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Some question the new use of credit ratings
To have your credit rating determine how much you pay for car or homeowner's insurance may be questionable, and some think illegal, but it is being used by some companiesHaving a perfect driving record will no longer ensure getting a lower insurance rate. More and more insurance companies are beginning to use something called (credit scoring) to determine how much you will pay for car and homeowners insurance.
This practice quietly began about five years ago and is becoming the standard for many companies. Originally, studies conducted indicated that people with poorer credit scores were incurring greater losses for insurance companies. Automobile insurance companies, over a five year period, paid out more dollars in claims to motorists with a poor scoring credit rating and better amounts in claims to motorists with lower credit rating scores.
Insurance scores are determined by factors in your credit report combined with your driving history. Insurance companies use the scores to help them determine the likelihood that a person will file a claim. Unlike credit scores, insurance scores are not made available to the public.
"More and more companies are pulling credit reports to determine the type of risk a person is to insure," said Mike Kidwell, vice president and co-founder of Myvesta.org. "Your credit history is used to calculate an insurance score which can determine what type of policy you are offered and how much you'll pay."
Insurance agents in Oregon do not have any information on how the credit score is arrived at, nor what goes into how a person can improve it.
"If you are turned down for insurance because of your score, ask your insurance representative why," Kidwell said. "They can't tell you your exact score, but in certain states they have to disclose the factors that went into it."
Insurance scores and credit scores are determined by entirely different formulas. This means that if you have a high credit score you could still have a low insurance score. Your score will change over time along with changes in your credit report.
"Your credit history is becoming increasingly important," said Kidwell. "It's vital that you check your credit report at least once a year to make sure that the information reported is accurate and up to date. Many credit reports contain mistakes, if you don't take the initiative to clear them up you could end up paying a lot more for insurance."
Historically, according to a report from the National Association of Insurance Commissioners, it is believed that a direct link exists between financial stability and risk. A direct relationship between credit use and stability is also accepted: persons who have favorable credit history are more stable than those with unfavorable credit and therefore better risks, according to the report.
That doesn't bother most insurance executives nor is that line of reasoning of much concern to insurance buyers. It is the method of determining who is a better insurance risk that bothers some. Chet Petersen, owner of Chet Petersen Insurance, used the following example to illustrate his point.
"I know of one man who has been insured for 20 years with never a ticket or an accident claim, but with poor credit. His insurance could go up 27 percent based on his credit rating." Petersen was recently appointed by the Oregon state insurance commissioner, Joel Ario to a 12-member committee to look into how credit ratings are used for insurance purposes.
Many states don't have regulatory requirements for underwriting criteria and rating factors.
One thing that Petersen and others of the Credit Score Underwriting Advisory Committee noted was that even those using accepted methods didn't know what those methods were based on.
When someone buys an insurance policy, that person)s personal information is entered into a program that scores that person. Petersen said he didn't know what information went into determining that score; from the information entered into the program it is impossible to tell.
A personal credit rating is not used, only the service using the program has access to the credit report and other information that might be used to score the applicant.
"There are about 50 things taken into account, but what weight or value the are given isn't known," Petersen explained.
The problem with that is, without knowing the value of a given item, a person is unable to 'fix' it. Another example: If an individual calls to buy an insurance policy and is quoted $300. He gets a ticket or two and an accident and the cost goes up to $500. After three years or so with a clean driving record, the tickets and accident are wiped out and the rate should drop back to $300.
The same person, without the tickets and accident, finds his rate has gone up to $500. He is told his credit score is the cause. Without knowing exactly what that means, he has no way of bringing it down.
The obvious unfairness of this system, Petersen said, is clear. "I know a local man who has had two DUIIs, and excellent credit. He receives a discount on his auto insurance. Then there is a woman whose husband left her with the children and isn't paying child support. Because of her poor credit, I have to charge her 50 percent more for her auto and home insurance. Yet," Petersen added, "she has never turned in a claim nor does she have any traffic citations or accidents."
Others are raising concerns about this seemingly arbitrary practice, however. At least one Beaverton attorney, Charles Ringo, warns "If you pay for car or homeowners insurance and if you have less-than-perfect credit, you are probably paying a hidden illegal charge."
Most insurance companies are imposing charges in secret and that, Reno advertised, "is against federal law." The Reno law office is willing to investigate whether any insurance company is violating federal law at no cost.
Even the make up of the Oregon advisory committee is questionable, Petersen believes. The majority of the 12 members are affiliated in someway with insurance companies. Two of the members, a representative from ChoicePoint and another from a company called Fair Isaac. These two, Petersen explained, have played a part in development of the scoring methodology.
"Obviously they are in favor of designing administrative rules that won't impede things," he said. "I am the only member who is adamantly against the practice."
People should not simply let this practice happen to them, Petersen concluded. He offered two things they, as purchasers of insurance, can do to protect themselves - "First, let your legislator know your views on this use of credit scoring. They, and they alone can outlaw it in the state of Oregon," he explained.
Getting someone's credit report without that person's permission is illegal and that is another factor that should come into play with the companies developing credit scores.
A second thing to ask the legislative representatives to do is have the insurance commissioner develop rules that regulate insurance companies to disclose the models they are using to the consumer. "If adverse action is taken by the insurance company, including increased premium changes that are a result of credit scoring, this information must be given by the company to the consumer, Petersen believes. "Full disclosure to all consumers about the use and effect of credit scoring could make the use of the scoring practice unprofitable for the credit scoring company."