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