Car insurance and credit scores

Hello-

Here’s a good article from the folks at Consumer Reports with an explanation about how your credit score affects your car insurance rates and why.

Here’s an excerpt:

Insurers have long used statistics to determine premiums.

That’s how they figured out that drivers under age 25 have more accidents than older drivers.

The traditional rating factors have been age, sex, marital status, ZIP code, driving record, and three-year history of at-fault accidents.

Insurers determine how much each factor affects the frequency and size of payouts and create a formula for calculating a premium based on your characteristics.

The formula starts with a dollar base rate for each type of coverage, then multiplies, adds, or subtracts amounts based on each of the rating factors.

In the 1990s, Fair Isaac worked with several insurers to test its theory that credit scores might predict homeowners- and auto-insurance claims losses.

Statistical analysis of archived data from more than a million credit files found that 30 of 100 or so items in the reports correlated with payouts.

That finding led to the creation of homeowners- and auto-insurance scores.

A study conducted in 2000 by James Monaghan, a research strategist at Metropolitan Property and Casualty Insurance Company, found, for example, that people whose oldest account on their credit report dated back 25 to 29 years subsequently filed only $60 worth of claims for every $100 of premiums paid over the next three years.

Neither insurers nor the credit-scoring companies that discovered the relationship know what causes it, except to suggest that those with subpar credit are themselves subpar.

“People with a pattern of irresponsible financial behavior and poor credit history have a much greater chance of being in an accident or filing a claim,” says Joseph Annotti, a spokesman for the Property Casualty Insurers Association of America, a trade group.

The American Academy of Actuaries said in its 2004 recommendations to the Federal Trade Commission that “aggressiveness” and “willingness to take risks” go along with a poor driving record.

“The correlation with fraud is striking,” says Gordon Stewart, president of the Insurance Information Institute.

But the Monaghan study, which reviewed those long-standing inferences, says that links between responsible financial management and future expected losses are “unsupported.”

Steven Parton, general counsel for the Florida Office of Insurance Regulation, says, “What they’re really looking to see with insurance scores is who is most likely to file a claim, not who will most likely have an accident.

Read the rest of the article below for tips on improving your credit score and lowering your insurance rates.
-Adam

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