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Auto insurers use your credit history to set rates

The battle lines are drawn.

Auto insurance companies want to use consumer credit information to help determine insurance rates. Consumer advocates want the practice banned. They're taking the battle to state legislatures around the country.

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In the past two years, 40 state legislatures have rolled out bills aimed at curbing the use of credit data by insurance companies.

"It's a very bad system," says Robert Hunter, director of insurance at the Consumer Federation of America. "There's no logical connection."

Insurers say there is. They point to study after study showing a statistical correlation between your credit-based insurance score and your likelihood of filing an auto insurance claim.

"The industry is united in the fact that it's an accurate predictor of your risk loss," says Candace Frick, director of legislative affairs and education for the National Conference of Insurance Legislators.

Studies backed by insurers all say the same thing: people with low insurance scores are more likely to file claims than people with high insurance scores. Like a credit score, an insurance score is based on information found in a consumer's credit file.

"Insurance scores are one of the most valuable tools insurers currently have at their disposal for the accurate rating and pricing of automobile insurance," says Michael Miller of EPIC Actuaries LLC, which analyzed 2.7 million auto records nationwide.

Ten years ago, insurance companies offered three tiers of insurance pricing -- preferred, standard and nonstandard. Preferred customers paid the lowest premiums and those considered nonstandard paid the highest premiums.

Thanks to insurance scores, today's insurance companies may offer 10 or 12 different tiers of pricing.

"It allows companies to price policies with a lot more accuracy," says Neil Alldredge, director of state affairs for the National Association of Mutual Insurance Companies.

But consumer groups aren't buying the link between your credit data and your driving record. And they say it's unfair to punish people who suffer unexpected financial woes with higher insurance rates. Say you get sick and get slammed with high hospital bills, or you lose your job or get divorced, why should you have to pay higher premiums on your car on top of everything else?

"The part that gets me is blaming the victim. They're trying to blame people who've been victims of financial or medical catastrophes," says Birny Birnbaum, executive director of the Center for Economic Justice in Austin, Texas.

 
 
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