1. Credit Rating and Life Insurance Underwriting
Lecture 3
Credit Rating and Life Insurance
Underwriting

2. Agenda What is credit rating? How does credit rating work?
Why is insurer use credit rating is controversial?
Should insurer use of credit information
be prohibited?

3. Underwriting process
Underwriting process involves evaluating the applicant or policyholder (the “risk”) by using objective information about the risk.
Policyholders are grouped with those having similar characteristics and likelihood of loss, and rating the risk

4. What is Credit Scoring?
Credit reports are detailed histories of an individual or firm’s current and past credit related transactions.
Credit reports include detailed information on revolving credit, mortgages, collections and bankruptcies.
Insurers use “insurance scores” to predict the likelihood of future losses.
The score does not include specific details from one’s credit report, but represents a composite “picture” of an insurance risk.

5. How Does it Work?
Application of credit information to automobile and homeowners underwriting and rating is still a comparatively new practice.
Statistically, the higher the credit score, the lower the risk of loss.

6. Why Is Insurer Use of Credit Scoring So Controversial?
Some opponents of insurer use of credit information have charged that insurers use credit information for the purpose of refusing business or to charge higher rates.
Insurers are in the business of writing policies. Any insurer who would attempt to disqualify as much business as possible, or to unfairly rate their policies, would not remain in business very long.

7. On the contrary, credit information has proven to be an effective tool for insurers, allowing them to underwrite or rate business with a greater degree of certainty and accuracy.
Privacy is another issue that has been raised in opposition to the use of credit reports.
Credit scoring actually allows an underwriter to carefully evaluate a risk without the disclosure of sensitive or private information.

8. Should Insurer Use of Credit Information be Prohibited?
A prohibition on the use of credit information or credit scores would not be fair at all.
If credit scores could not be used as an underwriting tool, a majority of policyholders would pay more than their fair share for insurance.

9. Use of credit scoring may improve insurance availability.
When insurers can evaluate applicants with greater confidence, they are able to accept many applicants they might not have accepted in the past.

10. Further, the use of credit scoring does not make it difficult for people to buy insurance.
Credit scoring allows insurers to more accurately underwrite and rate their business.

11. Can bad credit affect life insurance premiums?
Will a life insurance company charge higher premiums if you have bad credit?
Bad credit isn’t generally as big an issue with life insurance.
If you are stressed by having a large amount of debt, or by being unable to meet your obligations (evidenced by a poor credit score), the auto insurer may judge you to be a higher risk. The stress of living with debt problems could lead to reckless driving behavior, and that will affect premiums.

12. The Life Insurance Company Will Generally Require Access to Your Credit History
The insurance company may not pull up a credit report as a matter of course, but they may do so after noticing certain patterns. For example, a non-health related concern that a life insurance company will have is employment.
Naturally, they will want to know what kind of work that you do because certain occupations are considered to be more hazardous than others.
While your credit quality itself is unlikely to be reason for decline, or even for an increase in premium, it will be a corroborating factor in determining your overall insurability.

13. Employment Can Be a Bigger Issue
Risk factors associated with your particular occupation.
Beyond occupational risk, the insurance company is very concerned about one very practical matter: that you have the capacity to be able to afford to pay the premium.

14. Driving and drug use history
The insurers ask for driving history and your prescription drug use history.
They’ll verify the info by checking your records with your state’s Department of Motor Vehicles.
The medicines you take, as well as the dosage and length of use, can indicate past and present health issues

15. Criminal activity
Insurers will also check for any recent criminal activity, for example if you’re currently in jail, awaiting trial, or on probation or parole.
Most carriers will postpone the application until you’ve been out of jail or off probation or parole for at least 12 months.

16. Your health and your lifestyle
life insurance companies aren’t that concerned about whether you’ll pay your premiums on time. Instead, they want to know how risky it will be to cover you so that they can price the policy accordingly—and the best way to do this is to look at your health and your overall lifestyle.

17. Health
When it comes to information about your health, the insurer first relies on you to provide accurate information about yourself and your immediate family.
The insurer may reach out to your doctor for medical records.
The insurer will also do a little primary research of its own and pay to have you undergo a short medical exam.

18. Lifestyle
The insurer actually wants to know your general activities that affect the chance of dying.
Do you regularly scuba dive?
Are you a rock climber?
Do you wrestle alligators during the summer months?
The insurance company would like to know!

19. Example
If your broker knows you’re a weekend rock climber she can focus most of her attention on insurers who take a more lenient view of the sport.

20. Bottom Line
It may seem simplistic, but the best way to find a good price is to get as healthy as you can and then stay that way, and to make sure your broker or agent has an accurate view of your risk profile so that she can find the insurers that are the best fit in terms of price and adaptability.