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Economic Downturn Yields Renewed Focus on Using Credit Scores to Set Premiums

Source: Hartford Currant

Posted on 26 Jan 2009

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Consumers already struggling in the national financial fiasco could face more bad news they hadn't even thought of: Higher auto and home insurance premiums if their credit deteriorates. 
Mounting layoffs, foreclosures and unpaid bills are renewing the debate over the insurance industry's use of credit information in pricing policies. Consumer advocates are calling for a moratorium on the practice. 
As people lose their jobs and homes, "their credit scores are going to make premiums go up at the very time they can't afford it," said J. Robert Hunter, director of insurance for the Consumer Federation of America. 
The problem could also affect insured people who have good credit. That's because more people are expected to drop auto insurance during the recession, driving up rates for "uninsured motorist" coverage. The Insurance Research Council said last Wednesday that nearly one in six U.S. drivers may be driving without insurance in 2010 because of hard times. 
The credit-related premium issue comes at a time when auto and home insurance rates are inching up, anyway. Auto insurance premiums were 4 percent higher in December than they were a year earlier on a national average, according to the U.S. Department of Labor. 
The impact of the credit issue varies by state. Some states let insurers use credit records in renewing customers and rating new applicants, and it's typically one of many factors, including driving record, miles driven, and type of vehicle. A few states, including Hawaii and California, don't allow auto insurance premiums to be based on credit at all. 
Connecticut and some other states prohibit insurers from using credit to re-price policies at renewal time unless a customer requests it. So worsening credit wouldn't be an issue for consumers who stick with their insurer. 
However, Connecticut does allow insurers to score consumers who seek new policies. So someone with poor credit who's shopping around for a more affordable policy may be out of luck, insurance agents say. 
Spencer Houldin, president of the Ericson Agency in Washington, Conn., recently had a Ridgefield customer in a financial bind who was looking for more affordable homeowners insurance. Insurers, seeing the tarnished credit, wouldn't offer cheaper rates. A week later, the customer called to cancel the insurance; a bank had foreclosed on the home. 
It's hard to gauge how big an issue credit scoring is in the current recession. So far, the Connecticut Insurance Department says it has not seen an uptick in consumer complaints about the issue, and agents say they've seen little, if any, fallout. An insurer that makes an adverse decision based on credit is supposed to notify a customer or applicant, but agents may not see the notices. 
"I think that with the economy tanking, I don't think we've seen the full effects of this yet," Houldin said. "I think in the next 12 to 24 months, we're going to feel this as an industry much more. 
"More people are going to be screaming about not being able to afford homeowners or auto insurance, and there's going to be much more pressure on our elected officials to look at this issue." 
Insurers began using credit scores -- different ones from those lenders use -- in the mid- to late 1990s on auto insurance, then expanded the much-criticized system to homeowners policies. 
"There is an extremely strong correlation between credit and claims," said Robert Hartwig, president of the Insurance Information Institute. "Credit is a measure of personal responsibility." 
Studies, including one by the Federal Trade Commission on auto insurance, have reported such a correlation. The FTC has subpoenaed nine insurers, including Travelers, for information on how credit is used to figure homeowners' insurance rates. 
Critics of the insurance industry point out that many people have bad credit through no fault of their own and aren't worse drivers or riskier homeowners because of it. 
The Consumer Federation of America and Center for Economic Justice are renewing the plea they made last March to the National Association of Insurance Commissioners urging it to support at least a three-year moratorium on insurers' use of credit. 
As bad as tightened lending is for consumers, "it is cruel to pile on with higher auto and homeowners insurance premiums because of insurance scoring," Birny Birnbaum, the center's executive director, told the NAIC. 
Connecticut Insurance Commissioner Thomas R. Sullivan says he's hesitant about "tinkering" with the rules on credit scoring because the state still has "a highly competitive market where there's abundant choice" for consumers. 
In legislatures around the nation, including Connecticut, the insurance industry has fought nearly perennial proposals for curbs on their use of credit, and more are expected this year. 
"They don't have any evidence to show there is a major problem," said David Snyder, vice president and general counsel of the American Insurance Association, a trade group. "Why would you artificially create a crisis? You would overnight create a series of problems within personal lines of insurance." 
Industry spokesmen and some agents, such as Joy Byrnes, president of the Killingly-based Byrnes Agency, are concerned that companies might not want to write as much insurance if they lose the credit tool for assessing risk. 
Alex Hageli, manager of personal lines for the Property Casualty Insurers Association of America, predicted that a moratorium would increase rates for people with good credit. 
Worsening credit for customers won't mean a windfall for insurers, as some consumer advocates allege, Hartwig said. Insurers figure what revenue they need to cover claims and make a profit, and using credit information just affects what proportion of the revenue will come from people with good credit, as opposed to bad credit, he said. 
The moratorium idea, Hartwig said, "shows a profound lack of understanding of underwriting" and "these groups are simply seizing on the recession to force their agenda." 
Insurers can recalibrate their pricing models to reflect a drop in average credit scores, and they are more responsive to individuals' circumstances than they were years ago, industry officials say. 
At The Travelers Cos., "we have safeguards in our pricing model that cap the amount of impact an individual credit score will have on a customer's renewal price," said Marina Luri-Clark, a company spokeswoman. If a customer reports a financial issue, such as divorce, foreclosure or layoff, Travelers considers that case by case, she added. 
"These companies, they read the paper, too; they understand what's going on," Hageli said. "They don't want to lose a policyholder any more than a policyholder wants to pay more for insurance."