The economic downturn is bringing attention to a little known practice by auto insurers that targets consumers with blemished credit histories. Insurers can charge higher rates, decline to renew coverage or deny coverage to these customers.
A task force of state insurance commissioners is examining the issue. They're expected to make recommendations by August as to whether auto insurers' use of credit reports should be more tightly monitored, or even outlawed.
“We are trying to cut through the rhetoric and get the facts to make an informed decision,” says Michael T. McRaith, an Illinois insurance regulator who chairs the task force.
Three states currently ban auto insurers from using credit reports: California, Hawaii and Massachusetts.
The insurance industry argues that studies correlate poorer credit with an increased likelihood of filing an accident claim. Consumer advocates, on the other hand, question the fairness and ethics of using credit reports to rate auto insurance customers. They are also concerned that consumers already affected by the current economic crisis may get a double whammy when they see their auto insurance rates go up.
“I don’t understand why someone who lost their job because of the poor economy is suddenly a worse auto insurance risk,’’ says Robert Hunter, insurance director of the Consumer Federation of America.
The insurance industry has statistical correlations but can only theorize about the reason for the connection between credit scores and a higher claim frequency.
“If you’re particular about managing your finances, then that same personality may make you a more attentive driver,” says Alex Hageli, of the Property Casualty Insurers Association of America.
Credit-based insurance scoring has been used since 1993 and is now used by 95% of auto insurers. Insurance representatives insist the current financial crisis hasn’t meant the sky is falling in for auto insurance customers. Rates haven’t risen in general, they say, because insurance scores derived from credit reports have remained flat on average through the financial crisis.
But Lamont Boyd, a project manager for FICO, which sells the most widely used industry model for credit scores, said scores have declined for those directly impacted by the economy.
“As a small but growing number of consumers have experienced recent financial hardships, it is impossible to generalize about the impact of such an event on an individual’s credit-based insurance score,” Boyd says.
The nation's biggest auto insurer, State Farm Mutual Auto Insurance Company, says it has not seen a spike in higher insurance rates.
Regardless of whether motorists are paying higher rates due to the impact of the poor economy, opponents of insurance scoring say the practice is wrong.
Florida Insurance Commissioner Kevin McCarty says studies have shown that scoring has a disproportionate effect on minority groups. “The industry’s attempt to ignore this issue shows a failure to treat its consumers fairly and equitably” he says.
Hunter, with the Consumer Federation, says another big issue is that the information in credit reports is not always accurate, leading to inaccurate scores. (Which is why you should check your credit report regularly and correct any mistakes.) Scores can also vary, depending on which of the three credit reporting bureaus an insurer is using, he says.
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Consumers are advised to shop around for auto insurance. Among companies that do factor in credit, different auto insurers assign different weights to it. Having poor credit could account for 30% of the total premium for one insurer and only 5% for another, says Boyd.
It may even pay to talk to more than one insurance agent because different agents represent different insurers, Hunter says.
He also says under federal law insurers must inform consumers who don’t get the best rates because of their credit history the reasons their insurance score was less than perfect. Consumers are then entitled to a free credit report from the credit agency used by the insurer.
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