Clarity and transparency are necessary components in ensuring an industry, or individual company, is offering its consumers the best prices and services. As auto insurance is often mandated by many governments to ensure all drivers have basic coverage in the case of a collision, the calculations, which produce a customer’s premium, are important factors in determining whether or not an insurance company is offering its customers a fair price. Understanding what these factors are, as well as whether or not they should be considered, is necessary to determine if an insurance company is treating its customers in an ethical and legal manner.
When insurance companies evaluate a potential customer for an any type of insurance policy, there are several dimensions that go into determining the premium. The resulting rate is often somewhat of a mystery as the calculation can be unclear and complicated. Including factors, such as driving history and type of car, to determine an auto insurance premium makes sense, but the need to base most types of personal insurance premiums on a person’s credit score is something most individuals would find a bit odd as a credit score is intended to be used as a reference for obtaining financial services, such as loans.
A credit report is a means of assessing a person’s or married couple’s financial behavior in order to determine how viable of an investment it would to grand a loan. In other words, it tells banks and other financial institutes a customer is credit worthy. From a customer’s perspective, the credit report does more than determine if a loan can be obtained; it often determines the rate of the loan as well as the repayment schedule. To properly reflect a potential borrower’s credit history, credit reports must collect a tremendous amount of personal information, which is mainly accomplished by creditors reporting to three major agencies. Because the reports contain so much personal data, insurance companies are presumably using the information to help determine if a policyholder will be a responsible client.
On the other hand, a credit score cannot offer a complete picture of a person’s character, so its weight should be minimal or nonexistent as a credit score is solely meant to provide a reference on financial responsibility. An auto insurance company only needs to provide insurance when that customer pays the premium, thus any customer defaulting on his or her premium simply looses coverage. As such, there is likely no significant reason to use a credit score to determine a policy premium, expect to add greater costs to those who have spotty credit histories. In such cases, the insurance industry may well be behaving unethically.
Using items such as credit scores to determine auto insurance premiums, in particular, is especially disturbing when considering most drivers are required by law to maintain a minimum coverage. That said, the use of credit scores in determining premiums, outside of insurance policies related to financial matters, such as mortgage title insurance, is unsettling and questionable. It is imperative that all companies pursue transparency when charging customers fees, so insurance companies need to better justify why factors like credit scores are even considered. All policyholders must also be given the ability to contest a factor that contributes to their premium; otherwise, a company can use legal mandates to overcharge their customers.