Index indicates that auto insurance rates may go up

Kathryn Hawkins

A key measurement of auto insurance “risk” is on the rise, and that could mean higher auto insurance rates in your state.

TransUnion, which gathers and analyzes consumer credit data, developed a risk barometer for the car insurance industry known as the Auto Insurance Risk Index. The index analyzes the expected insurance loss ratio on a state-by-state basis every quarter, and compares it with a benchmark of the first quarter of 2001. The insurance loss ratio refers to how much insurance companies pay in claims compared with how much they collect in premiums. Although the TransUnion index is 31 basis points lower than it was at the same time in 2010, it rose by 0.03 percent from June 2011 to September 2011.

Even this tiny increase is statistically significant, says TransUnion’s global chief scientist, Chet Wiermanski. “It might seem minor, but the important aspect is that we’re seeing two-thirds of the states increase in the risk index,” he says. “In the previous quarter, we’d seen 47 states decrease.”

The riskiest states

The index tracked which states had the highest and lowest levels of auto insurance risk. Montana — with a population of less than 1 million — was ranked as the riskiest state, with an index of 108.46. Other high-risk states were Washington (104.55), Mississippi (102.50), Arkansas (101.29) and Maryland (101.19). A state with an index of, say, 110 is 10 percent riskier than a state with an index of 100.

Wiermanski points out that people in Montana tend to have high monthly car payments. “What it reflects is that people drive longer distances, are more dependent on vehicles and need to replace them more frequently,” he says.

In Mississippi, on the other hand, the risk is tied primarily to people being late with bill payments. “Consumers tend to have riskier credit profiles, more delinquency and more overextension of credit,” Wiermanski says.

States with the least risk from an auto insurance perspective were Alaska (94.48), Minnesota (94.79), Massachusetts (95.60), North Dakota (95.62) and Hawaii (95.79), the TransUnion index shows.

How is risk calculated?

TransUnion’s Auto Insurance Risk Index is based on an average of auto insurance scores taken from a sampling of 27 million U.S. policyholders. These scores are based on how much outstanding debt car owners have and how quickly they repay their loans.

The overall increase in the index is “predominantly due to the number of installment loans reported to credit bureaus,” Wiermanski says. “What we’re seeing is that the value of the (nationwide) auto fleet is starting to increase, which means they’re more expensive to replace or repair.”

Automakers reported that U.S. sales of new cars reached 12.7 million in 2011, up from 11.5 million in 2010.

How the numbers are used

According to the American Insurance Association’s vice president and associate general counsel, David Snyder, the majority of auto, home and other property insurers use credit-based insurance scores (like those provided by TransUnion and its rivals) to determine customers’ risk in terms of filing a claim.

TransUnion won’t reveal how many insurance providers rely on its data, but Ashley Hunter is among them. Hunter, president of HM Risk Group Insurance Brokers, says her company uses TransUnion’s risk index data in underwriting policies, and so do most other insurance brokers.

“We have to use their data,” she says. “Their platform is the largest for assessing credit risk. The majority of insurers use TransUnion.”

Hunter says HM Risk Group takes credit risk into account on both a state-by-state and individual level. If TransUnion rates a particular state as high-risk, insurance premiums within that state are likely to be higher as a whole. Her company also analyzes individual policyholders’ credit histories and combines those details with the state-level data to come up with individual risk scores for each policyholder.

A 2004 study by the Texas Department of Insurance found a direct correlation between credit scores and the likelihood of filing claims: After analyzing more than 2 million policies, the department found the 10 percent of policyholders with the lowest credit scores were 1.5 percent to 2 percent more likely to file an auto or home insurance claim than the highest-rated 10 percent of policyholders. Insurers typically set higher rates for people with low credit scores, and may raise or lower rates based on the state’s risk profile as well.

Justification for higher premiums

Amy Bach, executive director of consumer advocacy group United Policyholders, says the increase in TransUnion’s risk index is so small that it’s barely worth noting.

“They’re making out a 0.03 percent uptick to be a big deal,” she says. “They’re always looking for a hook to get publicity, so they have a motivation to be dramatic.”

She believes that consumers should be wary of such announcements.

“Companies like TransUnion are a big driver in the costs that people pay for insurance,” Bach says. “We on the consumer side have concerns about the accuracy of the data that they’re selling.”

Bach believes that by publicizing increases in risk level, no matter how small, TransUnion is giving insurance companies ammunition for raising rates. “These statistical vendors have a vested interest in telling insurers what they want to hear,” she says. “If they can give justification for raising prices, they’ll do that.”

Wiermanski doesn’t claim to know exactly how insurance companies use TransUnion’s data.

“It’s up to the companies that use insurance risk scores for underwriting,” he says. “Some may raise rates and some may not; it depends on their strategy in the marketplace.”