Final answer:
Protective Insurance requests to pull a credit report in order to assess Lisa's creditworthiness. This practice is common among insurance companies, as they use credit history as an indicator of risk, which informs the calculation of insurance premiums. This approach is analogous to financial institutions checking credit before granting loans.
Step-by-step explanation:
When Lisa started shopping for auto insurance, she found that Protective Insurance wanted to pull a credit report, and she was surprised by this request. The reason for this is to assess her creditworthiness. Insurance companies often use an individual’s credit history as an indicator of risk because statistical studies have shown a correlation between credit behavior and insurance claims. A good credit score may suggest that an individual is more responsible and less likely to file claims, while a lower credit score might indicate the opposite. Therefore, instead of assessing salary, verifying education, or checking criminal records, credit history is used to evaluate the potential risk and determine insurance premiums.
Similarly, in the financial capital market, a bank will conduct a credit check before making a loan, to see if the borrower has a history of repaying their debts on time. They may also require a cosigner or collateral to secure the loan. This concept is closely related to why an insurance company is interested in the credit report of someone seeking car insurance.
It’s worth noting for consumers that they have rights regarding personal data. They should always provide only the minimum information requested, inquire why the information is collected, how it will be used, and who will have access to it, and monitor their credit history for any signs of identity theft or fraud.