Question

Should insurance companies be able to use credit ratings to set liability insurance premiums?

Explain why or why not?

Answer 1

In general Credit Ratings can be used to assess a risk of a customer, and thereby should be allowable to insurers, to set liability insurance premiums, as general principal.

Credit Rating is the score telling the user of the information, about their promptness or default risk associated, and while the insurance premium goes up, it should only go up reasonably to cover for the increase in risk that they are taking up.

For example, if there is a higher default risk, and the insurers are more likely to cover for that risk , or any other eventuality they might increase the premium in a statistically accepted way to cover for the increase in risk of outflow for them, but not in an exorbitant or arbitrary manner.

Also, in situations where the insurance is not depandant on the credit worthiness of the insured, then there is no reason for the insurer to increase the premium, hence it has to be seen on a case to case basis.