Using Credit Data to Predict Insurance Loss
Individuals who closely and cautiously monitor and manage their finances tend to also take better care of their cars and homes.
One objection to the use of insurance scores in underwriting decisions goes something like this: "I can see why a score based on credit data can forecast credit performance, but I don't see how it can forecast insurance claim performance." If you look at it from the perspective of accountability, however, it is perhaps not surprising that somewhat less than stellar credit management reflects a greater degree of claims risk, and vice versa. The analysis of millions of consumers' credit histories and insurance losses shows that individuals who effectively and closely manage their credit obligations present fewer or lower-value losses for insurance companies. Insurance underwriters feel this makes sense — individuals who closely and cautiously monitor and manage their finances tend to also take better care of their cars and homes.
That said, it is important to note that FICO does not claim that the predictive power of the scores is based on a causal relationship
(we're not claiming a less than stellar credit history causes a policyholder to file insurance claims), but rather that it is based on empirical correlation (that people with less than stellar credit histories on average file more claims than people with a stellar credit history), and this correlation can be validated. The consistently high performance of the insurance score models has been validated many times by FICO, the Federal Trade Commission ("CREDIT-BASED INSURANCE SCORES: IMPACTS ON CONSUMERS OF AUTOMOBILE INSURANCE" – July 2007) and other independent academic and regulatory entities.
The real proof, however, is that hundreds of leading insurers in the US and Canada who use FICO Credit-Based Insurance Scores continue to see improved results. Insurers wouldn't use insurance scores if they didn't work – and the vast majority of insurance companies are using credit-based insurance scores as one of the many factors they evaluate in the underwriting decision. Remember, the majority of consumers manage their credit obligations very well, even during turbulent economic times, and receive pricing discounts based on the insurance industry’s use of credit-based insurance scores.