Driving mishaps generate insurance claims, and at least one major insurer now considers driving records when setting homeowners insurance premiums. Allstate Insurance has begun using driving information to set premiums in Oklahoma and Kansas. The company plans to bring the policy to other states by 2014. Insurance companies already use lifestyle information and credit scores to underwrite homeowners policies. If Allstate's policy is financially successful, other companies will likely follow.
Rules of the Road
Each insurance company uses its own formula to evaluate risk, and most companies use demographic information, location, building materials and external factors to value dwellings and set premiums. Homeowners insurance underwriters consider whether people conduct business from their homes, lifestyle issues and whether repairing an existing structure costs more than its value. According to the Society of Actuaries, adjusters get information about your buying habits, fitness level, health, children and hobbies just by obtaining your Social Security number and ZIP code. Adding your driving record to the mix seems less intrusive when considering what companies can already determine about you.
Lifestyle issues and predictive guesswork are used by thousands of companies to adjust risk, cross-sell products, generate leads and target customers. Although most insurance companies don't use driving records to adjust premiums, many use the information to sell other insurance products and target customers for advertising campaigns. Insurance underwriting is the process of selecting risks and adjusting premiums so that insurance companies make profits by spreading risks among large groups of people. An underwriter's job involves gathering information to make educated guesses about risks, and insurance companies believe careful drivers pose fewer property risks than people with questionable driving records.
Home and Hearth Issues
Most homeowners insurance policies base premiums on age, pets, children, age of house, neighborhood crime rate, deductible and discounts. Firefighting resources in the area, hydrant placement, type of construction, weather and property value also help determine premiums. Consumer Reports finds that insurance companies increasingly use credit scores to set homeowners insurance policies. Credit-based premiums have been adopted by 85 percent of the insurance industry after the practice was introduced in the 1990s, and these scores predict behavior and the likelihood of insurance claims with great accuracy, the report said. If driving records provide the same predictive benefits, more insurance companies will use them to set rates.
Consumers Strike Back
Many consumers remain unaware of how insurance companies invade personal privacy to underwrite policies. Consumer groups have protested the use of credit scores, and a similar movement will likely develop if using driving records becomes more universal in the industry. States don't allow insurance companies to increase rates based solely on credit scores, and some have banned the practice. Insurance companies have the right to limit their financial risk, but consumers can respond by refusing to do business with companies that become too intrusive. Base your decision to buy homeowners insurance on physical risk, premium rates, company reliability, available discounts and competitors' prices.
- Chicago Tribune: Allstate Using Driving Records to Set Homeowners' Rates in Oklahoma
- IRMI:The Underwriting Submission -- Homeowners Insurance
- Society of Actuaries: Underwriting Trends -- Session 26 -- October 15, 2012
- Financial Web: Basics of Underwriting Insurance
- D&H Investment Trust: Insurance Underwriting
- Consumer Reports: Tighter Underwriting
- NAIC: Credit-Based Insurance Scores
- Siri Stafford/Digital Vision/Getty Images