Auto Insurance

Q&A: Why The Insurance Industry Uses Personal Data To Help Set Premiums

Q&A: Why The Insurance Industry Uses Personal Data To Help Set Premiums

Insurance companies utilize a wide range of data to determine your auto and homeowners insurance rates. With a growing list of states regulating what information insurers can use, we talked to an expert to find out why the insurance industry relies on this data.

Are you still carrying credit card debt from the holiday season? If so, your insurance company may have taken note.

Many people are surprised to learn that seemingly unrelated factors, such as their occupation, level of education or credit score, can have a significant impact on the premiums they pay for their home and auto insurance policies. For example, our research has shown that drivers with a "poor" credit score may pay 60% to 70% more for their auto insurance than drivers with an "excellent" score.

Now, however, legislators in some states are striking back at the use of such criteria, saying they unfairly discriminate against, for example, those who lack a college degree or work in certain industries, when those factors have nothing directly to do with how well those individuals drive.

To get an industry perspective on why insurance companies use these factors, and what that use means for consumers, we reached out to James Whittle, Assistant General Counsel and Chief Claims Counsel for the American Insurance Association (AIA). Whittle has more than two-and-a-half decades of industry experience, and his employer counts among its members the major insurance companies.

The industry faces barriers to using certain data, including outright bans on the use of credit information in some states—California, Massachusetts and Hawaii for auto insurance, and Maryland and Hawaii for homeowners insurance. Now a recent ruling in New York state bars insurance companies from using occupation- and education-related criteria to set rates. Help our readers understand why companies use such factors.

Insurers compete on price by using a variety of non-experiential variables that have statistically relevant correlations to potential risk. Such variables are predictive in nature. Their purpose is simple—to help insurers seek as accurate an assessment [as possible] of future, potential losses, so they have higher confidence that their rates most accurately reflect risk. Consumers can, of course, shop for the best product for them based on premium and levels of coverage.

Do you believe other states will pass similar restrictions on the use of non-driving information in the coming year?

It is hard to say. We continue to work to educate public policy decision makers about how these factors work to improve rating accuracy and avoid cross-subsidization [the charging of higher prices for one group to lower the price for others], so that good drivers do not pay for the behavior of bad drivers.

Delaware prohibits insurance companies from taking action if a person lacks credit information. In states that lack such restrictions, is there any recourse for good drivers who have no credit history or a poor credit score?

Absolutely; auto insurance is a highly competitive business. Consumers can shop around for coverage and find the best product for them. Competing insurers use differing combinations of rating variables, [and they] do not use them in the same way [or with the same] weighting assigned to each variable. That insurers do not all rely equally on the same variables, of course, means consumers have more choice in products that might better fit their particular risk characteristics, needs, or interests.

What requirements do insurance companies need to meet in order to demonstrate that the criteria they use for setting rates are valid?

Across the United States, insurers must make rate filings with insurance regulators. Such filings must demonstrate how rates are supported and that they comply with each state’s requirements.

Is the bar high enough?

This is a subjective question. Insurers met their legal obligations in setting and using rates. If we want highly competitive markets in which insurers have the necessary confidence to aggressively compete, public policy decision makers must avoid regulatory impediments that are not based on well-founded analysis.

Responses may have been edited for brevity and flow.