Credit Scores Can Affect Car Insurance Rates

If your credit score slipped during the recession, it might cost you more to insure your vehicle.

Credit scores can be a factor in setting auto insurance rates in Michigan, the Michigan Supreme Court ruled Thursday. (See the Detroit Free Press story.)

The same is true in Connecticut. Insurers can use information from credit reports and credit scores to measure a person’s potential risk when that person applies for coverage. Insurance companies have data to back the belief that credit scores are an indicator of an applicant’s ability to pay premiums and how likely that applicant is to file claims, according to a report by the Insurance Information Institute.

The rules about using credit information when calculating insurance premiums vary from state to state. Georgia, Illinois, Utah and Washington don’t allow insurers to decide to cancel a policy, or to deny a renewal, based solely on a person’s credit, according to a May 2009 report by the Connecticut Office of Legislative Research.

So, why should credit history be relevant in determining risk? That’s explained in the summary of the Office of Legislative Research report:

Insurers reason that actuarial studies show a high correlation between insurance scores and loss ratio. Essentially, applicants with lower scores are more likely to file loss claims. Because the companies are taking a risk in insuring applicants, they must be able to accurately predict the premiums to charge in order to financially cover applicants in the event of a loss. Insurers use many different scoring models, which they generally keep secret because they compete to offer the lowest prices to consumers.

Source: courant.com