According to a recent study by the Insurance Research Council (IRC), consumers’ skepticism regarding the relationship between credit history and potential insurance claims seems to decrease when the predictive value of credit-based insurance scores is conveyed to them.
This is only one of the encouraging results from the IRC. Others consist of:
The majority of consumers are aware of the credit, credit histories, and credit ratings.
Most people think it would be simple to raise their credit score, and almost all think it’s crucial to keep a clean credit history.
Almost all demographic groupings agree that the majority of households do not find it difficult to pay for auto insurance.
There have been questions raised concerning the use of credit-based scores and a few other measures in determining the cost of auto and house insurance. People of color, who are more likely to have less-than-stellar credit histories, may occasionally pay more than their neighbors for the same coverage, according to critics, which can result in “proxy discrimination.”
Given the intricate models used to evaluate and calculate risk, confusion surrounding insurance rating is understandable. In addition, insurers are well aware of the history of unfair discrimination in the financial services industry. They employ teams of actuaries and data scientists to measure and distinguish between a variety of risk indicators while avoiding unjust discrimination in order to traverse this complexity.
The graph below demonstrates how insurance claims often decrease when credit scores rise. The frequent association between race and poorer credit scores underscores societal issues that need public policy, including financial literacy instruction. If anything, it strengthens arguments for policy change when there are clear racial differences in insurance availability or affordability connected to credit quality.
In research released last year, over half of participants said receiving financial literacy training would have improved their money management during the pandemic. According to the study, which polled 1,047 U.S. adults, insurance was the topic that 21% of respondents said they understood the least.
While the non-Hispanic Black respondents in the IRC study were more likely than other groups to believe it is necessary to improve their credit scores and would be simple to do so, they were also less likely to think that credit is a reliable indicator of paying bills or submitting claims. They also expressed less agreement with the use of credit history in situations involving lending, renting, or insurance.
However, all racial and ethnic groupings concurred that a person with high credit should reap the rewards in the form of cheaper insurance prices.
According to the IRC report, numerous studies have shown credit-based insurance score’s predictive power for claims behavior. More recent research using driving data from mobile devices “shows that there is a link between driving habits, such as hard brakes, and credit-based insurance score variations.”
Any rating feature that predicts claims and losses aids insurers in fairly pricing insurance by charging distinct drivers premiums that closely match their risk. Without these elements, less risky drivers would be required to pay higher rates to cover the insurance of riskier drivers.