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I.I.I. Says Use of Credit Plays Role in Trend of Declining Auto Rates

INSURANCE INFORMATION INSTITUTE
Contact: Press Offices
New York: 212-346-5500; media@iii.org
Washington, D.C.: 202-833-1580

NEW YORK, July 20, 2007 - The Federal Trade Commission (FTC) has found, after years of extensive research, that auto insurers have been able to price their products more accurately by incorporating a policyholder's credit history into their underwriting and rating criteria.

The ºÚÁϲ»´òìÈ Information Institute (I.I.I.) said that the use of credit-based insurance scores is a factor in declining auto insurance rates.

"Credit-based insurance scores are effective predictors of risk under automobile policies," stated the FTC's report, entitled Credit Based ºÚÁϲ»´òìÈ Scores: Impacts on Consumers of Automobile ºÚÁϲ»´òìÈ. "They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums."

The typical information used in credit-based insurance scoring models is based primarily on a potential policyholder's performance on credit obligations (mortgages, student loans), credit-seeking behavior (the acquisition of multiple credit cards), the use of credit (outstanding balances as compared to available credit lines), length of credit history (the age of the oldest credit card accounts), and types of credit used (bank, department store and/or oil company credit cards), according to the FTC.

"Auto insurance premium rates are dropping for millions of Americans in 2007 as compared to a year earlier, the first time this has occurred since 1999," said Dr. Robert Hartwig, president and chief economist of the ºÚÁϲ»´òìÈ Information Institute (I.I.I.). "This favorable trend for consumers is occurring in part because auto insurers are not only assessing a policyholder's age, driving record, driving habits and the automobile they drive but also the extent to which they act in a financially responsible way, a criterion that has repeatedly been shown to be an actuarially sound rating factor."

The FTC report further stated that the largest 15 U.S. auto insurers, with a combined 72 percent of the nation's market share, utilize credit-based insurance scores, a practice that originated in the mid-1990s. Moreover, as of June 2006, 48 states have taken either legislative or regulatory actions to protect consumers from policy cancellations based solely on their credit-based insurance score and to require insurers to notify consumers about the use of credit-based insurance scores.

The I.I.I. has experts prepared to comment on the FTC report.

For consumer information on credit, go the I.I.I.'s Credit section.

For a backgrounder on credit and insurance, go to I.I.I. Issues Update: Credit Scoring.

The I.I.I. is a nonprofit, communications organization supported by the insurance industry.