Insurers use credit scores for premiums, but is it fair?

BY PETER HULL
The Post and Courier

Credit scores can help determine interest rates on an individual’s credit card and mortgage loan. They even play a role in the approval of cellular telephone plans.

But a good score also can keep insurance premiums down, including rates for homeowners and automobile policies. A bad score can lead to higher payments or, in some cases, loss of coverage.

Consumers with good credit scores usually are a safer bet, insurance companies say. Consumer advocates argue that a person’s ability to save money or pay bills has nothing to do with how well they drive.

It’s an issue that’s attracting interest across the country.

Most insurers, including State Farm, Allstate and S.C. Farm Bureau, routinely use credit scores to assess risk when issuing or renewing policies. The companies say the practice makes their pricing more competitive. There’s a strong correlation between the way individuals handle credit and the likelihood they will file a claim, the industry says.

"It’s a reflection of their overall lifestyle," said Lamont Boyd, insurance market director for Fair Isaac Corp., a leading credit analysis and risk management firm that calculates credit-based insurance scores for insurers. "The same people who take care of their credit are likely to take care of their car. The statistics prove that over and over," he said.

The data Boyd’s company provides are used by insurers to set premiums, as are other factors, such as a person’s driving record, years of driving experience, prior claims and the location of a home.

Scores range from a low of around 350 to a high of about 900, Boyd said. Fair Isaac provides insurance companies with individual scores, plus up to four reasons why the number wasn’t higher.

Insurance companies do not use personal information such as income, religion or race in setting insurance rates, Boyd said. Nor do they use credit information to determine a person’s ability to pay premiums.

Insurance companies want to know how risky a person is, and lifestyle is a good indicator, he said. For example, "is this person more likely to leave five minutes early or five minutes late?" Boyd said.

Opponents of the use of credit-based scores by insurers include Michaele Pena, director of Consumer Credit Counseling Service in North Charleston, a division of Family Services Inc.

She said the practice is another way of kicking someone when they’re down.

Driving records and other factors are more relevant, Pena said. A low credit or insurance score doesn’t necessarily mean someone has managed their credit poorly. It may mean they didn’t qualify for credit in the first place, particularly people with lower incomes.

"When you’re down with your finances and you’re struggling, that’s when they heap it on you more so," Pena said. "I guess your mind’s on paying higher insurance premiums rather than driving."

Insurance scores are based on information from consumer credit reports. In South Carolina, insurers are not allowed to base auto insurance rates on the scores alone, but a customer with poor credit could be denied homeowners coverage.

The widespread use of credit scores by the insurance industry has garnered attention across the country.

Consumer groups, such as the Consumer Federation of America, have questioned whether credit scores can be used fairly.

Legislators also are scrutinizing the practice. About 70 bills in 21 states were introduced last year to regulate the use of credit in setting insurance rates, according to the Casualty Actuarial Society. About half of those bills sought to ban the practice completely in 17 states.

In Oregon, for example, the issue made its way onto the November ballot. But a measure that would have outlawed credit scoring in determining insurance premiums was squashed by two-thirds of voters.

In New Mexico, insurers and the state’s insurance department launched an information campaign to help the public understand the credit-based scoring law.

In Florida, a judge recently struck down a state rule that required insurers to prove that the use of credit scores does not result in discrimination.

There is no legislation on the table in South Carolina that would further restrict the use of credit or insurance scores in setting rates.

Insurers that do business in South Carolina defend the practice.

Allstate says the use of credit information in setting rates often means lower premiums for many customers.

Susan Merrill, spokeswoman for S.C. Farm Bureau, said that if the company didn’t use insurance scores, some consumers may not receive discounts if rates were based solely on driving records.

Using an insurance score that’s derived from a number of factors is more objective than using just a person’s credit report, she said.

And an individual’s score is not checked every time a policy is renewed, said Bruce White, State Farm spokesman.

"If you’ve been insured with us for 20 years, I’m not suddenly going to run a credit check and raise your rates because you haven’t paid your bills on time," White said.

Reach Peter Hull at 937-5594 or phull@postandcourier.com.

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