Minnesota Agents Voice Concern Over Credit Ratings

A growing number of insurance companies operating in Minnesota are using credit-rating scores to establish premiums for car drivers and homeowners. This means that in certain situations people with poor credit histories are being charged more for insurance policies than those with good credit, according to the Minnesota Independent Insurance Agents Association.

The Minnesota Independent Insurance Agents Association is concerned about this practice. Daniel Riley, Executive Vice President of MIIA, questions how someone’s credit score impacts the likelihood of having a car stolen or a fire in their home. “The MIIA, which represents over 4,500 independent agent members, has questioned the relationship between credit reports, credit scoring and loss. We feel the consumers of Minnesota should be aware of the new underwriting practice by insurance companies and consumers should review their credit report on a frequent basis to ensure the adequacy of their report, if in fact, your score can impact on what consumers pay for their auto and homeowners insurance.”

Last year, Minnesota Attorney General Mike Hatch introduced legislation that would ban the use of credit for insurance because he considers the practice a form of economic redlining. The MIIA worked with the Attorney General’s office to find a resolution to the conflict.

As a result of this cooperative effort, the MIIA proposed legislation in 1999 to protect consumers if they are adversely affected due to a misleading or inaccurate credit report. According to Riley, “The MIIA proposal relating to the use of credit in underwriting for auto and homeowners insurance was enacted by the legislature this year. The legislation was the product of over a year’s worth of meetings and discussions with the Insurance Federation of Minnesota, an insurance company trade group, regarding credit underwriting. The compromise legislation does not prohibit the use of credit information in personal lines underwriting but does require greater disclosure if credit scoring results in an adverse underwriting decision.”

According to Riley, if credit information results in an adverse underwriting decision by the insurer, the insurer must provide to the policyholder or applicant in writing the primary reasons for the negative credit score or information used in the underwriting decision. An “adverse underwriting decision” refers to a denial of an application, a refusal of renewal, or an alteration of insurance rates to the disadvantage of the policyholder. The new law took effect on August 1, 2000.

Riley admits that risk classification is an essential part of how insurance companies compete financially and determine how much to charge for policies. Having mechanisms to accurately gauge how likely a consumer is to file a claim benefits both the company and consumers through fairer and lower rates.

Topics Agencies Legislation Underwriting Minnesota