Credit Score Use in Insurance: Actuarial and Regulatory Issues
The actuarial basis for credit-based insurance scores and the regulatory debates surrounding their use.
Actuarial Evidence
Credit-based insurance scores are strong predictors of future insurance claims in both personal auto and homeowners lines. Numerous actuarial studies have demonstrated that insurance scores are statistically significant predictors of loss even after controlling for traditional rating variables like age, gender, territory, and driving record. The relationship between credit and insurance losses appears to reflect underlying behavioral characteristics related to risk management and financial responsibility.
Regulatory Controversy
Despite actuarial support, credit score use in insurance is controversial. Critics argue it has disparate impact on minority and low-income populations. Several states have restricted or banned its use in insurance rating. The actuarial profession emphasizes that correlation with claims does not necessarily mean the variable is ethically appropriate for rating. The debate involves balancing actuarial accuracy against social equity concerns. Some states require insurers to demonstrate that credit scores do not unfairly discriminate, while others prohibit their use entirely in certain lines of business.