The Impact Of Your Credit Score On Insurance Rates
Credit scores can impact a number of things, but there is a lot of chatter over whether or not credit scores should impact whether someone qualifies for insurance or what they pay for it. In fact, using credit scores to determine insurance eligibility and rates is not used everywhere in Canada.
There is a major debate that is going on in Canada about whether or not property and auto insurers should be allowed to use a person's credit score to determine insurance rates. Many of the proponents have argued that Canadians would benefit if their insurance ratings were based off of their credit score.
This is a controversy that has been alive and well. Ontario banned the practice of using credit scores to classify auto insurance risk. They did this back in 2005. In 2011, Newfoundland and Labrador regulators prohibited insurance companies from refusing property and fire insurance to individuals based on information in their credit files.
Recently, Consumer Affairs and the New Brunswick Ministry of Justice drafted regulations that would prohibit home and auto insurers from screening applicants with weak credit histories. This resulted in many New Brunswick consumers complaining that they had been denied coverage or the insurance company imposed large premium increases after the insurance companies screened their credit files.
However, scores are used in Quebec to underwrite property and auto insurance. According to the Canadian Association of Direct Response Insurers, they say that credit scoring doesn't have a negative impact on the affordability or availability of insurance in LaBelle Province.
The Impact On Premiums
The Canadian Council of Insurance Regulators is gathering research through the creation of the Credit Scoring Work Group. This work group takes the research and the feedback on practices, such as credit-based underwriting, that is provided by the major insurance companies and the credit reporting bureaus and they evaluate it.
In 2011, a written submission to the CCIR said that 66 percent of clients received lower home insurance rates because they had good credit scores that determined the price of their coverage. The report said that only 28 percent of the applicants who were credit-rated had to pay higher premiums. The rates for the remaining 6 percent did not change. The consensus was that the removal of credit scoring in order to rate clients would cause the premiums to increase almost across the board.
A Financial Consumer Agency of Canada study in 2008 showed that 75 percent of Canadians have a credit score of 700 or above. The proponents of using credit scores when making insurance decisions have stated that the majority of insured individuals in Canada would receive discounts on their premiums if their insurance rates were based on their credit scores.
The Opt Out Option
Due to the Insurance Bureau of Canada's Code of Conduct, Canadians have to give permission to the insurer before their credit files can be viewed. Prospects with poor credit scores can make the decision to opt out of their credit information being released. This means that they won't qualify for a credit-rating discount. Consumers can also choose insurers that do not rely on credit scores as a part of their underwriting.
The Code of Conduct also has certain allowances for new Canadian residents or young people who do not have Canadian credit histories. One of those allowances is for the insurers to use their discretionary power to accommodate consumers whose scores have been adversely impacted by a life event, such as identity theft or the death of a spouse. Many of the biggest personal insurance insurers have made a commitment to follow this code, which protects consumers from unfair practices.
Credit Scores On Claims
Many critics state that credit scores have nothing to do with claims. However, proponents have referenced at least a dozen studies in Canada and the United States that state that credit scores do have an influence on the claims experience. For instance, one of Canada's largest property and casualty insurers looked at data from 2007 to 2009 and found that those with the lowest credit scores filed 50 percent more claims than those with average credit.
Another insurance company conducted its own independent study based on data from five of the major insurers in Canada. In that analysis, they also found that high credit scores matched with lower claim frequency. This also meant lower costs for the insurance company.
Even Equifax, one of the major credit reporting bureaus in Canada, said in a letter that they had determined through research and testing that there is a relationship between risks associated with the underwriting of insurance and consumer behavior. The assumption is that a credit file can show whether or not a person engages in risky behaviors.
The proponents of insurance ratings based off of credit argue that insurers in Canada need to do a much better job in explaining to consumers why and how they use credit information, especially what the benefits are to the customer. Because of the Code of Conduct, the path toward that communication is in place. For instance, insurance companies have to correct their premium calculations as soon as an applicant tells them of a mistake on their credit file. Consumers who are sensitive regarding their privacy can also have the peace of mind that the Code of Conduct safeguards their privacy when accessing personal and credit information.
If you are someone who has a low credit score, you can relax because there are options available to you. Credit scores are just one of the factors that are used by insurance companies to determine insurance eligibility and premiums.
While there are many individuals against using credit files to determine insurance eligibility and rates, there are solutions to those who prefer to opt out. If you wish to opt out, you can tell your insurer or you can choose an insurer who does not use credit scores in their underwriting process.
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