Why, or how does being poor or having bad credit cause insurance companies to charge more for insurance?
In: Economics
They run a risk analysis on how likely you are to cost the company money.
Overtime there have been connections between poor/bad credit and increased payouts, so they charge people higher rates based on that
Okay. Let’s say Joe and John go to buy insurance for their cars. Joe has an 800+ credit rating and pays his bill every month. John has a 400 credit rating and misses his payment every 2 or 3 months. Let’s say that for every year of owning a car, a person makes $1,200 in claims on their car.
Joe pays $100 every month… and at the end of the year somebody dings his car and he makes a $1,200 claim.
John pays $100 every month but he misses two payments. At the end of the year, somebody dings his car and he makes a $1,200 claim. The insurance company is out $200.
The insurance company decides it has to charge John more money, or else it isn’t worth insuring John.
Hang on tight. Statistically people who have bad credit are bad with money. Thus live in lower income communities. Statistically there are more accidents and fraud in more densely populated areas. Also higher frequency of dui and drug problems. And if they didn’t fuck you over enough for all this, there is also a higher probably that you will miss payments and have to pay late fees and worse. And they all work together to make sure rates are high and you have no choice but to pay whatever they want.
People with bad credit are more likely to need to resort to commuting insurance fraud so that increased risk is accounted for in your premium.
The simple answer is that there is a statistical correlation between claims frequency and credit scores. People with lower credit scores are statistically more likely to file claims. That is the answer to the question you asked.
The more complex part is, why does this correlation exist? There are likely several reasons.
1. People with greater financial means are probably more likely to cover small damages out of pocket than someone with lesser financial means. In this situation, it’s not just the likelihood of having an accident, but also the likelihood of actually filing an insurance claim for that accident. Someone that is well off financially may pay $200 (for example) for minor damages, whereas someone that is living paycheck to paycheck may file a claim.
2. Someone with greater financial means may be more likely to keep up with routine maintenance, such as replacing tires and brakes when necessary, which makes the car safer. Putting off replacing bald tires or worn out brake pads can increase stopping distance and make your car harder to control and therefore increase your risk of an accident.
3. Poorer people often live in more high crime areas, which increases the risk of theft and vandalism.
4. Those that are less well off likely have greater incentive to exaggerate a claim or commit outright fraud. This could be anything from trying to claim a worn out strut as a collision loss to setting a car on fire to collect an insurance payout. As a former adjuster, the first thing I’d do when someone claimed engine or transmission issues as part of a loss would be to check the glove box for past repair invoices or price quotes and check the trunk for empty bottles of trans fluid or coolant. You’d be shocked how easy it was to find evidence that the mechanical issues existed prior to the loss.
Also, people often claim that it’s because poor people are less likely to pay their bills. This is nonsense. You can get dropped for nonpayment and then you are no longer covered.
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