Credit Scoring: A Consumer’s Perspective

It is no secret that insurance companies use the credit scores of individuals as one tool in the approval/disapproval process and in establishing premiums.

Most courts allow this process as long as the scoring is uniformly applied to all insureds and is consistent with the purposes of the individual state’s insurance code. But just because credit scoring is legal does not make it right.

Insurers contend that there is a clear correlation between credit scores and the risk of loss; that is, the lower the credit score, the more likely that the insured will file a claim. This may be statistically correct, but I wonder if insurers take into consideration the fact that the credit-scoring companies often make mistakes. And, what is even worse, the credit-scoring companies don’t admit mistakes or when they do, it takes months and even years to make the corrections.

That is not going to help any potential insured get coverage when it is needed.

Insurers want to attract and retain low-risk customers since this is a way to make a profit, but many state insurance codes have the express purpose of making insurance available and affordable for everyone. Turning away a potential customer or charging the customer prohibitively high premiums because of some anonymous crowd of pencil-pushers using subjective standards does not seem to me to be living up to that express (and grand) purpose.

Plus, I just find it irritating that these credit-scoring agencies have so much power over the daily lives and operations of citizens (and even countries as the effect of the downgrading of the U.S. credit rating shows).

Now, before anyone thinks I am complaining because I have a low credit score, the fact is that I don’t. And I realize that an insurer needs to make a profit to continue in business.

But credit scoring still seems to me to be a crude, unfair, overly subjective way to set underwriting standards. There has to be a better way to establish the insurance-worthiness of a potential customer.

Those in the insurance business are intelligent people, and ignoring credit scores or at least downgrading their importance when it comes to the approval/disapproval process and establishing premiums cannot be that hard a task.


David D. Thamann

David D. Thamann, JD, CPCU, ARM, is managing editor for FC&S Online.