Credit-Based Insurance Scores
last updated 11/25/14

Issue: Insurance companies often use consumer credit information in determining if they will offer a consumer automobile or homeowners' insurance policy and how much that policy will cost. A credit-based insurance score is a rating based in whole or in part on a consumer's credit information. Credit-based insurance scores use certain elements of a person's credit history to predict how likely they are to have an insurance loss. Credit-based insurance scores were introduced by the Fair Isaac Corporation (FICO) in the early 1990s. FICO estimates approximately 95% of auto insurers and 85% of homeowners' insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.

Overview: Insurers use credit-based insurance scores primarily in underwriting and rating of consumers. Underwriting is the process by which the insurer determines whether a consumer is eligible for coverage and rating is the process that determines how much premium to charge a consumer. The credit-based insurance score models used by insurers are designed to predict the risk of loss. Insurers use credit-based insurance scores for underwriting to assign consumers to a pool based on risk and then for rating by deciding how to adjust the premium up or down.

Insurers argue that the use of credit-based insurance scores is necessary to properly evaluate risk and charge individual policyholders rates that most closely align with their true risk. They also note that not using credit-based insurance scores could result in subsidies from lower-risk individuals to higher-risk individuals.

Typically states will not allow credit-based insurance scores to be used as the sole basis for increasing rates or denying, cancelling or not renewing policies. Some states prohibit credit-based insurance scores being used as the sole basis in underwriting or rating decisions. Some states require insurers to notify applicants or insureds that adverse credit-related decisions have been taken regarding pending applications or existing coverage based on the consumer's credit score. A few states effectively have banned the use of credit information in rate regulation processes.

Consumer groups continue to have concerns with the use of credit based insurance scores, including the fact that that most consumers do not understand the concept of credit-based insurance scoring or how or why it works. Many consumers are not even aware that their credit characteristics are being used to create a score that will then affect their purchase of an insurance policy. Even if they have the knowledge of the existence of credit-based insurance scores, it is not intuitive for consumers to understand how credit-based insurance scores work or why they work.

Some groups allege that the use of credit-based insurance scores falls disproportionately on certain minority and low income groups. Moreover, the use of credit-based insurance scores may not appropriately encompass unforeseen life events (events outside consumers' direct control).

Status: State insurance regulators continue to monitor the impact of credit-based insurance score on consumers. On November 5, 2011 a Credit Based Insurance Scoring Symposium was held at the NAIC Fall National Meeting to discuss the use and impact of credit-based insurance scores. The Symposium featured representatives from two credit information vendors as well as consumer representatives.

Committees Active on This Topic
Property and Casualty Insurance (C) Committee

Market Regulation and Consumer Affairs (D) Committee

Additional Resources
NAIC Consumer Alert: Credit-Based Insurance Scores—How an Insurance Company Can Use Your Credit to Determine Your Premium

Consumer Insurance Score: Exploring the Possibility of an Alternative to Credit-Based Insurance Scores
July 2012, CIPR Newsletter

NAIC Credit Based Insurance Scoring Symposium
11/5/11

News Releases
Insurance Regulators to Hold Hearing on Credit Scoring
04/27/09
Consumers and Credit: Regulator Hearing to Review Concerns
03/16/09
NAIC Testifies on the Use of Credit-Based Insurance Scores
05/21/08

States Work to Protect Consumers Against Credit Scoring
10/03/07

Testimony and Speeches

Testimony before the Subcommittee on Financial Institutions and Consumer Credit of the House Committee on Financial Services Regarding: “Use of Credit Information Beyond Lending: Issues and Reform Proposals
Illinois Insurance Commissioner Michael McRaith
05/12/10

NAIC Public Hearing: The Use of Credit-Based Insurance Scores
06/15/09

Testimony before the Subcommittee on Oversight and Investigations of the House Committee on Financial Services Regarding: “The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance
Florida Insurance Commissioner Kevin McCarty
05/21/08

Contacts

Aaron Brandenburg
Statistical Information Manager
(816) 783-8271

NAIC Center for Insurance Policy and Research (CIPR)
Media queries should be directed to the NAIC Communications Division at 816-783-8909 or news@naic.org.