Another article on Ins Prem/Credit

http://www.dallasnews.com/texassouthwest/stories/042702dntexinsure.afa9.html

Credit scoring boosts premiums
Insurance industry defends practice; state agency investigates

04/27/2002

By TERRENCE STUTZ / The Dallas Morning News

AUSTIN â?? Sara Lapham of Garland has watched her insurance bills soar in recent months, taking a larger and larger chunk of her household budget.

First her annual premium for homeowners insurance went up 78 percent. Then her auto insurance rates jumped.

After inquiring about the increases, she was told that rising mold damage claims across the state were a big cause. But she was stunned when her agent cited another factor â?? her credit history.

"We have no history of late payments whatsoever," Ms. Lapham said. "All of our accounts are in good standing."

Still, her insurance company assigned her and husband Derek a low-credit score that not only raised their premiums but also pushed their auto insurance policy into an unregulated company that can charge whatever rates it wants.

Her predicament is being repeated throughout Texas as more and more insurers incorporate a customer's credit history â?? called credit scoring â?? into underwriting decisions that determine what rates are paid and whether a person should be sold a new policy.

Consumer groups have denounced the practice. Industry representatives defended credit scoring and cite internal studies to justify its use.

The scores are based on consumer credit histories compiled by national credit bureaus. Those reports give a picture of how the consumer paid back loans and met other financial obligations, such as credit card balances. Financial troubles, such as late payments, delinquencies and bankruptcies, also are reflected.

State Insurance Commissioner Jose Montemayor is investigating the use of credit scoring at the request of Gov. Rick Perry. The governor asked Mr. Montemayor to determine "whether companies are abusing this practice to the detriment of Texas consumers."

Mr. Montemayor said he will be looking with an eye toward new state rules â?? such as mandatory disclosure of scores to consumers â?? and possible recommendations for the Legislature that convenes in January 2003.

Restrictions approved


Three states â?? Idaho, Utah and Washington â?? recently approved new laws sharply restricting the use of credit information in setting premiums. Similar bills are pending in several other states.
The Texas Department of Insurance has received an increasing number of consumer complaints about credit scoring by insurance companies even though most policyholders have little awareness of the practice.

"It's hard to see a correlation between credit history and insurance risk. I am not convinced it can be done," Mr. Montemayor said.

"There is also a high degree of correlation between roosters crowing and the sun rising, and yet one doesn't drive the other."

Consumers Union's Rob Schneider said use of credit history in determining insurance rates and whether to sell someone a policy "doesn't pass the reasonableness test" and doesn't make sense to the average driver or homeowner.

For example, he said, "Eighty percent of homeowners claims are related to weather. So is the insurance industry saying that if I have a bad credit history, my house is more likely to get hit by a hailstorm?

"What does my credit history have to do with the weather? It is that sort of logic by the industry that is making people mad."

Industry spokesman Jerry Johns responded that studies show credit scores to be an accurate predictor of future losses for both auto and homeowners insurance. He said some insurers have used credit histories for years in selling and pricing their policies.

"People with a poor credit history typically have more losses," he said, referring to past experience of many companies.

Any move to restrict the use of credit histories â?? one of several factors considered in determining what a policyholder should pay â?? would be unfair to those with good credit ratings and could create a subsidy for those with a poor ratings, he said.

"Good drivers with a good credit history would wind up paying for the losses of those with a bad credit history," Mr. Johns said.

Justin Schmitt, a spokesman for Allstate, which has used credit scoring for several years, repeated the numbers from industry studies that back up the practice â?? homeowners with a low credit score are twice as likely to experience a property loss and drivers with a low credit score are nearly 40 percent more likely to be in an accident or experience some other loss.

"The studies confirm the connection between credit report information and the likelihood of experiencing a loss," he said.

Mr. Schmitt pointed to what he called the positive side of credit scoring, saying that it allows many customers â?? those with good credit reports â?? to qualify for lower premiums.

Critics argue that the practice is particularly harmful to lower-income drivers and homeowners, who are more likely to have a lower credit score â?? often because they don't use credit cards or don't have a mortgage or car loan.

Mr. Montemayor said he also is troubled by that.

"I am worried about the folks with no score, including many senior citizens and immigrants. No credit history translates into a low score for insurance purposes," he said, noting that the result typically is higher rates.

"If you are a loyal customer for 20 years and haven't had a claim, but your credit score comes up low, should you have to face a doubling of your premium?" he asked.

Mark Toohey, a spokesman for Farmers Insurance Group at its national offices in Los Angeles, rejected the notion that credit scoring has a disproportionate effect on lower income policyholders.

"It is malarkey that higher income people always have the best credit ratings," Mr. Toohey said, noting that many people with large incomes have low ratings. "Your credit history has nothing to do with your level of income."

Farmers has been using credit history as part of its "risk assessment scores" for customers since 2000. The scores determine among other things what premium a policyholder will pay.

Those who have good scores qualify for a discount on their premium, and Mr. Toohey said a majority of Farmers customers have that discount.

Three years ago, the Texas House passed a bill to restrict credit scoring by insurance companies, but the measure died in the Senate under fierce opposition from the industry. Lawmakers who support restrictions are expected to make another attempt in the 2003 session.

The insurance industry has signaled that it will vigorously fight the proposals again.

Ms. Lapham intends to be among those calling for credit scoring to be banned as "discriminatory and anti-consumer."

She points to her own case, where late payment of a $400 medical bill by her health insurance company adversely affected her credit score, along with an above-average balance on one of her credit cards.

The Garland businesswoman, who has established a Web site on credit scoring, also questioned the industry studies showing the validity of the practice.

"It's not the way reputable companies should be doing business," she said.

 

Re: Cred Rpt Connection Will Backfire!!

Here's the thing: They say that credit history reflects odd of filing claims.

In Jan my scores were Exp 613 Exf 638 and TU 673 (And that's after 2 years of NOT missing any payments so I'm assuming I was in the mid 500's back in early 2000). Last accident I had was back in 5/1991 and never missed insurance payments.

I did have 2 hailstorm claims when I lived in Louisiana (93 and 95). But those storms were so severe that State Farm had to rent the local sports arena just to handle the influx of cars coming in for claims...guess it was just the bad credit people filing


GT