When I first heard about the use of credit in the insurance industry, I thought, “What’s credit got to do with it?” (Set to the tune of Tina Turner’s number one billboard hit of 1984, “What’s Love Got To Do With It?” of course!). Well insurance consumers and Tina Turner fans alike may be surprised to learn that credit has a lot to do with it!
Most people realize that financial institutions look at a person’s credit history to determine whether to loan money or what interest rate to charge. What many people may not realize is most insurance companies also use credit history to help decide whether to issue insurance policies or what price to charge for them. Why do insurers use credit history? Studies by various groups show that credit history not only predicts a person’s ability to repay a loan, but is also very predictive of a person’s likelihood of having future insurance losses.
Despite the statistical evidence, it may still be difficult to understand what credit has to do with a person’s future loss likelihood. A person’s ability to handle and manage credit has a direct correlation to a person’s stability and responsibility, which are two characteristics most insurance companies look at closely when reviewing an insurance application. These characteristics are inherently subjective in nature and difficult to measure. Evaluating data from a credit report can be very subjective as well. To make the evaluation more objective, insurers use mathematical models that weigh and score factors taken from an applicant’s credit report. The resulting score – called an insurance score – is then used to help insurance companies make better decisions as they underwrite and rate insurance policies.
Many insurance consumers may not realize the advantages using credit affords them. Using credit helps make insurance more affordable. Insurance companies have found that using credit as one factor in the underwriting or rating process helps them more accurately price policies. By more closely matching the price of the policy with the individual’s potential for loss, companies are able to reduce rates for more consumers.
Credit, and ultimately your insurance score, is just one piece of the rating and underwriting puzzle. Insurance companies consider many factors when determining a person’s insurability and the right price to charge for taking on a particular risk.
