Do Credit Scores and Car Insurance Premiums Add Up?

Actuarial science, the discipline that applies mathematical and statistical methods to assess risk, became a formal mathematical discipline in the late 17th century with the increased demand for long-term insurance coverages such as Burial, Life insurance, and Annuities, according to Wikipedia. Risk assessment, as we all know, is increasingly essential in our business and personal lives. But the problem with corollative modeling is that it's virtually infinite – as are the number of variables that can be thrown into the mix.

The personal auto insurance industry is a salient case in point. Clearly, a person with traffic violations and recurring accident history presents significantly higher risk than one with a clean driving record and should bare a proportional cost of that risk in the premiums they pay. It's even possible that this increased cost will alter behavior and make some drivers more careful. But what about indirect life factors that modern actuarial science is now capable of correlating? Should taking anti-depressant medication – or not – be considered along with sleep apnea, divorce, migraine headaches, unemployment and poor credit in the risk mix to establish individual premiums?

Now that this level of personal data is easily obtainable, it would appear that we have an increasing moral dilemma as to the limit of correlative data that will be used by insurers to assess premiums going forward. Last week's WSJ reported that "State regulators are drawing fire from auto insurers as they lay plans to revisit the use of factors such as consumers' credit scores, occupations and education levels in determining rates paid by individual policy holders ... in light of high unemployment and mounting home foreclosures." And goes on to claim that "Insurers say the effort is overkill given multiple past studies concluding credit-related factors, in use for about two decades, allow for more accurate underwriting."

The issue here is not whether the correlative factors are statistically significant -- though of course that must be verified – but if we're willing to have our personal premiums for mandatory insurance established through close scrutiny of our infinitely complex and varied lives. It's a sticky wicket that could easily impact a plethora of personal spend in the not so distant future.

What do you think?

William Busch

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