Washington Commissioner Criticizes Insurers’ Credit Score Use

July 16, 2010

Washington Insurance Commissioner Mike Kreidler is taking aim at insurers’ use of credit scores, warning consumers that large drops in credit scores could lead them to pay 8 percent to 15 percent more for insurance. Meanwhile, several insurance associations say credit-based insurance scores are accurate, fair and continue to provide savings for most consumers on their home and auto insurance.

This week, Kreidler said credit score producer FICO Inc. reported more than 43 million people now have a credit score of 599 or below. Credit scores range from 300 to 850. Because most insurance companies use credit information and other factors to create an insurance credit score, the lower a consumer’s score, the more the person could pay for home or auto insurance, he said.

“Today, your insurance credit score can make up as much as 50 percent of your auto and homeowners rates,” Kreidler said. “We warned people last year if the economy failed to rebound, we would see people’s credit scores dive. Many people still out of work are struggling and relying more on their credit cards to pay bills.”

In particular, he cautioned consumers against:

  • Consolidating credit cards, lowering credit card limits, or canceling cards.
  • Buying large ticket items with 12-months deferred interest.
  • Using or opening a store card to get a 10 percent discount on a purchase.
  • Opening a new credit card to get frequent flyer miles.

However, the Property Casualty Insurers Association of America (PCI), Northwest Insurance Council (NWIC), American Insurance Association (AIA) and National Association of Mutual Insurance Companies (NAMIC) said the major consumer reporting agencies such as FICO report that average scores remain steady and that credit-based insurance scores are not necessarily adversely impacted by changes in a consumers’ lending credit situation.

“Credit-based insurance scoring is a fair, long-established tool that saves the typical insurance consumer anywhere from 30 to 59 percent on auto insurance due to the proven correlation between insurance scores and risk,” said Kenton Brine, PCI’s assistant vice president, state government relations. “The Federal Trade Commission, St. Ambrose University, the Texas Department of Insurance, and independent actuaries have all released studies in recent years confirming that credit-based insurance scores are predictive of risk.”

While credit scores and credit-based insurance scores are both based on information from a consumer’s credit history, credit-based insurance scores only reflect credit-related information that helps an insurer determine a consumer’s likelihood of loss. So, while a person’s credit score might rise or fall based on changes in their spending or bill-paying habits, that doesn’t necessarily mean that person will see a corresponding rise or decline in their insurance score, the associations said. That explains why, as the credit analysis firm FICO noted in June, average insurance scores have remained relatively stable as of April of this year (as they have throughout the recession).

“In addition to the differences between the two types of scores, Washington is among most states in imposing restrictions on the types of information that may be used to calculate insurance scores,” said Karl Newman, NWIC’s president. “For example, while an overdue medical bill sent to a collection agency can negatively impact a consumer’s credit score, it will have no impact on the consumer’s insurance score because Washington law prohibits insurers from including it when calculating an insurance score.”

“With families in Washington State struggling to make ends meet in our tough economy insurance scoring can help ensure that lower-risk consumers are not subsidizing higher risk consumers,” said Christian Rataj NAMIC’s Western state affairs manager. “The evidence shows credit-based insurance scoring accurately predicts risk – which helps insurers accurately price insurance policies. This helps consumers reduce the cost of home and auto insurance.”

Kreidler pushed for a ban on insurance credit scoring last year, but the legislation was unsuccessful.

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