Credit Reports and Auto Insurance

Auto insurance companies have discovered that consumers who are careless in their use of credit are also accident-prone drivers, according to Associated Press writer, Dave Carpenter. The correlation between debt management and driving is close enough that auto insurers are relying more and more on credit scoring in their underwriting. Counsel Steven Sheffy of Allstate Corp., the number two car insurer, is quoted: "Financial stability is an extremely powerful predictor of future losses." Further, obtaining credit scores is a quick and low-cost way of assessing the insurance risk. It is estimated that about half of auto insurance companies now use credit scores to aid their underwriting, and more are adopting the practice. In fact, a driver with a bankruptcy on his or her credit record may have a hard time obtaining auto insurance.

Reliance on credit scores improves the accuracy of underwriting and generates more competition in auto insurance. While that may give lower insurance rates to creditworthy consumers, it means higher rates for others. And that's the rub. Insurance officials and various consumer groups oppose the trend. Consumer advocates point out that the credit scores could be used "unfairly" because consumers with low incomes and minorities are more likely to have credit problems than affluent whites. Robert Hunter, insurance director for the Consumers Federation of America is quoted: "We worry about it because we think it might be a surrogate for prohibited factors such as race and income." In response to a number of complaints, Colorado's insurance director has moved to limit the use of credit scores, in spite of his view that "it may work from a statistical standpoint." David Burnbaum, executive director of the Texas-based Center for Economic Justice has argued that there is no definitive study showing the relationship between credit scores and insurance claims. "Even if there was a definitive relationship, that doesn't mean it has to be used."