Insurance Rates
http://www.msnbc.msn.com/id/35103647...consumer_news/
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Insurance companies base their prices on risk. Drivers under the age of 25 have higher premiums because statistically they are more likely to have an accident. Homeowners with a burglar alarm system get a discount because they tend to have fewer break-ins.
Okay, this makes sense. But why do insurance companies consider your credit history when they set your rates? What does that have to do with their risk? If I lose my job and my credit score drops, am I really more likely to file a claim?
“Absolutely,” says Kenton Brine with the Property Casualty Insurers Association of America.
Brine admits this doesn’t make much sense to a lot of people. But he says after 20 years of studies, the insurance industry can “absolutely prove beyond a shadow of a doubt” that credit scoring is correlated to risk of loss.
“It’s more accurate statistically than your driving record,” he says.
The insurance industry points to a study released by the Federal Trade Commission in July of 2007 that looked at credit scores and auto insurance. It concluded:
“(Credit) scores effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.”
In testimony before Congress in 2008, Robert Hunter, director of insurance for the Consumer Federation of America called the FTC study “substandard” because it relied on data “hand-picked by the insurance industry.”
Even so, he notes, the commission found that insurance scoring “likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians. Hunter told Congress insurance scores are really a “proxy for race” which should not be allowed.
‘Unfair and discriminatory’
Washington State Insurance Commissioner Mike Kreidler says even if there is a link between credit scores and insurance claims, “it’s unfair and discriminatory” to use this information – especially in the current economy. He wants Washington State lawmakers to ban the use of credit history, education and income to set rates. These factors can impact premiums by as much as 50 percent Kreidler says.
Insurance companies don’t use a score provided by one of the big credit bureaus. They create their own “insurance score” using their own criteria. It’s a secret formula; they won’t tell you how your score is computed. In many states, insurance companies aren’t even required to tell customers their credit history was used to set their premium.
“The secrecy behind this credit scoring is part of what makes it so inherently unfair,” Kreidler says. “No two companies use it the same way and when consumers ask, they can’t get a straight answer on how to get a better score.”
The Washington State Insurance Commissioner’s office has received thousands of complaints about this issue over the last few years. People report their rates were increased after the bank lowered their credit limit or canceled their card, or when they consolidated their credit cards, opened new credit card accounts or bought a large ticket item with deferred interest.
David Andruss of Washougal, Wash., had his premiums go up last month. The 63-year-old retiree always makes his premium payments on time. He didn’t have an accident, get a traffic ticket or file a claim on his homeowners insurance. So why the rate hike?
The insurance company told him his use of credit was too high. There’s a reason for that. Last fall, the bank slashed the credit limit on his card from $16,000 to $8,300. At the time Andruss was carrying a balance of $7,000. He has a lot of medical bills. The bank’s action dramatically changed his ratio of debt-to-available-credit, which lowered his credit score.
Kreidler tells me your insurance score can have a bigger impact on your premium than an at-fault accident.
“It’s just a crazy way and a lazy way on the part of insurance companies to set rates,” Kreidler says. “Quite frankly, they should be embarrassed.”
It could happen to you
Blair and Barbara Patrick live in Olympia, Wash. In 2004, the retired school principals received a notice that their home and car insurance premiums were going up because of their “less than favorable” credit rating.
“It’s very unfair, Mr. Patrick says. “We worked our tails off to maintain a very positive credit rating and have done so and yet we are being penalized.”
In its letter, the insurance company said it was concerned about several things. For example, the Patricks did not have any lines of credit open for more than 40 years. Their J.C. Penny account was only 38 years old.
When the Patricks asked to talk to someone at the company about the scoring process, they were told it was a complicated process and confidential.
“The company basically indicated that they had no provision for contesting or questioning the result,” Mr. Patrick says. “It’s just absurd.”
'Scare tactics'
The insurance industry says between 60 percent and 70 percent of its customers pay less because of their good credit score. The Casualty Insurers Association told Washington state lawmakers if they banned the use of credit histories, rates for these “good” customers would go up.
“Scare tactics,” says Birny Birnbaum, executive director of the Center for Economic Justice. He says insurance companies are not going to raise the rates on their most favorable customers.
Birnbaum, the former chief economist at the Texas Department of Insurance, is vehemently opposed to pricing based on credit history.
“Whether there’s a correlation (with claims) or not, it should not be permitted,” he says. “This is not what we as a society, as a matter of public policy, want as the basis of insurance premiums.
“I don’t know anyone who thinks it’s fair to charge somebody a higher premium because they’ve been the victim of a medical or economic catastrophe.”
The bottom line
Right now, regulators in two states, California and Massachusetts, ban the use of credit-based insurance scores for auto and homeowners insurance. Maryland prohibits the practice for homeowner coverage. Hawaii bans it for auto insurance.
Last year, lawmakers in 16 states considered bills to stop insurance companies from using credit history for pricing purpose. Those bills went nowhere.
Both Washington and Michigan are currently considering legislation to completely ban the practice. If lawmakers in Washington vote to ban the practice, it would be the first legislature in the country to take this bold step.
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People don't really seem to understand. There is a very strong relationship between responsible credit behavior and responsible behavior in general. This is why employers will look at your credit report. This is why your insurance company will look at your credit report.
The bottom line is that if you dislike the way your insurer prices its risk then get another provider. Legislation that prevents companies from using credit reports will lead to people who are more likely to file claims to have lower rates and those who would be likely to file fewer claims will have higher rates. Why people don't understand this I will never get.
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Originally Posted by Hazir
