Should insurers use credit scores?

There has been some debate recently on whether insurers in Washington state (and others) should be allowed to use credit scores in underwriting policies.

I can understand why insurers have been restricted from using some criteria in underwriting. For instance, you shouldn’t have a different rate based on your race. Insurers have used other tactics such as redlining to circumvent these protected classes. For instance, insurers used zip codes to isolate high populations of minorities and refused to sell them insurance. This is an illegal practice and has been banned.

But I can’t see the correlation of discrimination of protected classes and credit score: credit score is an unbiased assessment of financial responsibility. Banks use credit scores to judge ability to repay a loan. Employers use credit scores to evaluate how responsible candidates will be with company assets. If you can’t manage your own finances, why would an employer put company assets under your management?

The connection is logical for insurers as well – your financial responsibility (credit score) is directly correlated with the way you manage your assets (e.g. homes, autos, etc.). Insurers wouldn’t want to use credit scores if there wasn’t a significant correlation.

Does credit score sometimes get it wrong? Of course. But insurance companies have an incentive to try to identify those that would be a good underwriting risk but may have a lower credit score. All insurance companies use proprietary models to try to identify these people and increase their market share and profit.

What we don’t need is more government intervention, telling insurance companies how to operate and reducing competition. That raises rates for everyone.