This appeared in the Washington Post Business section this morning. Thought it may be of interest. At least, Maryland is wising up. Only 46 states to go. Bad Credit, Big Premiums Insurers Using Bill-Payment History to Help Set Rates By Albert B. Crenshaw Washington Post Staff Writer Tuesday, June 18, 2002; Page E01 Most people understand that if they run up a handful of speeding tickets, their car insurance rates may go up. But many don't realize that paying a credit card bill late could have the same effect -- and unlike traffic violations, a bad credit report could boost their homeowners insurance premiums as well. Property insurers across the country have concluded that people with poor credit histories are more likely to have auto accidents and incur damage to their houses. The companies can't really explain why there should be such a correlation, but they say statistics show there is one. Based on the findings, insurers are increasingly turning to credit reports and credit scores derived from them as tools in setting rates -- and even in determining whom to insure. Legislators and regulators in many states are going along, at least so far, although a few states, including Maryland, have banned or sharply limited the practice. Consumer groups are scornful of the industry's findings. "I an unconvinced that failure to pay my Visa bill makes me a bad driver," said Ed Mierzwinski, of the U.S. Public Interest Research Group. But the insurance industry argues that it has indisputable evidence that credit reports and credit scores, such as those compiled by Fair, Isaac & Co., a San Rafael, Calif., software, analysis and modeling firm, correlate very highly with the riskiness of homeowners and drivers. Some 90 percent of property insurers now use credit scoring in some way in their underwriting decisions, said Robert P. Hartwig, chief economist of the Insurance Information Institute, a trade group. Such use has spread rapidly over the past 10 years because "when one [company] uses it, it has an underwriting advantage," he said. A credit score "has predictive value," Hartwig said. The scores, which insurers say could indicate a lack of personal responsibility, enable carriers to identify good risks in such high-risk environments as old, urban areas and charge them lower rates, said David F. Snyder, assistant general counsel of the American Insurance Association, a property insurer group. When insurers are forced to use cruder measures, as they did in the past, "the good, responsible risks subsidize the lousy risks," he said. An additional benefit to consumers, Snyder and others in the industry said, is that it enables more companies to enter new markets, increasing competition. Bills to regulate the practice were introduced in about 30 state legislatures during the past year, many proposing to ban outright the use of credit scores in property insurance. "There's real emotion out there at the state level," said P.J. Crowley of the Insurance Information Institute. Most of the bills were not enacted, and of those that were, the majority allowed insurers to use credit scores as long as they were not the sole criterion for determining rates or insurability. But the Maryland General Assembly, with the support of Insurance Commissioner Steven B. Larsen, enacted a complete ban on the use of credit scores in homeowners insurance and severely restricted it for auto coverage. Complaints are also growing. In Maryland, for example, Larsen's office received 14 complaints in 1998 about insurers' use of credit information. Last year it received 274, and so far this year it has gotten 226. Other states are also seeing an impact. Beginning this month, Allstate Insurance Co. is refusing to write new homeowners policies in Texas for applicants who are not in the top two tiers of its five-tier rating system based on credit scores. Allstate spokesman Justin Schmitt said, "We are not doing that because of a person's financial history." Schmitt said "we concede" that the effect is the same, but he insisted that is not Allstate's purpose. "We are making an underwriting change to slow growth in Texas in response to difficult market conditions," he said. Texas officials are investigating the tactic. In Florida, a task force created by Insurance Commissioner Tom Gallagher to study the issue concluded that "credit reports are a useful tool for the insurance industry" and that the correlation between bad credit and increased risk is "reasonably clear." "But," the report concluded, "whether the use of credit reports is, on the whole, beneficial to the consumers of Florida is not clear at all." In fact, the Florida task force concluded, "it does appear that the use of credit reports has a negative impact on young people, minorities and people with low incomes. That determination was not obvious nor was it easily arrived at, and neither, unfortunately, are its remedies." One of the key problems cited by opponents of credit scoring is that insurers can't really explain the correlation between credit scores and risk. Opponents also argue that since credit scores are proprietary, regulators can't parse them to make sure they are used fairly -- that they are not, for example, a way around the prohibition on using race as an underwriting criterion. The system "violates one of the two fundamental principles" that should underlie an underwriting criterion: that it should have some logical connection to risk, and that the logic should be proved with statistics, said J. Robert Hunter, a former Texas insurance commissioner who is now with the Consumer Federation of America. Mierzwinski, of the U.S. Public Interest Research Group, said scoring may be backed up with statistics but it lacks a logical connection to risk. He added that credit reports also can contain errors and that drivers and homeowners could face insurance premium increases even if they have perfect credit. Insurers reply that such errors are rare and that consumers who are adversely affected by information on their credit report must be notified of that by the insurer under the federal Fair Credit Reporting Act. That gives the consumer a chance to straighten out mistakes. And whether or not the logic is obvious, they say, the statistical correlation is clear. They contend that tools such as credit scores that enable carriers to gauge risk more accurately benefits consumers because they will pay rates that more closely reflect the true cost of insuring them. Some insurers now divide customers into a dozen or more levels, based on their risk. "Consumer groups have long complained about the old classifications, [which] they said were too broad. Now they are complaining about this," said the AIA's Snyder. Traditionally, insurers have rated drivers on the basis of such factors as age, sex, type of car, place the car is principally parked, and prior driving experience and record. Homeowners are rated on the age of the home, its location and proximity to fire hydrants, its roofing material, the presence of smoke detectors and other factors. But some of these other criteria aren't always as reliable as they seem, Snyder added. For example, he said, in Maryland many driving offenses do not appear in public records, partly because of the state's "probation before judgment" method of dealing with violators, which allows them to avoid a formal conviction if they complete counseling or community service as ordered by a judge. "When public records are coming back showing 90 percent" of the state's motorists have clean driving records, "what else can you use? You might like to use other factors, but for various reasons they have been eroded as to the value of the information contained in them," he said. © 2002 The Washington Post Company
Kind of interesting. I was talking to an insurance adjuster the other day, and she told me that she gets tons of actual insurance FRAUD cases. At least in the case of people who fake a theft, or torch their own car to get the payoff and avoid having it repoed, using a FICO to discriminate among customers does seem to make sense to me. But maybe only for comprehensive or homeowner's. After all, credit or no credit, I have NO incentive to incur a liability claim under my liability-only policy covering an $850 car.
Boy do I love living in Maryland!!!! This has got to be one of the most consumer friendly states out there! Montgomery County is awesome as well! Whatever the state doesn't have, most likely the county will (or vise versa). One thing about it though, you have to play by the rules here. If you don't have insurance on your car for 1 day (up to 30 days) the fine is $150. Car inspections are $40-60, and unless you know the guy doing the inspection, you will NOT pass the first time. My wife's less than a year old car didn't pass the first time because...drum roll...the headlamps weren't aimed properly... Still love it here though!
Great article, Dani. It's kinda funny how, in the last two paragraphs, this Snyder guy seems to bemoan the apparent lack of adverse data with which to jack up rates. It's like he's saying "Sheesh, we need to gouge folks somehow...can you all cut us some slack on this credit thing?" (well, at least that's how I read it ) Ah, yes, the obligatory headlight adjustment. Luckily, I'm pretty sure you can get the State Police involved if you suspect a higher-than-usual amount of bs from the inspection station. If a state trooper inspects your car and finds nothing wrong, then I think it's something like a $5k fine for that garage. Then again, with just a headlight adjustment, you should consider yourself lucky wajaba
Pulling a credit score for auto insurance risk analysis is nothing but pure B.S. Okay, may score sucks, BUT, I have been driving since I was 16, have never had a speeding ticket, moving violation or accident. While I have a decent rate - full coverage on 2001 Neon, to get that rate I have to keep a high deductible. I have tried several different agencies over the past 3-4 years to see how my rates would change if I lowered the deductible. My current rate - $93.00 month (includes $5.00 processing fee for monthly pmt) and $1K deductible. Almost every "quote" I have received is over $1500 for 6 months - when I inquire as to why they always say I am put in a "high risk" category because of my credit score. I am "high risk" because of late payments and charge offs??? I have never paid my insurance late, had any points on my license or an accident in 25 years of driving. Just another way to artificially inflate rates to gouge the consumer for a product that the law requires they purchase!
WHAT?????????????? "SEE" HOW I DRIVE BY MY CREDIT REPORT??????????? "SEE" HOW I TAKE CARE OF MY HOUSE BY MY CREDIT REPORT??????????? I have NEVER had any claims, EVER...one ticket 7 mph+ (speed trap) 1983... I have GREAT credit...BUT I DON'T BELIEVE IN SCORE BASED PREMIUMS!!!! HOW CAN AN INSURANCE COMPANY JUSTIFY CHARGING $500+/6 MONTHS FOR A CAR YOU SPENT $800 ON!!!!!!!!!!!!!!!!!!!
If I could get 100% (EVEN 50%) cooperation from everybody in the USA that has ROTTEN CREDIT and NO TICKETS, NO CLAIMS, and NO ACCIDENTS...and I could get paid for the survey...I would love to do it!!! THE INSURANCE INDUSTRY HAS AN ULTERIOR MOTIVE TO NOT ALLOW ANY SURVEY TO DISPROVE THEIR CONTENTIONS...
A credit score "has predictive value," Hartwig said. If low scores cause lossee the answer is give everyone a high score When insurers are forced to use cruder measures, as they did in the past, "the good, responsible risks subsidize the lousy risks," he said. With scoring the 70% with incorrect scores subsisize the other 30%. He added that credit reports also can contain errors and that drivers and homeowners could face insurance premium increases even if they have perfect credit. This is already happening to 70% of them. Insurers reply that such errors are rare If 70% is rare-wonder what they call excessive.? "When public records are coming back showing 90 percent" of the state's motorists have clean driving records, "what else can you use? WHAT ELSE CAN YOU USE?- In other words what other methods can we use to fleece them? If to many people had good high scores they would be forced to find another way to rip folks off ===================
using a FICO to discriminate among customers does seem to make sense to me. TomJones ======================= Thing are not always what they seem.
If you don't have insurance on your car for 1 day (up to 30 days) the fine is $150. Hurricane ===================That's consumer friendly-Duh. I have 7 cars and trucks five of which are not insured. Glad I'm not in Maryland! Mandatory insurance is a farce filled with flaws.
Great article, Dani. 1* It's kinda funny how, in the last two paragraphs, this Snyder guy seems to bemoan the apparent lack of adverse data with which to jack up rates. 2*It's like he's saying "Sheesh, we need to gouge folks somehow... wajaba ============================== 1*&2*This is exactly what he's doing and saying. Congratulations on using your thinking cap instead of lashing out against the messenger simply because you don't understand what's being said or you read something into it that's not there.
Pulling a credit score for auto insurance risk analysis is nothing but pure B.S. Okay, may score sucks, BUT, I have been driving since I was 16, have never had a speeding ticket, moving violation or accident. While I have a decent rate - full coverage on 2001 Neon, to get that rate I have to keep a high deductible. I have tried several different agencies over the past 3-4 years to see how my rates would change if I lowered the deductible. My current rate - $93.00 month (includes $5.00 processing fee for monthly pmt) and $1K deductible. Almost every "quote" I have received is over $1500 for 6 months - when I inquire as to why they always say I am put in a "high risk" category because of my credit score. I am "high risk" because of late payments and charge offs??? I have never paid my insurance late, had any points on my license or an accident in 25 years of driving. *Just another way to artificially inflate rates to gouge the consumer for a product that the law requires they purchase! Hal ============================ Great post Hal I couldn't agree with you more as you are 100% correct. *This is why I stated in reply to another post that forced insurance is a fleece. It's good to see an insightful response rather than a flaming retort simply because the reader didn't understand the message because they weren't able to think through what was being said. Again congratulations on a job well done!
1*Almost every "quote" I have received is over $1500 for 6 months - when I inquire as to why they always say I am put in a "high risk" category because of my credit score. 2*I am "high risk" because of late payments and charge offs??? Hal ==================== 1*You have just described the only reason they use credit scoring. Another angle is they are preventing you from getting a better rate with a different company while at the same time they are loosing new customers. This scoring thing is a 2 edged sword as it damages both consumers and businesses. 2*Would you please hurry up and get your reports cleaned up so that there will be one more safe driver out there? L O L
GEORGE~~ ==================== People shouldn't buy auto insurance. I know there are laws against that so what are they going to do about it / take everyones license away from them and throw us all in jail?
lbrown59, I'm all for having one less payment each month, but even if it weren't the law, I'm not sure I would be in such a hurry to drop auto insurance. What if my car gets stolen? What if somebody jacks my stereo or if a hailstorm pockmarks my car? What if I, in a haze of crystal meth and tequila, plow my car filled with sorority girls through a hotel lobby? These are all very real dilemmas that can be assuaged by adequate auto insurance coverage. So c'mon, even you have to admit that insurance serves a crucial purpose. Its underwriting may involve some objectionable and counter-intuitive tactics, i.e., FICO-driven pricing, but it's still something I wouldn't do without, regardless of any "message" I'm trying to send. Just some more of my $.02... wajaba
1*These are all very real dilemmas that can be assuaged by adequate auto insurance coverage. 2*So c'mon, even you have to admit that insurance serves a crucial purpose. but 3*it's something I wouldn't do without, wajaba ========================= 1*Lots of times they're not B/C of the insurers failure to honor claims. 2*It's supposed to - oft times it don't. 3*Right but There has to be better ways.
Curious lbrown, if you hold the same view toward all insurance or just auto insurance. What do you consider homeowner's, life, and medical insurance? A waste of money? Dani
Curious lbrown, if you hold the same view toward all insurance or just auto insurance. What do you consider homeowner's, life, and medical insurance? A waste of money? Dani============================= With proper asset management the need for life disability & homeowners coverage can be eliminated. This could be more difficult with auto, medical and long term care due to the large amounts of money needing protected; however the possibility remans to reduce amounts of coverage which would reduce premium dollars expended. Any reduced or eliminated premiums could be used to further fund your insurance needs without the purchase of insurance. ********************** Do you consider homeowner's, life, and medical insurance? A waste of money? Dani====== =============================== To answer this question, without combining coverage needs with good asset management is a waste of tens of thousands of dollars.
