Unraveling the Mystery of Auto Insurance Rating Factors: What You Need to Know

Understanding Auto Insurance Rating Factors

Auto insurance rating factors have been a hot topic lately, with many people questioning how these factors are determined and why they matter. James Lynch, Chief Actuary at the Insurance Information Institute, recently testified before Congress on this very issue. He explained that insurance scores, which are based on credit history, are a reliable predictor of future claims. This is because people with lower credit scores tend to file more claims. However, recent research has shown that insurance scores do not act as a proxy for income, which is a variable that insurers are banned from using.

The Role of Insurance Scores in Predicting Losses

Insurance scores have been thoroughly examined for around two decades, and there is no doubt that they are good at predicting the likelihood of loss. The National Association of Insurance Commissioners (NAIC) has a roundup of scholarship on this topic. One study, "Do Credit-Based Insurance Scores Proxy for Income in Predicting Auto Claim Risk," found that insurance score does not act as a proxy for income in a standard actuarial model of auto claim risk. This is notable because one of the authors, Daniel Schwarcz, served as consumer representative to the NAIC from 2007 to 2014.

Why Credit Scores Predict Auto Insurance Losses

One of the most common questions we get is why an insurance credit score can predict whether someone is likely to be in an accident. A study titled "Empirical Evidence on the Use of Credit Scoring for Predicting Insurance Losses with Psycho-social and Biochemical Explanations" found that credit scores contain significant information not already incorporated into other traditional rating variables. The study also discussed how sensation seeking and self-control theory provide a partial explanation of why credit scoring works. Additionally, it presented an overview of biological and chemical correlates of risk-taking that helps explain why knowing risk-taking behavior in one realm (e.g., risky financial behavior and poor credit history) transits to predicting risk-taking behavior in other realms (e.g., automobile insurance incurred losses).

In conclusion, while auto insurance rating factors can seem complex, understanding them can help you make more informed decisions about your insurance coverage. It's important to remember that while insurance scores are a factor, they are not the only factor. Other factors, such as age, sex, and driving history, also play a role in determining your insurance rates.