Credit Score is Predicative. But should it be used?

[Allen Trent]

So maybe their analytics are not advanced enou

The carriers don't receive any specifics as they have merely bought the proprietary algorithm from the data seller & the data seller won't disclose the specifics of the algorithm to the carrier because they fear the carrier could create their own algorithm & no longer need to buy the data sellers algorithm.

But I am a life/annuity agent, so I certainly could be wrong

Same has become somewhat true to the accelerated UW algorithms in Life industry. The financial credit based components of the algorithm are near impossible to figure out or explain to clients. 2 business partners applying for accelerated UW without exam. 1 may get best rate class & the other a standard risk without knowing why. Seeing this more commonly with the slightly younger applicant without much credit history. Roll of the dice on who to encourage to use traditional full health based UW & who to use accelerated data based.

Hell, Fidelity won't even let my 18 yr old son with 2 existing Fidelity accounts(Roth IRA from jobs & inherited IRA I disclaimed) to open a 3rd account (after tax brokerage account} because the data sellers sites indicate he isn't a real person......until I ask 3 times for fidelity to reference his other accounts they previously confirmed he was a real human. He has 3 tax returns filed & bank accounts, but default is to say he doesn't exist because credit reporting doesn't recognize him. Kid has a net worth of double or triple the average adult American between bank accounts, retirement & brokerage accounts & 529 plans that will cover college without need for big student loans. Likely will get gouged for a decade on auto & home insurance rates based on the algorithms.........LOL

Data collectors & sellers have basically gotten green light to sell for good money macro data that is predictive, but not always accurate at micro individual level

 

[scagnt83]

Same has become somewhat true to the accelerated UW algorithms in Life industry. The financial credit based components of the algorithm are near impossible to figure out or explain to clients. 2 business partners applying for accelerated UW without exam. 1 may get best rate class & the other a standard risk without knowing why. Seeing this more commonly with the slightly younger applicant without much credit history. Roll of the dice on who to encourage to use traditional full health based UW & who to use accelerated data based.

Very true. Overall I like the new accelerated UW systems on the life side that are not 100% automated for everyone. But they are not perfect. Things definitely are slipping through the cracks that otherwise would not. And Im sure its adversely affecting some consumers negatively.

Recently I had a guy come to me with a Std rating at a major carrier, of course his agent quoted Preferred Plus. Asked what I could do. Std was due to labwork, but his rx record was clean. Ran him through an accelerated UW carrier and he got Preferred Plus... had it got kicked to full UW he would have been standard with them too based on the lab work...

That is the perfect example of how the system can be played. Great for the consumer and agent. But possibly not that great for the carrier if too much of that goes on... and if it does, it could result in higher premiums for future sales. (perhaps something the auto industry is already seeing?)

Ive heard rumors about insurers doing more due diligence during claims in the future because of the automation being used now. Carriers know there is slippage compared to prior, so they will make it up on the back end as much as possible. Im sure cost savings on the front end more than offset everything after you factor in time value of money.

 

[ehall2]

As an agent for 50 years I'm not convinced credit is a reliable predictor of claims. When I started my current agency in 1998 companies were just beginning credit scoring and at that time used your credit score number and listed it on your quote. In 1998 I owed $30,000 on my home, had an amex that I paid in full each month and was furnished a company vehicle. I went to my banker and told him I had to buy a vehicle. He told me to get what I wanted and to call him and he would deposit the money in my account. So I did. Then when I tried to insure my new vehicle my score that the insurance company listed on the quote was 555. The minimum to get insurance with the company was 650. I talked to the company to see if me being an agent they would make an exception and they said with credit scoring they couldn't make exceptions anymore. My driving record was clean and I told them if I pulled out of the parking lot that day and had an accident it wouldn't have anything to do with my credit score. Our insurance commissioner made companies stop accepting or rejecting insureds because of a score. Companies then came out with multiple tiers so you could still get coverage but the lower the score the higher your rate. I then discovered the more debt you had the lower your score. It didn't matter if you paid your bills 30 days in advance you still wouldn't get a good score. I found that business people normally didn't get good scores because they usually had to borrow money to operate. In this situation I could list the wife's name first, as most companies ran the score on the first named insured, and the wife would get a higher score and better rate. I had an insured that didn't have a mortgage on his home and had a 1 million dollar cd. He never got a low rate because he didn't have a good score. He later told me he was going to buy a cabin in the mountains but he couldn't get a mortgage because of his low score. I am convinced that if a property and casualty company needs a rate increase they don't have to apply to the insurance commissioner, they can just tweak the insurance scoring. Finally if the score is such a predictable measure why get MVR's? Why use past claims for acceptance?

 

[Valor]

It seems that in general, this is the best way to rate insurance customers just as it is for loans. Good paying customers are rewarded with favorable rates and I think that research has shown that they tend to have less claims. I cannot back that up with anything concrete, but it seems that was the case in the research.

As well, I cannot speak for all states, but each state has its own insurance department and the ability to use some of the premium rating based upon an "insurance index" (credit rating), I believe has to be approved by each state's legislature. The insurance industry must have some very compelling evidence in order for legislatures to approve that portion of rating due to credit scores...of course there are always exceptions, but in general, that has been done and I agree with it.

 

[ehall2]

One of the major national companies, that was the first to used credit scoring, now say they are re thinking using credit scoring. I wonder if GEICO even uses credit scoring. If someone comes in our office and they are with GEICO we will be as much as half their rate if the insured gets a good credit score. If the insured gets a low score we can't touch their rate. So, who knows who is right.

 

[Markthebroker]

I'm a fan of using credit scores, but I have a bias as my score is over 800.

In most, not all, but most cases, the free market will be the most fair and honest to find the best way to do something. If companies find something that works, and is legal, and makes them an extra few pennies they're gonna use it.

Don't like it? Then you can pay your bills on time and don't finance things you can't afford, or don't use an insurance company that uses credit scores.

 

[Allen Trent]

have a bias as my score is over 800.

Tiny score, but then again tiny hands too. My score is 1790..........so take that. Sure, my carrier might just add 1000 so people compare & think 1500 is better than their previous carrier 600, but whatever. Mines bigger than yours

 

[Allen Trent]

Then you can pay your bills on time and don't finance things you can't afford, or don't use an insurance company that uses credit scores.

Agree with the premise, but have seen a lot of widows with massive savings, no claims but get shitty insurance scores because either they have no debt or they have never been the primary name on the debt. The primary flaw I see is they say it isn't based on your credit score, but people flush with cash that never borrow money are like a unicorn with no real place in the "insurance scoring models"

 

[adjusterjack]

flush with cash that never borrow money are like a unicorn with no real place in the "insurance scoring models"

I'm sure there are other exceptions to that besides me.

I am "flush with cash." I have no mortgage, no car loans or other loans, CCs are paid in full, no running balances, no claims, tickets or accidents, 800 FICO, and have no problem getting insurance with competitive rates.

I have to go polish my horn now.

 

[Life Hawk]

I see that topic digression occurs here in the P&C world as well. Us FX guy's have taught you all a thing or two.

As to a predictive score, I was thinking how accurate that model would be at letting one know of their chances of winning the lottery. This of course is a question from the FX side of things, but minds that "read" the Enquirer want to know.