Insurance Scores based on Credit

Instead of posting a video of my own, I think a link to Prince’s hit song Controversy could best summarize the issue when it comes to insurance risk and credit scores.

First a definition: Insurance scores are a credit based scoring model that is tweaked for the insurance industry.

Myths: Credit-based insurance scores are not based on race or income.  Also, in some states, a policyholder cannot be denied insurance based on a credit-based insurance score.

The issue around insurance scores is that credit history — something not related to one’s driving history — seems to be a correlated determining factor in insurance risk. Critics would argue that this is like correlating “making the bed each morning” to insurance rates.   So let’s follow “making the bed” as an argument.

What if there was a way to track who made their beds each day and the data was matched up with some other data like insurance incidents.  Let’s say the data showed that people who make the beds have fewer accidents.  Should that data be used to set insurance rates?

Do you claim it’s unfair that teenagers have higher insurance rates?  After all, their frequency of incidents is much higher than older adults.  How about gender rate differences?  I have paid more than my wife for car insurance even though my record is equally squeaky clean. Is this okay? Frankly, my anger subsides when I see actuarial tables for this data.  Men are more likely to get in accidents, therefore I must be grouped with them.

What about correlations to race. From a purely mathematical standpoint, shouldn’t every factor be used?  Perhaps not.  But why?  Well, one problem with this approach is that it keeps a group on a vicious circle.  Teenagers can grow out of being teenagers, but we never grow out of our race/color.  What what about gender based pricing?  That’s probably not fair too, in my opinion.

Note: these are not behavior examples.  They are examples of things that people can’t change. I guess a sex change is possible, but what a headline that would make if someone did it just to get better insurance rates.

Now ask yourself if you agree that behavior factors for health care insurance, like smoking,  should be figured in someone’s health care costs.  For those of you who argue that smoking is a cause of bad health, but a non-made bed is not causal of more driving accidents, I have to ask if cause is the right issue.   Remember, if you wipe these factors out, rates go up for a lot of people as some average rate has to be used.

Insurance analysts are simply looking for correlations.  They don’t know that being a teenager proves that you are going to be a bad driver, they are only quoting correlations.  The data points out that there is a correlation between credit behavior and insurance risk.  The question as to why they are correlated goes unanswered and ultimately isn’t relevant.  The industry just cares that they have found a tool to predict risk.  They don’t care about the cause, or fixing it, that’s not their business.

Where will this end?  Will transparency move to such a point to charge more for insurance if I send out too many emails or text messages.  Higher insurance for GPS proof that my phone was used while moving in a car…[although how can they know if I'm driving or not?].

One thing is for sure.  Behavioral correlations are not new and they aren’t going away.  Regulators might be able to block something like credit scores for use in setting insurance rates, but I suspect the insurance companies would simply go to banks to inquire about transaction behaviors and try to correlate that to driving records. If that gets blocked, they will look for something else to help provide insights into our risk profiles.

In conclusion, I think we should just all listen to our parents and make our beds every day, just in case.

photo credit: blog.vegas.com

Having a Baby Lowers Credit Score

This might sound a little crazy.  But, I can tell you that becoming a parent certainly lowered my credit score.  Sure, we’ve heard of all kinds of things that can lower your credit score.  In fact, this may be the most myth filled topic in the last 10 years [acai berry is pretty close though].  I feel I tell at least one person each week not to close down open credit cards as it hurts your score, but many people feel its counter intuitive and they do it anyway.

Here’s the story on becoming a parent.  When you have a baby, even if you have great insurance, you are likely to incur some costs.  In our case, our boy was delivered via c-section [although I'm not sure how that even impacted the cost].  All I know is that we got a bill for about $2500 [the total cost was probably similar to a year of college at Harvard].  We — the lovers of reward points — put that charge on our American Express card.  Great right?

Well, my credit score went down by 8 points.  Why?  The stated reason is an increase in my balance to over $3000.  So, could I have done anything to avoid this point drop?  Yes. Here’s a list

• Paid with a check.  That way there’s no sudden bump in credit card expenses
• Recognize that the time after you have a baby is really busy and you will likely be late on bills or not be paying quite as quickly.
• Pay your credit card bill the same day you pay the medical bill.

What I wish I had done is this final bullet point.  Many of you know that I like to pay my credit card bills off every 2 weeks for the purpose of keeping my rolling balance lower.  This keeps my credit card utilization ratio higher and thus my credit score in great shape – over 760.

Why pay your credit card every two weeks?  You get paid every two weeks.  It’s a good habit that rewards your credit score.

Now, I’ll probably get these 8 points back by getting back to my every 2 weeks strategy.  I would expect to see my score head back up in the next two months.  But, I’ll be more careful, the next time we have a baby, and yes, I hope and expect there will be a next time.

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