Want Cheaper Car Insurance? Pay Your Electric Bill on Time
Automotive insurers use more than just your driving history to set your rates, the New York Times is reporting.
Factors such as your credit score, address and marital status can increasingly affect premiums more than driving history, the story explains.
A survey of the nation’s largest insurers — Geico, State Farm, Nationwide, Liberty Mutual and Farmers — found that a hypothetical woman in her 30s paid more if she was widowed, instead of married, at four of the five firms. The premium increases ranged from 3 percent to 29 percent. Only State Farm charged the woman the same, regardless of marital status.
Many insurers use credit reporting bureaus to adjust rates for drivers looking for coverage.
A 2003 study by the University of Texas found that drivers with lower credit scores filed more claims and were a greater risk to car insurance companies, although several states including California, Massachusetts, Hawaii and Colorado outlaw the practice of adjusting rates or denying coverage by using credit scores. Some have said that credit scores are unreliable at predicting driving habits and unlike cable companies, if you don’t pay your premium, insurance companies are pretty quick to suspend your coverage.
But the study found that married drivers get the benefit of the doubt more often. Despite having more single adults in the U.S. now, married drivers get lower rates because they’re responsible adults and never make mistakes, or something. Here’s how they explain how it works ( via NYTimes):
“David Snyder, a spokesman for the Property Casualty Insurers Association of America, said that rather than showing a penalty applied to widows or other unmarried people, the analysis reflected that many insurers gave a discounted premium to married couples, because they tended to be more responsible and had a lower rate of filing claims. So if drivers are not married, they will not receive a quote with that discount.”
See? Single drivers aren’t penalized. They’re just not rewarded. Those are totally different.
Nonetheless, the story’s most salient point is that — at least in the United States — the process of adjusting and setting rates isn’t totally transparent, despite the government mandate to make it so.
More by Aaron Cole
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Consumer reports had a great story on this, this month. It did a better job of describing why this is news and also why the practices could be devious. The bottom line is that they found the pricing of insurance is not risk based and varied wildly, and that those cute commercials create the illusion of price competition where there isnt really any. The insurance companies are using big data analysis to figure out price sensitivity , i.e can they raise your rates a little and you dont notice or dont care...etc. Too bad that is illegal in MA as well as credit score rating. Edit...expanding on the credit score since most dont seem to know how it works...damn over simplified news stories... They are not using anyones credit score. They are calcualting their own score based on the data. This is already common for say auto loans the generic classic FICO score is hardly used any more in favor of proprietary formulas. What this means, is that even if your credit score is great you dont know what your insurance credit score is or how it was calculated. The ins companies do claim it indicates your propensity to file a claim, but it could also be your ability and propensity to shop around...
As others have mentioned, this is not news. Allow me to put on my car insurance hat: The thing that isn't widely understood is that most insurance companies don't use your actual credit score, because your credit score is a measure of creditworthiness. The ability to walk into a bank and walk out with a million dollar mortgage has nothing to do with what insurance companies are looking at. What most insurance companies DO look at is a subset of the data, usually something like this: * The length of history available * Number of balances reported as past due * Length of time since a credit check for a loan or credit card * Number of accounts opened in the last 12 months * Number of balances sent to collections * Ratio of available credit to balance on credit cards * Ratio of accounts which are past due to never past due * Number of credit checks (multiple inquiries within 30 days are counted as one inquiry) Effectively, what insurance companies are looking for is that a person pays their bills on time and effectively manages whatever credit they have. Each carrier develops their own score based on how they want to fit credit-based underwriting into the mix with their other factors, which is in turn based on who their target customer is. Actuarial consulting firm Tillinghast validated that in 89% of cases they studied, the statistical significance between likelihood of loss and measurement of these factors was above 99%. The FTC has acknowledged the mathematical underpinnings are sound. The problem with anything that's predictive in nature is there are always outliers and people can fall through the cracks. People who go card hopping (sign up for credit cards and/or store cards (ie Target, Lowe's, etc.) for points or promotional discounts then cut up the card only to repeat the process a month later) will get hammered. So will people who have one card they pay off each month and pay everything else in cash, because they don't generate enough credit history to develop a score. At least if you had an ex run up your credit cards then leave you, you can usually talk to your insurance company and they will factor them out. (In case you're wondering, yes, I have indeed spent about 10 years explaining this to customers on the telephone.)