Credit Score and Car Insurance: Beyond the Statistical Correlation
In most states, a poor credit history has a direct impact on your auto insurance premiums. This article dives deep into why credit history influences car insurance rates and explores the validity of statistical correlations between credit scores and insurance claims.
Understanding the Connection
Insurance companies often claim that a higher credit score leads to lower insurance risks and, therefore, lower premiums. However, this relationship is not as straightforward as it seems. Let's explore the logic behind it and the evidence supporting this claim.
Why Does Credit History Affect Your Car Insurance?
A common belief is that if you have a poor credit score, you are more likely to default on your insurance payments, leading to higher premiums. However, this logic extends beyond just auto insurance. If you have appendicitis, is there a significant increase in your medical insurance premiums? If you have an accident, do your car insurance premiums go up? The answer is often no, as these situations are temporary or specific events.
Unlike medical insurance, which is generally tied to specific incidents, car insurance is mandatory. Therefore, uninsured drivers face significant legal and practical consequences. This raises the question: why do insurance companies use credit scores to assess risk?
Political Influence and Corporate Practices
One possible explanation is the political and corporate influence of insurance companies. Insurance companies contribute heavily to political campaigns, often influencing legislation to their advantage. This political power allows them to set rates based on factors that benefit their financial health rather than public interest.
Simple statistical analysis shows that there is a correlation between credit scores and the likelihood of filing insurance claims. A study from the University of Texas supports this correlation. However, whether this correlation indicates causation or if it is merely a statistical artifact remains a subject of debate.
Non-Indicator Factors and Errors
It is crucial to understand that factors contributing to a low credit score may not necessarily indicate an increased risk of filing insurance claims. For instance, errors in credit reporting or data inaccuracies can lead to a poor insurance score without reflecting actual risk factors. This was evident in my experience with homeowners insurance where, despite an excellent credit score and insurance score, I faced surcharges due to adverse 'reason codes' involving my credit history.
These surcharges were based on incorrect information. In one instance, the insurance company had the wrong Wilson family, and in another, the information was erroneous for a different reason. Insurance companies increasingly rely on 'big data' and 'insurtech' for quotes, often without accurate or vetted data, leading to further errors.
The Reliance on 'Big Data'
Insurers are turning to 'big data' and 'insurtech' to gather and analyze vast amounts of data. While this approach is cheaper and more convenient, it often relies on 'dirty' data. For example, one insurtech startup I approached obtained my home's square footage from off-by-1000 square feet property tax records. This data may seem too convenient, but its accuracy is dubious.
The increasing reliance on this data raises ethical and practical concerns. Ensuring the accuracy and reliability of this data is crucial to avoiding unfair surcharges and misleading assessments. Insurers must take responsibility for the data they use to determine premiums, ensuring that it is both accurate and fair.
Conclusion
While a poor credit history may be correlated with a higher likelihood of filing claims, the relationship is not necessarily causal. Errors in credit and insurance scoring can lead to unjustified surcharges. As the reliance on 'big data' continues to grow, it is essential for insurance companies to ensure the accuracy and reliability of this data. Ethical and fair practices should be prioritized over financial gain, especially when it comes to a system as critical as insurance.
Understanding these issues can help consumers make informed decisions about their insurance policies and advocate for fair practices in the insurance industry.