Unless you’ve been hidden under a rock you have probably heard or noticed that almost every major insurance carrier uses a credit rating when calculating insurance premiums. Different carriers use this information to different degrees but almost all of them use a credit based insurance score in some way.
I found a very informative article from Mint.com that explains their rationale and it’s not the reasons you’d immediately think.
“Insurance companies have the same issues lenders have: understanding the risk of doing business with certain consumers. It’s not necessarily the risk of being paid or not being paid for their services (premiums). It’s more so the risk of providing a policy for someone who is more likely to file claims and thus be a less profitable customer. It’s all about the money.”
Sadly, insurance companies are not charities but do exist as a profit seeking business. The sole responsibility of an actuary is to find a correlation between individual characteristics and the likelihood to file a claim. Over time that correlation has been found between credit and likelihood to file a claim.
“Determining whether or not you’ll pay your premiums is not the primary reason some of them pull your credit reports and credit scores. The primary reason is to determine if they even want to do business with you and/or under what terms. Despite what many believe, how you manage your credit is very predictive of what kind of insurance customer you’ll be. It’s predictive not only of your likelihood of filing claims but also predictive of how profitable you’ll be. If it weren’t, insurance companies wouldn’t spend the money buying millions of credit reports and scores each year.”