Understanding Credit Scores and Insurance Scores

Disclaimer: What you read here are my recollections and opinions of events that I experienced with Allstate - and should not be considered statements of fact.

Credit scores are widely used in the financial industry to gauge an individual's financial responsibility and creditworthiness. A higher score reflects greater financial responsibility, while a lower score suggests the opposite. Low credit scores are often associated with a higher likelihood of debt default, categorizing the individual as a higher credit risk. This can lead to higher interest rates, denial of credit, or even adverse impacts on job opportunities. The Government of Canada provides detailed insights: Credit report and score basics.

However, credit scores don't just affect loans and credit cards—they also play a role in insurance premiums. Most insurance companies calculate an “insurance score,” which often incorporates elements of an individual’s credit score. This practice raises the question: Why would a credit score be a factor for an insurance policy which is paid in advance?

Why credit scores affect insurance premiums

When Allstate refused to provide answers, through my own research, I learned that insurance companies argue that credit scores provide a window into a policyholder's behaviour. They claim that research indicates that individuals with lower credit scores are more likely to file claims—whether due to carelessness leading to more home damage or, controversially, alleged moral risk that results in fraudulent claims. Consequently, a lower credit score typically results in a lower insurance score, which translates to higher premiums for property (home) insurance.

Insurance pricing is largely determined through statistical modelling and financial theory. Actuaries, experts in risk analysis, spend considerable resources developing models that predict future claims. While these models are sophisticated, they are not infallible. One well-documented correlation is that individuals with lower credit scores tend to file more claims. Yet, correlation does not prove causation, and, no matter how elegant the model, it is only an approximation used to make a guess.

A personal case: Ljubica Zidaric and Allstate

A case in point involves Ljubica Zidaric, a 75-year-old woman who has been insured by Allstate for 30 years and has filed just one claim in over five decades. Despite this stellar record, Allstate charged her nearly double the premium compared to other options. Strangely, the company’s "Disappearing Deductible" program rewarded her for claim-free behaviour by reducing her deductible to $0, while simultaneously labeling her a high risk and charging and exorbitant premium.

When asked to explain this discrepancy, Allstate refused to provide details about how her insurance score was calculated or why her premium was so high. This lack of transparency contradicts Allstate's own Code of Consumer Rights & Responsibilities, which promises that: “You also have a right to know how insurers calculate price based on relevant facts”

An informative experiment

Seeking answers, I (Zeljko Zidaric) conducted an experiment using Allstate’s quote system. Here’s what I discovered:

$1,524/year: A 75-year-old woman (Ljubica), no car insurance, no consent for a credit check.
$1,704/year: A 57-year-old man (myself), with car insurance, and no consent for a credit check.
$1,284/year: A 57-year-old man, with car insurance, consenting to a credit check (good credit score).

This suggests a strong correlation between credit scores and insurance premiums. Ljubica, who has no credit score—not due to financial irresponsibility but because she has never had a credit card —seems to have been penalized for this lack of data.

Allstate’s response

After asking multiple times, in a letter dated December 6, 2024, Rosemarie Davis, Allstate’s Director, Compliance and Business Conduct, Chief Compliance Officer, stated that: “… with regards to the specific questions raised by Mr. Zidaric regarding the above-noted policy and whether Allstate used credit scores in rating of Policy #158254XXXX, we confirm that adequate consent was provided, and Allstate does not use credit scores to determine insurance premiums in the province of Ontario, in compliance with all relevant insurance regulations.”

To me, Ms Davis’ words smell like corporate bullshit. In Ontario, regulations prevent insurance companies from using credit scores to determine automobile insurance but they are free to use them for property insurance premiums.

Her assertion raises questions about transparency and honesty. If credit scores truly play no role, why does the data from my experiment suggest otherwise? Ljubica, the policy-holder, does not recall consenting to a credit check, nor was she aware of the impact her lack of a credit score would have on her insurance.

Final Thoughts

This situation illustrates the opacity and potential inequities in how insurance companies assess risk and set premiums. While statistical models may guide pricing, their reliance on proxies like credit scores can inadvertently penalize individuals like Ljubica, who have spotless records but lack conventional financial data by which to prove their financial responsibility and good moral character.

Transparency and accountability are crucial. Consumers deserve clear explanations of how premiums are calculated and assurance that their rights are respected.

For those interested in doing their own research, you can start with the following web pages:

What is an insurance score?

Code of Conduct for Insurers’ Use of Credit Information

Discriminating by Credit Score

How Your Credit Score Can Impact Your Home Insurance Rates

Does credit score affect homeowners insurance?

How Your Credit Score Affects Homeowners Insurance

Credit Scores And Your Insurance

Better Business Bureau: Allstate

Allstate Home Insurance Review

Allstate charges 'sucker' customers higher car insurance premiums

See what customers say about Allstate Insurance Company of Canada