How Insurance Companies Use Your Credit Rating To Decide Your Premiums

UK Insurance Companies have been using credit scoring to determine policy acceptance, flag potential claims risks and load premiums for over ten years now.

What this means for the consumer is that if you do not fall into the credit/lifestyle brackets determined by the credit rating companies and identified by the Insurance Companies as the most profitable people sectors for their particular products, you will be either declined cover or offered it at a loaded rate commensurate with the amount of extra risk that the lifestyle group that you fall into presents, and designed to deter you from taking up cover.

In other words if you aren’t what the insurance companies are looking for…. they don’t want your business!

Here are the examples of the Experian Groups of type of person that YOU are! These are used for what is known as ‘customer segmentation’. For Insurance purposes these are then grouped into four quadrants.

Low Conversion / Low Risk of Claims – An Insurance Company’s desired customers
1. Wealthy Retirement
2. Mid Life Affluence
3. Surviving Singles
4. Elderly Deprivation

Low Conversion / High Risk of claims – An Insurance Company’s least preferred customers
1. Ageing workers
2. Happy housemates
3. Credit Hungry Families
4. Advancing Status

High Conversion / High Risk of Claims – The customers an Insurance Company would like to be rid of
1. On The Breadline

High Conversion / Low Risk of Claims – An Insurance Company’s most preferred customers
1. Gilt Edged Lifestyles
2. Modest Mid Years
3. Successful Starters
4. Flourishing Familes

So…..which one are you?

In the UK credit scoring was first introduced in the household and car insurance markets in the late 1990′s.
It is important to remember that credit scoring in the UK as carried out by ‘big brother’ credit scoring company Experian plc, is postcode and not people centric.
Where you live is the database primary key!

Nothing much has changed in the last decade with regards the database structures with the exception of the amount of data that Experian holds on each and every one of us and how the data Experian holds on each and every one of us is used!

When a customer applied for home insurance in the 1990′s, the insurance company collected the data regarding all new policyholders and sent the extract overnight to Experian. Experian then took the extract and applied it to its credit scoring database and sent the file back a day or so later with the credit scores for the applicant attached. The Insurance companies could then use the database to see the likelyhood of claims by the type of people they’d underwritten the policies for.

At renewal those likely to make a claim could have their premiums loaded to discourage renewal and in theory protect the fund.

That is if you believe the Experian categorisation of propensity to claim!

When I first was asked to design these systems I thought that propensity to claim by lifestyle had some merit, for example young drivers, but to judge someone by the house the live in, job they do, credit cards they hold, and nowadays even by the school reports they were given… as being rational variables in a model to determine propensity to claim….was complete and utter bullshit… and I still do!

Yes Big Brother Experian even holds your school reports these days and it won’t be long before they get your medical records as well………

Thanks to the Internet and Experians new offshoot company Hitwise, all these things can be done online and the decision to offer insurance made instantly.

If you’d like to see an interesting if flawed analysis by Experian of the UK Insurance Industry online for 2009, but more importantly an excellent demonstration of how Experian data is used by UK Insurance companies to bracket and categorise each and every one of us before deciding how much to charge us in premiums…… – watch this!

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