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

27 Pages Posted: 27 Apr 2017

See all articles by Darcy Steeg Morris

Darcy Steeg Morris

U.S. Census Bureau

Daniel Schwarcz

University of Minnesota Law School

Joshua C. Teitelbaum

Georgetown University Law Center

Date Written: June 2017

Abstract

Property and casualty 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 scores do not proxy for income in a standard actuarial model of auto claim risk.

Suggested Citation

Morris, Darcy Steeg and Schwarcz, Daniel B. and Teitelbaum, Joshua C., Do Credit‐Based Insurance Scores Proxy for Income in Predicting Auto Claim Risk? (June 2017). Journal of Empirical Legal Studies, Vol. 14, Issue 2, pp. 397-423, 2017. Available at SSRN: https://ssrn.com/abstract=2959108 or http://dx.doi.org/10.1111/jels.12151

Darcy Steeg Morris (Contact Author)

U.S. Census Bureau ( email )

4600 Silver Hill Road
D.C., WA 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

Georgetown University Law Center ( email )

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

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