Question

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

Answer 1

The question of using credit rating to set liability insurance premium can be used by the companies, this does have some benefits as some consumer insurance premium would be reduced but some will be at disadvantage. The idea behind using credit score is that people with high credit score are normally people with certain level of wealth and lifestyle and the probability that they will occur loss and the insurance company will have to pay reduces. For example, take automobile insurance, people with high credit score have luxurious car and are careful while driving because they value their life as well as the car. Another example can be health insurance, if you have a high credit score that means there is high probability that you are in white color job and the probability having serious health consequences reduces to a certain extent. However there are certain disadvantage to this also as insurance was basically brought in to take care of the large unexpected need of the people who can not afford that much expenditure and they are being deprived of this by being charged high premium so this is one issue which can be raised by the regulator or civil society in general. The credit score that is used by the insurance companies are slightly different then the one we see traditionally.