Can Good Credit Scores Decrease Insurance Premiums?
Market Wire, October, 2009
With unemployment and high prices plaguing the
economy, many are struggling to cover everyday expenses. While cutting back
is never easy, it’s impossible when the expense is mandatory. Unlike health
insurance (at least for now), car insurance isn’t pennsylvania auto insurance quotes optional. Traditionally,
age, gender, driving history, and geography have been used to determine
premiums, but credit scores are gaining recognition as one of the most
reliable indicators of a person’s potential insured losses.
In his new report, “Credit-Based Scoring in Insurance Markets” (October
2009), Independent Institute Research Fellow Lawrence Powell discusses the
accuracy and appropriateness of credit-based scoring, also known as
insurance scoring. Professor Powell examines its effect on insurance
markets, focusing on its value in the automobile insurance industry.
The correlation is one of financial habits, says Professor Powell: those
who make timely debt payments in order to avoid higher interest rates are
less likely to file insurance claims, thereby preventing higher premiums.
He notes, “When insurers cannot accurately classify applicants for
insurance, they must either decline applications,” or charge high- and
low-risk drivers the same. In the latter case, low-risk drivers overpay to
compensate. Although simply refusing to insure too-risky drivers is a
solution, individuals who cannot find private coverage fall into the
problematic residual insurance market, a system that exists solely because
auto insurance is compulsory.
This market depends on cross-subsidization between private and public
sectors. The state, acting as an insurer of last resort, undercharges for
premiums
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