http://www.usnews.com/usnews/issue/020617/finance/17score.htm Money & Business 6/17/02 Property insurers keep score Premiums depend on a consumer's creditâ??and regulators are crying foul By Noam Neusner Think installing smoke detectors will lower your homeowner insurance premiums? Probably. And maybe that new car with antilock brakes will help trim your auto insurance bill? Most likely. But the secret to insurance costs might be buried in your credit report. Werner Idler can attest to that. The insurance premium on his Arlington, Texas, home jumped from $806 to about $1,800 over the past year. "I never in my wildest dreams thought I'd see such an increase," says Idler, a 42-year-old aerospace engineer. His insurer, Allstate, blamed some of the higher tab on a rise in mold claims and area flooding. But the remainder came about because Allstate characterized Idler's credit rating as so-so. Curious, Idler got a copy of his credit report and found he had "excellent" credit, scoring 843 out of a possible 934. Allstate told Idler it wasn't judging his credit but rather his "likelihood of insurance losses." Trouble is, Allstate wouldn't say what exact factors influenced that likelihood. A growing number of consumers are caught in a similar predicament. Most auto and home insurers now review an individual's credit report when deciding whether to issue or renew a policy and how much to charge. The credit checks are aimed at discovering a consumer's propensity to file an insurance claim in the future. The practice is drawing plenty of criticism, including from state legislators and insurance commissioners who say it makes no sense. Outraged by what is fast becoming an industry standard, Idaho, Utah, Washington, and several other states have recently passed laws to prevent insurers from canceling consumers' policies because of bad credit or using consumers' available credit lines as a measure of insurance-worthiness. Risky business While those efforts have required the insurance industry to alter some of its methods, federal law allows insurers to peek at consumer credit reportsâ??so the practice will continue. No wonder; insurance experts say credit reports reveal a lot more about your habits than you might think. "The people who tend to manage one part of their lifestyle well manage risk on other issues well," says Lamont Boyd, account executive for the insurance division of Fair, Isaac & Co., the firm that created credit-scoring software for insurers less than a decade ago. Now, nearly 400 insurers use Fair, Isaac's computer models to chew up data from an individual's credit report and spit out an insurance score. "Insurance companies want to write as many risks as they can possibly writeâ??but need to get the right price for those people," says Boyd. For the roughly 60 percent of the population with good credit, the use of credit scores means manageable premiums. But for those with low credit scoresâ??about 620 or lessâ??that can mean a premium estimated to be anywhere from 25 percent to 50 percent higher than usual. New insurance applicants with bum credit also can be turned down for coverage. Insurance industry studies have found that not only are bad credit risks more likely to file auto and homeowner claims, but they are also more likely to agree that it's OK to inflate a claim to make up for a deductible. Insurers say they pay far more for the losses of new customers, so they need better tools to evaluate applicants. Credit scoring fits the bill. Yet some critics don't buy the correlation between credit scores and insurance risk. "I have a hard time believing that a hailstorm knows which house has a good credit score and which doesn't," says José Montemayor, Texas's insurance commissioner. Maybe so, says Clarence Smith, an insurance analyst at Conning Research in Hartford, Conn. "But if you can't afford basic repairs, you're more likely to suffer catastrophic losses. If the same storm blows over the same ZIP code, those homes that have been kept up will hold up better," he says. So insurers are asking: Who's ready for Mother Nature? Montemayor also counters that credit can be a deceptive indicator. People who don't use credit cards, such as the elderly or recent immigrants, might have low scores because regular use of credit is a major factor in a good credit score. What's more, some studies by consumer groups have found that credit reports are riddled with errors. Mum's the word Some of the criticism could be quelled if insurers came clean. John Morovitz says he still hasn't gotten a straight answer as to why his superb credit report translates into a "mediocre" rating by his insurer, which more than doubled his homeowner's premium. "I just bought a new car and had no problem financing it. I went to the bank to redo my home equity loan and they love me," says the Houston retiree. Morovitz believes insurers are merely using scores to boost premiums. Industry representatives acknowledge that some insurers use credit scores as the sole underwriting criteria, ignoring other indicators such as prior claims and auto accident records. Some may even use scores as an excuse to jack up rates. But insurance companies also are in the business of managing risk. "If credit scoring wasn't predictive of loss, it wouldn't be used," says Neil Alldredge, state relations manager for the National Association of Mutual Insurance Companies, a trade group. Of about 100 categories on a credit report, most insurers use only 15 to 20 that they determine to be the most predictive of risky behavior. Which ones? Fair, Isaac says five factors are key: total credit balances, length of credit history, number of recent applications for credit, payment history, and types of credit utilized. Experts urge consumers to check their credit reports periodically, correcting errors that may have crept in. Fair, Isaac recently rolled out a tool that helps consumers improve their credit score. As it turns out, how you use credit matters as much to insurers as how your drive your car or whether you maintain your home. Taking chances, it appears, cuts across all activities.
