FTC Study Proves Credit-Based Insurance Scores Reduce Costs

The use of credit-based insurance scores for underwriting insurance has been shown, time and again, to be an effective tool to better predict the likelihood of future claims and the cost of those claims, as well as a means of reducing insurance costs for the vast majority of drivers and homeowners. So, it was not so surprising that a long-awaited government report echoed the statements of the insurance industry.

NAMIC has said for years that the practice encourages competition, enables insurers to offer coverage to more consumers at a fair price, and helps streamline the decision-making process. Credit-based insurance scores are one of many criteria insurers use to determine appropriate rates for policyholders. The practice does not, as some critics have asserted, unduly penalize certain demographic subgroups.

The study by the Federal Trade Commission puts to rest the arguments critics have lobbed at the insurance industry for years. It notes that credit-based insurance scores are effective predictors of risk under automobile policies, and their use results in benefits for consumers.

The report explicitly invalidates the notion that insurers unfairly target minorities for higher insurance rates through the use of insurance-based credit scores. One statement in the report says: “Credit-based insurance scores appear to have little effect as a ‘proxy’ for membership in racial and ethnic groups in decisions related to insurance.

Tags Credit Credit score Economics Financial economics Financial institutions Institutional investors Insurance Insurance score Investment Personal finance Risk purchasing group Social Issues Types of insurance

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