It’s just unfair! Three reasons insurers use credit scores to rate policies

I have been chastised by my co-workers in the past for using the motor vehicle report to identify bad payers and risks.  My friend and fellow agent, Michelle, gets very irate when I mention companies who use a credit based insurance score to rate policies.

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She believes, as do many of insureds, that just because some insureds have financial difficulty doesn’t necessarily mean they are a bad risk.  However, there are plenty of companies out there that would disagree.   Here are the main reasons why they do.

One Big Pot

When an insured buys a policy, their premium dollars are not just for that one insured.  That money goes toward operating budget at the company and salary disbursements, but primarily they go toward the reserve.   That reserve pays claims, rebuilds houses and covers the hospital bill.

If a carrier writes policies with too many late or poor payers – reserves fail, rates increase, and good insureds walk away.   If reserves become low, the rates may increase.

Believe it or not, no carrier wants to increase rates.  Now with so many weather occurrences related to climate change – reserves are ever more important.  The states are looking closer now, so insureds that pay on time is ever more important.

The best advice – if you have an insured that has shown they are a poor financial risk – don’t put them with a carrier that uses credit to calculate risks.

The Research

First, an insurance score is not the same as a credit score.  The bulk of carriers use the scores developed by Lexis Nexis.   The insurance score considered credit history in addition to claims history, reinstatements, and cancellations.

There is research that that links how a person manages their finances is a good judge of how many insurance claims an insured will have.  These same studies show people who have a poor insurance score are more likely to file a claim.

Disputed Claims

In general, for any mid-term changes, the insurance company issues out a bill to the insured between 30 to 15 days in advance.  They then have 10 to 15 days to pay.  If the insured does not pay, they get a cancellation which gives an additional 10 to 15 days to pay.  After that the policy goes into cancellation.

What I just explained is a month and a half minimum to pay a bill.  It could have been for adding a car, changing coverage, adding a much needed endorsement, adding a driver, or an address change.  All one hundred percent insured initiated.

We, at the carrier, know who will not pay the bill.  Some of us have technology built in to require the representative who made the change to try and initiate payment after the change is made.

When the policy cancels due to non-pay, each state has notification procedures.  Still, with all that there are insured’s who will have no idea that they have no insurance.  They still go to work, pick up kids, go out to eat, and drive to grandma’s house.

That leads to the spectacular alignment of some bad factors – accident, injuries and no insurance.  The disputed claim – enter the lawyers and their fees.   It becomes tedious and miserable – for the insured, the agent, and the carrier.

Commonly, insurance scores do not deny coverage (although never say never).  Instead they increase rates – similarly to loans and liens.  Any insured should be used to that with the banks.  I like to think us insurance professionals are more compassionate than the banks on the other side of the aisle.

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