Use of Credit in Insurance Scoring
What is it?
The Federal Trade Commission conducted a study that shows a strong correlation between credit history and the likelihood of future loss. The studies indicate that certain credit characteristics are predictive of future claims experience. Studies conducted by State Farm®, using its own data and scoring models, produced a similar conclusion.
While it has been shown over and over again that certain credit information is predictive of future insurance claims, the reasons for this correlation between credit information and insurance claims are not entirely clear. Nonetheless, others have offered their thoughts on why this correlation exists, including the Insurance Information Institute and the Casualty Actuarial Society.
What do others say?
- Credit Scoring — Insurance Information Institute white paper
- "The Impact of Personal Credit History on Loss Performance in Personal Lines" by James E. Monaghan [PDF-1MB]
What is the position of State Farm?
State Farm uses an applicant's claim history and certain credit characteristics to help in the effort to measure the risk being transferred from that person to State Farm. We combine credit characteristics and prior claims history and we have developed our measurement technique using our own book of business. State Farm is not attempting to assess wealth, income, or creditworthiness, but is instead focusing on the likelihood of future insurance losses (insurance risk).
We believe our use of credit information lessens the extent to which those who represent higher potential risk are subsidized by those who represent lower potential risk.