Do Credit-Based Insurance Scores Proxy for Income in Predicting Auto Claim Risk?

J. Empirical Legal Stud., Vol. 14, No. 2, pp. 397-423, 2017

33 Pages Posted: 3 Nov 2015 Last revised: 25 Jan 2018

See all articles by Darcy Steeg Morris

Darcy Steeg Morris

Government of the United States of America - Bureau of the Census

Daniel Schwarcz

University of Minnesota Law School

Joshua C. Teitelbaum

Georgetown University Law Center

Date Written: 2016

Abstract

Auto insurers often use credit-based insurance scores in their underwriting and rating processes. The practice is controversial — many consumer groups oppose it, and most states regulate it, in part out of concern that insurance scores proxy for policyholder income in predicting claim risk. We offer new evidence on this issue in the context of auto insurance. Prior studies on the subject suffer from the limitation that they rely solely on aggregate measures of income, such as the median income in a policyholder's census tract or zip code. We analyze a panel of households that purchased auto and home policies from a U.S. insurance company. Because we observe the households' home policies as well as their auto policies, we are able to employ two measures of income: the median income in a household's census tract, an aggregate measure, and the insured value of the household's dwelling, a policyholder-level measure. Using these measures, we find that insurance score does not act as proxy for income in a standard actuarial model of auto claim risk.

Keywords: auto insurance, income, insurance score, proxy

JEL Classification: G22, K23

Suggested Citation

Steeg Morris, Darcy and Schwarcz, Daniel B. and Teitelbaum, Joshua C., Do Credit-Based Insurance Scores Proxy for Income in Predicting Auto Claim Risk? (2016). J. Empirical Legal Stud., Vol. 14, No. 2, pp. 397-423, 2017. Available at SSRN: https://ssrn.com/abstract=2685304 or http://dx.doi.org/10.2139/ssrn.2685304

Darcy Steeg Morris

Government of the United States of America - Bureau of the Census

4600 Silver Hill Road
Washington, DC 20233
United States

Daniel B. Schwarcz

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://www.law.umn.edu/profiles/daniel-schwarcz

Joshua C. Teitelbaum (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue NW
Washington, DC 20001
United States
202-661-6589 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
181
Abstract Views
1,577
rank
164,267
PlumX Metrics