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

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Journal of Empirical Legal Studies, ISSN: 1740-1453, Vol: 14, Issue: 2, Page: 397-423

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Darcy Steeg Morris; Daniel Schwarcz; Joshua C. Teitelbaum
Social Sciences
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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.