Last Updated 1/31/2024
Issue: Insurance companies often use consumer credit information in determining if they will offer a consumer automobile or homeowners insurance policy and how much that policy will cost. A credit-based insurance score is a rating based in whole or in part on a consumer's credit information. Credit-based insurance scores use certain elements of a person's credit history to predict how likely they are to have an insurance loss. Credit-based insurance scores were introduced by the Fair Isaac Corporation (FICO) in the early 1990s. FICO estimates approximately 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.
Overview: Insurers use credit-based insurance scores primarily in underwriting and rating of consumers. Underwriting is the process by which the insurer determines whether a consumer is eligible for coverage and rating is the process that determines how much premium to charge a consumer. The credit-based insurance score models used by insurers are designed to predict the risk of loss. Insurers use credit-based insurance scores for underwriting to assign consumers to a pool based on risk and then for rating by deciding how to adjust the premium up or down.
Insurers argue that the use of credit-based insurance scores is necessary to properly evaluate risk and charge rates to individual policyholders that most closely align with their true risk. They also note that not using credit-based insurance scores could result in lower-risk individuals bearing some of the costs from higher-risk individuals.
Typically, states will not allow credit-based insurance scores to be used as the sole basis for increasing rates or denying, cancelling, or not renewing policies. Some states prohibit credit-based insurance scores being used as the sole basis in underwriting or rating decisions and some require insurers to notify applicants or insureds that adverse credit-related decisions have been taken regarding pending applications or existing coverage based on the consumer's credit score. Currently, California, Hawaii, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Utah ban insurance companies' use of credit-based insurance scores in determining policy rates or offering or renewing a policy. Washington Commissioner Mike Kreidler issued an order in 2022 to prohibit insurance companies from using credit scores to set policy rates on auto, homeowners, and renter's insurance for the following three years but this ruling was overturned by a state court before going into effect.
Consumer groups continue to have concerns with the use of credit-based insurance scores, including the fact that most consumers do not understand the concept of credit-based insurance scoring or how or why it works. Many consumers are not even aware that their credit characteristics are being used to create a score that will then affect their purchase of an insurance policy. Even if they have the knowledge of the existence of credit-based insurance scores, it is not intuitive for consumers to understand how credit-based insurance scores work or why they work.
Some groups allege that the use of credit-based insurance scores falls disproportionately on certain minority and low-income groups. Moreover, the use of credit-based insurance scores may not appropriately encompass unforeseen life events, such as the recent Covid pandemic.
Status: State insurance regulators continue to monitor the impact of credit-based insurance scores on consumers. At the 2023 NAIC Spring National Meeting, the Transparency and Consumer Readability (C) Working Group and Property and Casualty (C) Committee both adopted and shared “Regulatory Resources for Consumers on Personal Lines Pricing and Underwriting – Auto Section,” which includes details and tips on credit-based insurance scores.
Committees Related to This Topic
Additional Resources
Report of the Executive (EX) Committee, 2023 NAIC Spring National Meeting
Risk-Based Pricing of Property and Liability Insurance, Journal of Insurance Regulation (July 2020)
Education & Training: Course Schedule for Regulators and Consumers, NAIC
Background on: Credit scoring, Insurance Information Institute (2019)
Credit-Scoring FAQs, Nevada Division of Insurance
Empirical Evidence on the Use of Credit Scoring for Predicting Insurance Losses with Psycho-social and Biochemical Explanations, North American Actuarial Journal (Vol. 20, Issue #3, 2016)
Studies, Reports and Surveys Examining the Use of Credit Scoring, Occupation or Education in Insurance, NAIC (2013)
Consumer Insurance Score: Exploring the Possibility of an Alternative to Credit-Based Insurance Scores, CIPR Newsletter (July 2012)
NAIC Credit Based Insurance Scoring Symposium, 2011 NAIC Fall National Meeting (all documents linked under the 'Documents' tab)
Review of the Use of Credit-Based Insurance Scoring by Insurers, NAIC (2008)
News Releases
Credit-based insurance scores aren’t the same as a credit score. Understand how credit and other factors determine your premiums, NAIC (July 2020)
Testimony and Speeches
NAIC Public Hearing: The Use of Credit-Based Insurance Scores, June 2009
Testimony before the Subcommittee on Oversight and Investigations of the House Committee on Financial Services Regarding: The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance, Florida Insurance Commissioner Kevin McCarty (May 2008)
Contacts
Media queries should be directed to the NAIC Communications Division at 816-783-8909 or news@naic.org.
Aaron Brandenburg, Assistant Director, P&C Regulatory Services
816-783-8271
Tim Mullen, Director, Market Regulation
816-783-8260
Randy Helder, Assistant Director, Market Regulation
816-783-8261