TransUnion’s Auto Insurance Risk Index Increased

TransUnion, one of the three major credit bureaus, released their latest quarterly Auto Insurance Risk Index (IRI).  This Index is a barometer for the auto insurance industry and is related to expected insurance loss from auto claims. TransUnion’s Auto Insurance Risk Index decreased for the past four quarters and increased .03 percent in third quarter 2011 to an Index of 98.85, compared to an index of 98.82 in second quarter 2011.  It was .31 percent lower than a year earlier with an index of 99.46.   At the peak of the recession (second quarter 2009), the index was 99.58.

New Upward Trend?

This seems like a minor increase, but the trend may be shifting to an increase in insurance risk.  The Auto Insurance Risk Index increased for thirty-four states or 68 percent of the states in third quarter 2011 compared to the previous quarter, in which every state declined except Vermont.

“Prior to this quarter, the decline in Auto Insurance Risk Index has been gradually decelerating, reflecting the rebound in the auto market as consumers began replacing an aging automobile fleet,” said Kelley Buchanan executive vice president in TransUnion’s insurance business unit. “Stable and relatively low-loss ratios insurance carriers have experienced over the past several years may be coming to an end as consumers trade for newer automobiles, which generally are more expensive to repair,” added Buchanan.

What is the Insurance Risk Index?

TransUnion developed their Insurance Risk Index for the insurance industry to show expected insurance loss ratios for U.S. market segments such as by state. The benchmark for this Index is March 31, 2001, which the U.S. national average was 100.  For example, a state with an index of 100 is riskier than a state with an index of 95.

The Index is related to insurance loss ratios. Insurance premiums are tied to expected loss ratios and consumer risk. A key leading indicator is the number of new installment loans.  TransUnion’s Insurance scores are a key component of the Auto Insurance Risk Index.  Insurance scores predict the likelihood that the policyholder will file a claim. The higher the insurance score, the less likely the policyholder is to file a claim. Key components of TransUnion’s insurance scores are payment history, length of credit history, Installment debt activity and auto loan activity. These insurance scores are derived from TransUnion’s credit report.

Riskiest and least risky states

The five riskiest states for auto insurance are Montana (108.46), Washington (104.55), Mississippi (102.50), Arkansas (101.29) and Maryland (101.19).  The five with the least risk are Alaska (94.48), Minnesota (94.79), Massachusetts (95.60), North Dakota (95.62) and Hawaii (95.79).

What does this mean to you as a consumer? As more consumers begin buying cars and other installment purchases, the insurance risk index goes up.  Insurers may adjust rates when risk increases.   If insurance risk is increasing in your geographic area, premiums payments may also go up.  Your credit report is an important factor used by insurance companies in evaluating insurance risk.  To keep your premiums low, you need to pay your bills on time, pay them in full, keep your credit card balances low, and the obvious one is – don’t get in any auto accidents.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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