When you get a quote on car insurance, you may be asked for details such as your real name, date of birth, the zip code you live in and your favorite ice cream flavor. OK, maybe not the last one, but the others are pretty much the standard questions, regardless of the insurance company. I often get asked “Why do you need my real name” or “what does my zip code have to do with auto insurance?”. While there is a lot of details needed to properly answer these questions, the simple explanation is that insurance companies use statistics as a way to determine your rate. So, if you live in a densely populated area with a lot of traffic accidents, the insurance company is going to adjust your rate to account for this risk (i.e. higher price!). It works on the flip side too, if you live in an area with fewer accidents then you will more than likely get a better rate, especially if it’s a competitive marketplace. The other two questions, your real name and date of birth are used for various rating factors, including age and and credit score.
The usage of credit as a rating factor has been an ongoing practice for years, except in those states where it is not allowed. You might ask yourself, how does having bad credit have anything to do with my driving habits? The answer: nothing! However, statistics show people with lower credit scores are more likely to file a claim than those with good credit. This is simply a numbers game and one that is difficult to rationalize unless you’re an insurance company. In theory, this would be the same as charging people who liked chocolate ice cream over vanilla, because statistics showed they were poorer drivers.
