R Sheets Insurance

Determining Auto and Homeowner Insurance Prices


Jerry Theodorou
Policy Director, Finance, Insurance and Trade

Key Points

Credit-based insurance scores have been found to be predictive of insurance losses. Insurers that use credit based scores in their pricing methodology are able to calculate risk-adjusted premiums corresponding to actuarially-determined probability of loss.

Some consumer advocacy organizations maintain that insurers’ use of credit-based insurance scores in their rating is discriminatory because residents of minority communities often have lower insurance scores, resulting in higher premiums.

Objective, fact-based research by insurance economists has not found evidence of unfair discrimination by insurers in the pricing of automobile insurance policies.


Credit-based insurance scores are among the demographic ratemaking factors. A credit-based insurance score is a rating based in whole or in part on elements in a consumer’s credit information. Use of insurance scoring was developed to avoid discrimination based on categories challenged as unfair, such as race,
religion and national origin.

Most insurance companies incorporate credit-based insurance scores into their automobile and homeowner insurance rating algorithms. There have been claims by some consumer organizations and regulators that the use of insurance scores is discriminatory and should be prohibited. These arguments rely on the assumption that the credit information on which the scoring is based is either inherently inaccurate or inherently discriminatory. Insurance companies disagree, asserting that insurance scores allow them to price insurance policies more appropriately in accordance with risk magnitude associated with individual policyholders.

The methodology insurance companies use to calculate rates for personal automobile insurance has been refined over the years. Most insurers have developed algorithms called Generalized Linear Models (GLMs), introduced
in the 1990s. Today’s GLMs incorporate numerous rating factors, or predictors, and the impact of their interrelationships. In automobile insurance, these factors can include data on driver demographics, driving history and
vehicle type.

Approximately 95 percent of auto insurers make use of credit-based insurance scores in states where it is allowed. California, Hawaii, Maryland, Michigan and Massachusetts prohibit or limit insurers’ ability to use credit scores in ratemaking. These states have all resisted the model laws in different ways, claiming that insurance scores, despite the data, are unfairly disadvantaging customers.

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