Credit Based Scoring And
Insurance 199f016
Insurance companies use
different sources of information about a person that supplements an
application. For auto coverage, motor vehicle reports are ordered. For home
coverage, physical inspections may be needed. Another tool that is widely used
for underwriting is credit-based scoring. Use of this method was once controversial
but, by and large, it has gained public acceptance. Its origin lies in the
commercial use of credit histories.
Banks and other lenders have
long used credit history in their lending process. A discovery then occurred
which prompted a new use. For some reason, certain elements of a person’s
credit history are predictive of whether that person is likely to suffer
insurance claims. A credit-based score is developed from information such as
amount of debt, number of credit cards held, pattern of payments, defaults,
etc. Credit-based scores are used to help decide the acceptability of
applicants. They may also help a company choose to modify the premium charged
to existing clients.
Insurers, after battles
with regulators and consumers regarding the use of such information, routinely use
credit-based scoring. It is hailed as an aide to improve their pricing and
profitability. However, there is a reluctance to provide details on how scores
are developed. Companies have claimed that the information is considered
confidential. Insurers fear that revealing details on credit-based scores would
result in losing valuable information to competitors. While a handful of states
have banned the use of credit-based scoring, most others have approved its use
(along with guidelines for its use).
If you have been affected
by a credit-based score, you’re entitled to know. You can also get information
on how to be sure that your credit history is accurate. An insurance
professional is a good source to help you with questions on how your credit may
be affecting your insurability.
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2011
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