In a report to state lawmakers, the Arkansas Insurance Department revealed that almost a third of Arkansas homeowners and motor vehicle owners paid less in insurance premiums last year because their credit scores were good.
The report also showed that between 9 and 10 percent of Arkansas property owners paid higher insurance premiums because of poor credit histories, according to a recent Arkansas Senate weekly report.
Most insurance companies in Arkansas include credit scores when they determine how much a person pays in premiums. The practice has generated some controversy among consumers, who don’t understand how their credit history can affect whether or not they are safe drivers, and whether or not their home is a good or bad risk.
In 2003 the General Assembly passed Act 1452 to regulate the use of credit in calculating premiums for personal lines of property and casualty coverage. Some wanted a prohibition of the use of credit, but during committee hearings insurance executives said that people’s credit scores were a valid indicator of how likely they were to file claims.
As a compromise, the act was written to require insurance companies to submit detailed information to the Arkansas Insurance Department, which in turn makes it public in annual reports.
Act 1452 of 2003 prohibits an insurance company from relying solely on credit as a basis for calculating premiums. They must use recent credit reports that have been calculated within 90 days of the date on which the policy is first written or renewed.
Also, insurers may not rely on credit reports that are based on gender, race, marital status or religion. They may not use credit scores based on zip code, because zip codes can easily be used to identify a person by race or ethnic background.
The act requires insurers to notify consumers whenever their credit scores have been factors contributing to adverse action. Insurers must inform consumers that they have the right to obtain a free copy of their credit report from a credit bureau.
Of the 178 insurance companies that in 2006 issued policies in Arkansas, 110 used credit in determining premiums and 68 did not. According to the companies 31.2 percent of automobile owners and 32.3 percent of homeowners saw a decrease in premiums because of credit scores.
The companies said credit was a neutral factor in calculating 59 percent of automobile premiums and in 58.5 percent of homeowners’ premiums. They reported that poor credit was a factor in higher premiums for 9.8 percent of motor vehicle owners and 9.2 percent of homeowners.
Bad credit was less of a factor for people who bought other lines of personal insurance, such as for motorcycles and boats. Only 2.5 percent paid higher premiums because of their credit, while 15 percent paid less. For 82.5 percent of those consumers, their credit was a neutral factor.
Arkansas had a population of 2.8 million people in 2006, according to the United States Census Bureau. That same year, insurance companies wrote more than 1.8 million policies for motor vehicle owners and 458,000 policies for homeowners in which credit was a factor in premium amounts.
Total premiums paid by Arkansas consumers for car, home and other person lines of insurance was $1.9 billion.
Source: Arkansas Senate, www.arkansas.gov/senate/weeklyreview.html
Topics Carriers Auto Homeowners Arkansas
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