Consumer groups question insurers' use of credit scores

Coastal policyholders are well aware a hurricane is guaranteed to increase insurance rates, but fewer realize their credit reports also are factored into homeowner and automobile insurance premiums.

Consumers who have suffered financial setbacks because of the economy are seeing higher homeowner and auto insurance premiums, but the mistakes often found in credit reports also can lead to rate hikes. Even Mississippi Insurance Commissioner Mike Chaney said that he recently faced a 10 percent increase in his Safeco auto insurance rate because of an error on the insurer's part.

He said his rate was corrected when he questioned the charge, based on his credit history.

"The bottom line was, when we got down to it, they had rated me a credit risk because the agent had checked that I was eligible to pay on installment," said Chaney, who pays his premiums in a lump sum. "My credit history is very good because I have a thin credit file, very little credit."

Insurance companies contend consumers with bad credit tend to file more property insurance claims.

Consumer advocates question the accuracy of studies that find a correlation between credit and risk. They also argue the industry should stick with more relevant risk indicators, such as claims history and the condition of property being insured.

The debate is attracting more attention as a bad economy affects consumer credit and also has consumers scrutinizing their expenses.

Chaney sides with consumer advocates who believe insurance companies use credit histories to cherry pick customers and charge higher premiums. The commissioner said credit information in some cases allows insurance companies to raise premiums without a state-approved rate increase.

"It's a serious game for them," Chaney said. "It's always about money."

Insurers defend their use of credit reports to develop insurance scores, which dates to the mid-1990s.

They cite a 2007 Federal Trade Commission study that found credit-based insurance scores do predict risk for automobile policies. Studies sponsored by insurance companies, and the state of Texas, have reached similar conclusions.

Insurance companies point out that customers with good credit are rewarded with lower premiums. They view rates partly based on credit as an equitable way to set premiums.

"If you're conservative with your finances, you manage your finances and credit well, typically, you're also going to be an individual who is less likely to be involved in an accident," said Robert Hartwig, who heads the industry's nonprofit Insurance Information Institute. "You're going to be someone who is more likely to obey speed limits. You're going to be someone who is less likely to drive impaired. You're going to be less likely to be someone who fails to perform maintenance on your car.

"It's an objective measure of financial responsibility. What it's showing is that people who are financially responsible tend to be responsible in other dimensions of their life. This is not anything that should be a revelation."

Employers run credit checks on applicants as one way to determine whether they are responsible, Hartwig pointed out.

"The reality is that your credit standing is something that impacts your life in many ways beyond getting a credit card or a loan," he said.