Lower credit scores can mean higher insurance premiums

Mary Lou Jay

AB162, a bill pending in the Nevada Legislature, seeks to prevent insurance companies from considering a person's credit score when setting insurance rates or deciding whether to deny or cancel insurance coverage.

Advocates for AB162 say the bill will help protect consumers whose credit scores have been harmed as a result of a difficult economy, according to SessionAccess.org. They argue that people who have lost jobs or have fallen behind on their bills should not be further penalized by losing their insurance coverage or by seeing their insurance rates skyrocket.

The bill's supporters also say that credit scores in and of themselves are often discriminatory and unfair to Hispanics, African-Americans and other minorities. Those supporters say that allowing insurers to use credit scores in setting rates or denying coverage will further compound the injustice and make it difficult for some groups to get insurance.

Insurers say that using credit ratings is the fairest way to make sure that policyholders are paying the right premiums. A person's credit score is only one component that an insurer uses in underwriting insurance policies, but it does help set rates that reflect the actual risks that policyholders bear.

According to the Insurance Information Institute, the numbers show that people with low credit ratings are more likely to file home and auto insurance claims than those with higher credit ratings. So, in the eyes of an insurance company, someone who is financially responsible is more likely to behave responsibly in other areas of life.

In response to discrimination claims, AAA representative Michael Geeser pointed out during testimony about the legislation that insurance companies do not use gender, ethnicity, religion, nationality or income when calculating credit-based insurance scores.

The U.S. Federal Trade Commission seemed to agree with the insurance industry in a 2007 report to Congress on the effects of credit-based insurance. Credit scores effectively predict the number of claims a customer is likely to file as well as the total cost of those claims, according to the report. In fact, using credit scores allows insurers to more correctly match the risk customers pose with the premiums they pay -- and that could result in lower rates for some customers.

So, should insurance companies be able to use credit scores in determining rates? Nevada and other states are grappling with the issue. Maryland bans the use of credit scores by insurers when they are determining rates for home insurance and limits the use of credit scores when it comes to auto insurance. A bill under discussion in that state's 2011 legislative session would further restrict the use of credit scores in underwriting for auto insurance policies.

In Michigan, however, an effort by the state's Office of Financial and Insurance Services to impose a similar ban was struck down by the state's Supreme Court. A bill to ban the use of credit information by Michigan insurance companies also failed to pass the Washington Legislature in 2010.

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