefulness of credit-based insurance scoring,” said Steve Suchil, AIA’s assistant vice president, state affairs. “In 2006, Oregon voters rejected a ballot measure to ban credit-based insurance scoring by a 2-1 margin; the Washington Legislature rejected a similar proposal during the 2010 session. And just last week the Michigan Supreme Court upheld the use of credit scores as a factor in underwriting, affirming that credit scoring accurately predicts risk and is not unfairly discriminatory.”

“With families in Washington State struggling to make ends meet in our tough economy insurance scoring can help ensure that lower-risk consumers are not subsidizing higher risk consumers,” said Christian Rataj NAMIC’s Western state affairs manager. “The evidence shows credit-based insurance scoring accurately predicts risk – which helps insurers accurately price insurance policies. This helps consumers reduce the cost of home and auto insurance.”