Give Insurers some Credit!

Insurance commissioner of Washington State, Mike Kreidler wants the legislature to ban the use of credit scores from the measurements insurers use in determining the rates they charge for home and auto insurance.

“It doesn’t have anything to do with how you drive your car or maintain your home,” said state Insurance Commissioner Mike Kreidler.

While there is actually evidence that low credit scores do correlate with higher risks when it comes to insurance claims (not necessarily that consumers with poor credit are more likely to have accidents, but that they more likely to file claims rather than “eating” the cost), that isn’t the reason that insurers should be allowed to use credit ratings.

The simple fact is that insurance companies succeed or fail (you know, barring a federal bailout of some variety) based on their ability to assess risk and charge the appropriate rates to compensate their consumers while still keeping rates low enough to attract new customers. They utilize any and all information they can to guess as accurately as possible which consumers are likely to file claims and how much they will need. Political appointees or elected officials do not have the same impetus for accuracy when it comes to insurance rates. Their only motivation is to keep their constituents happy long enough to keep them in office.

In the long-run though these happy constituents will see their rates rise, even those with good credit ratings, because if insurers are banned from acquiring the details that they believe get them closer to adequately pricing insurance premiums then they will err on the side of caution–meaning higher than necessary rates for everyone.