In the early 1990s I was scratching out a living as anunderwriting manager when my phone rang with one of the most askedquestions in our industry: “What does my credit score have to dowith my car insurance rates?” Not having a better answer at thetime, I said something like, “It's really hard to explain, but itjust does.”

Today, not much has changed. Credit or credit-based insurancescoring is still easily misunderstood by consumers, making itlow-hanging fruit for aspiring politicians. In 2009, almost 50bills limiting or prohibiting the use of credit in insuranceunderwriting or pricing were introduced across the country.Fortunately for consumers, none made it into law.

In a business where the only way to predict and price futurelosses is to look at the past, credit is one of the best, mostaccurate tools available. A recent study commissioned by theinsurance consumer advocate's office in the Iowa insurancecommissioner's office confirms credit-based insurance scoring as afair and accurate predictor of loss.

Most consumers can probably make the connection between commonunderwriting/pricing variables like driving record, driver age, orwood versus brick construction. It is easy and logical to say ifyou had a DUI you will pay more for car insurance. However,surcharging drivers with bad driving records or charging higherpremiums for homes on the beach is done only after there isevidence that proves those surcharges are warranted. The industry'suse of credit meets that same standard.

Insurance agents have been trying to explain all of this totheir clients for years.

So why does credit scoring work? Maybe the answer I gave almost20 years ago still has merit after all–it just does. Study afterstudy (EPIC actuaries, Tillinghast, the University of Texas, andeven the Federal Trade Commission) has proven a clear and directrelationship between credit-based insurance scores and losses.Further, those studies validate that credit scoring is not unfairlydiscriminatory. Because it works, insurers can more accuratelypredict future risks and price their products accordingly. Theresult for most consumers is lower premiums.

Remove credit from the underwriting/pricing mix and thepredictability of future losses becomes less certain and policiesbecome more expensive. And if you think trying to explain the useof credit is tough, see what happens if the use of credit in theratemaking process goes away and insurance premiums go up for mostof your clients.