The insurance industry is now saying that it has hard data that proves that a driver with a bad credit score is more likely to slam on the breaks or step hard on the gas. These behaviors also correlate with being less educated, unmarried, or if you sell real estate for a living.
While the relationship between losses and many rating variables are intuitive and obvious, such as driver age or driving record, the relationship between loss and several other rating factors has largely been called into question in the past, particularly such variables as credit behavior, marital status, education, and profession.
The American Property Casualty Insurance Association has released a white paper, "Behavioral Validation of Auto Insurance Rating Variables," which highlights how many of the most commonly used driving rating factors are related to driving behaviors and the risk of loss. Many of these factors are contested by consumers.
The most common rating factors historically have been used for decades. Recently, insurance company's use of certain factors, including credit behavior, marital status, education, and occupation have come under fire for not truly being indicative of risk.
Actuarial standards of practice and state insurance regulators mandate that all rating factors insurers use comply with stringent requirements documenting strong statistical correlations between rating variables and loss outcomes. Although most factors, such as accident history, age, and miles driven, are very intuitive in the determination of what someone pays for insurance, the other less intuitive variables have proven to be highly accurate.
The white paper used telematics and claims data to demonstrate correlations between several commonly used driver-related characteristics and losses, including credit, marital status, occupation and education.
The white paper discussed how a driver's credit-based insurance score (CBIS) is a variable used by most auto insurers today. The insurance scores based on credit are highly predictive of loss. The paper found that every serious and reputable actuarial study on the issue, including a seminal study by the Federal Trade Commission (FTC) in 2007, reached the same conclusion, that there is a high correlation between insurance scores and the likelihood of insurance claims.
The FTC study found that the use of CBIS is likely to make the price of insurance better match the risk of loss that consumers pose, that as a result of the use of scores, higher-risk consumers, on average, pay higher premiums and lower-risk consumers pay lower premiums.
According to the paper, telematics data showed that hard braking behaviors are strongly associated with high credit based insurance scores and high risk drivers. The white paper indicated that the predictive power of credit-based insurance scores are consistent across companies.
The study also found that scores permit insurers to evaluate risk with greater accuracy, making them more willing to offer insurance to higher-risk consumers for whom they may not otherwise be able to determine an accurate premium. The study marks this as a benefit for the riskiest drivers who previously may not have been able to get auto insurance because it was too difficult to determine an accurate premium.
The study also found that marital status was highly predictive of loss, discovering that married drivers are associated with insurance claim costs approximately 20% lower than the overall population of drivers.
Occupation was also found to be highly predictive of loss, with telematics data confirming the association between claims costs and occupation. Certain occupations drive more frequently in areas they are unfamiliar, while other workers drive the same route at the same times every day. These risk groups are not based on income, and instead are based on actual claims costs. Data from one insurer showed that:
- "Bank tellers benefit from lower rates compared to psychologists
- Teachers benefit compared to financial advisors
- Enlisted military benefit compared to pharmacists
- Firefighters benefit compared to dentists [and]
- Receptionists benefit compared to veterinarians"
Editor's Note: This study comes in response to some industry developments, including Washington Insurance Commissioner's ban of using credit to rate insureds. That ban was overturned on October 8th. Credit-based scoring has been at the center of contention in the insurance industry in recent years. Industry groups argue the need for insurers to use credit scoring as an essential risk-based rating tool; however, consumer groups believe using credit factors in insurance is discriminatory and negatively impacts minority communities.