Mississippi Gulf Coast policyholders are well aware a hurricane is guaranteed to hike insurance rates, but fewer realize their credit reports also are factored into homeowner and automobile insurance premiums.
Consumers who have suffered financial setbacks because of the economy are seeing higher homeowner and auto insurance premiums, but the mistakes often found in credit reports also can lead to rate hikes.
Even Mississippi Insurance Commissioner Mike Chaney said that he recently faced a 10 percent increase in his Safeco auto insurance rate because of an error on the insurer’s part.
He said his rate was corrected when he questioned the charge, based on his credit history.
“The bottom line was, when we got down to it, they had rated me a credit risk because the agent had checked that I was eligible to pay on installment,” said Chaney, who pays his premiums in a lump sum. “My credit history is very good because I have a thin credit file, very little credit.”
Insurance companies contend consumers with bad credit tend to file more property insurance claims. Consumer advocates question the accuracy of studies that find a correlation between credit and risk. They also argue the industry should stick with more relevant risk indicators, such as claims history and the condition of property being insured.
The debate is attracting more attention as a bad economy affects consumer credit and has consumers scrutinizing their expenses.
Chaney sides with consumer advocates who believe insurance companies use credit histories to cherry pick customers and charge higher premiums. He said credit information in some cases allows insurance companies to raise premiums without a state-approved rate increase.
“It’s a serious game for them,” Chaney said. “It’s always about money.”
Insurers defend their use of credit reports to develop insurance scores, which dates to the mid-1990s.
They cite a 2007 Federal Trade Commission study that found credit-based insurance scores do predict risk for automobile policies. Studies sponsored by insurance companies, and the state of Texas, have reached similar conclusions.
Insurance companies point out that customers with good credit are rewarded with lower premiums. They view rates partly based on credit as an equitable way to set premiums.
“If you’re conservative with your finances, you manage your finances and credit well, typically, you’re also going to be an individual who is less likely to be involved in an accident,” said Robert Hartwig, who heads the industry’s nonprofit Insurance Information Institute.
“You’re going to be someone who is more likely to obey speed limits. You’re going to be someone who is less likely to drive impaired. You’re going to be less likely to be someone who fails to perform maintenance on your car.
“It’s an objective measure of financial responsibility. What it’s showing is that people who are financially responsible tend to be responsible in other dimensions of their life. This is not anything that should be a revelation,” Hartwig said.
Employers run credit checks on applicants as one way to determine whether they are responsible, Hartwig said.
“The reality is that your credit standing is something that impacts your life in many ways beyond getting a credit card or a loan,” he said.
Robert Hunter, former Texas insurance commissioner and National Flood Insurance Program administrator, does not buy the correlation between insurance risk and credit history. He said the FTC study relied on numbers the insurance industry was willing to provide.
The FTC is currently studying the link between credit-based insurance scores and homeowners insurance. Hunter, now director of insurance for the Consumer Federation of America, hopes this study will be more meaningful because the FTC has ordered insurance companies to turn over data related to use of credit reports.
He also believes consumers are paying more attention to the use of credit reports to set their insurance premiums because of economic hardships such as job layoffs.
“It’s really a pernicious system because it really hurts poor people,” Hunter said, “especially in this economy.”
Hunter said momentum to end the use of credit scoring lost steam completely when insurance companies backed a bill, adopted in most states, that prohibits basing premiums “solely” on credit information. The bill was toothless, he said, because credit information has never been the only factor used to set rates.
“They put this bill out all over the country and the insurance companies behind the scenes were pushing it and publicly were saying, ‘Oh, this is terrible, they’re going to regulate us,”‘ Hunter said. “And almost every state adopted this thing because it was a way for legislators not to risk losing insurance company financial support and look like they were voting for something.
“It was a very clever strategy. That set us back tremendously for several years because after everybody passed it, they wouldn’t take it up again.”
While state insurance departments learn through insurance company filings what credit information is used to set rates, consumers are rarely aware how it works. The credit information used to develop an insurance score varies by company.