Monthly Archives: November 2014

Renter’s Insurance — Does a Better Credit Score Make You Less Likely to Make a Claim?

I recently, and for the first time, experienced an insurance company (with whom I have long experience) tell me that my premium depended, in part, on my credit score. I called to inquire into the basis for the connection between those two seemingly independent questions. The explanation tracked what I later found onohmyapt.apartmentratings.com, where this appears:The logic behind using credit ratings, according to insurers, is that those who default on debt are more likely to make claims.”   Indeed, Liberty Mutual (not my insurer) candidly states this:While insurance scores predict insurance losses, credit scores predict credit delinquency. Both are calculated from information in a credit report ….”

I challenged the idea that my credit score, which is very good, was relevant to my insurance premium because the premium was to be paid in advance in order to obtain any insurance on my property. So credit and “delinquency” would appear to be irrelevant to what I should pay for protection against loss of personal property from external forces. The response from Travelers was essentially “that’s how we do it, so take or leave it.”

Remarkably, I believe, Liberty Mutual says this in its Q&A about the relationship between credit scores and insurance premiums: “I have an excellent credit rating; does this mean I qualify for the best insurance premium?
That depends. [my emphasis] Since insurance scores measure items related to insurance losses and credit scores measure creditworthiness, these scores may be very different. Items on a credit report considered by an insurance company may not be ones considered by a lender. Likewise, there may be items on a credit report used by a lender that are not relevant to an insurer. …. For your homeowner premium, insurers may consider prior loss history, construction type, distance to fire stations and fire hydrants, and presence of protective devices such as smoke detectors, theft alarms, and deadbolt locks. State laws and regulations also vary, so the factors insurers may use to calculate premium or determine eligibility may differ by state.”

What is missing from the answer is the explanation of why credit rating has anything real to do with the likelihood or size of a claim, which would seem to be the sole issue to be determined.

This may be a small part of a larger question related to the extent to which data about an individual is algorithmically evaluated to determine the commercial practices of firms performing essential services for large numbers of consumers. It is not beyond imagining that companies could, for example, be connecting low economic status with trustworthiness. I make so such claim about rental insurance companies. The key point is that If such data connections are being made, they should at least be made completely transparent upfront, so that consumers understand exactly what is going on and why. This is especially true when the correlations may be sound but causality is not proven. Transparency would enable shoppers in all areas to better assess their choices and would improve the competitive forces that lead good companies to treat their customers with respect.