Deep Thoughts on Insurance Scoring
October 23rd, 2008 by Jeb Foster
I don’t know about you, but I have a soft spot for policy wonkery.
So I enjoyed the recent series in the Insurance Journal about credit-based insurance scoring. Written by Lawrence S. Powell, Ph.D., who is also the author of the blog RiskProf, the collection of five articles amounts to a painstaking defense of insurers’ use of credit history as an underwriting tool, a controversial practice to say the least.
If you don’t have the time, patience and/or taste for wonkish articles, this paragraph will give you the gist:
Insurance scoring is an example of a beneficial tool used in ratemaking that is often misunderstood. Insurance scores are relatively powerful and accurate predictors of losses, even when controlling for other factors known to be correlated with losses. When insurers use insurance scores to improve the accuracy of predicted losses, it benefits individuals and society. It increases the equity or fairness in insurance pricing outcomes because, on average, premiums are closely related to consumers’ risk of loss. Insurance scoring also adds value to insurance transactions. It reduces the overall cost of providing insurance because insurance scores are accurate and inexpensive rating variables.
