Reliable Insurance Managers doesn't run credit in 99% of the time. We only do if you want us to in order to find a better rate, if you already know your credit is good.
Texas homeowners with poor credit ratings — including a high percentage of minorities and lower-income residents — are seeing their premiums climb as insurers sharply increase their reliance on credit history in pricing home insurance policies.
A Dallas Morning News analysis of sample rates filed by top insurers with the Texas Department of Insurance indicate that credit ratings alone are forcing many homeowners to pay an average of 42 percent more than those with good credit — even when all other factors, such as damage or theft claims, are identical.
That percentage is up significantly from just three years ago, when a low credit rating meant about a 35 percent premium increase in North Texas and across the state.
The use of credit ratings is legal, and industry representatives say they are necessary to fairly price auto and home insurance, and ensure that those who pose bigger risks pay higher premiums. Consumer advocates say that it amounts to another hardship for the poor, and that credit doesn’t determine insurance risk.
Drivers with poor insurance credit scores are also paying higher premiums for auto insurance, but not by as much. The analysis of sample rates found that a low credit rating typically forces a driver to pay an average of 38 percent more than those with good credit.
Rates submitted by the 27 largest home insurers and 44 largest auto insurers show that all but a handful use credit history to help decide whom to sell insurance to and how much to charge. Some companies double the rates for those with poor scores.
State regulators and experts have noted wide variations in the way companies use insurance credit scores. Some give top priority to scores in setting rates, while others give them less weight.
The state’s largest insurers — State Farm, Allstate, Farmers, Liberty Mutual and USAA — all rely on insurance credit scores to help determine premiums.
“Nearly every insurance company uses credit scores to some degree to determine its rates, and they do so because the scoring methodology is consistent, reliable and highly predictive of future losses,” said Mark Hanna, who represents the Insurance Council of Texas, an industry-sponsored group.
Among the factors that insurers look at when deriving insurance credit scores are how many credit accounts a policyholder has, whether any are past due, and how long accounts have been open. Companies must disclose their precise mix of factors to the state.
Hardships for poor?
Consumer groups and civil rights advocates contend that the practice of considering credit history creates financial hardships for poorer families who must pay high premiums. They say it hurts minorities in particular, because they are more likely to have bad credit or low incomes.
Sara Lensch, a homeowner in Sachse, is one of those policyholders. She saw her insurance rates double after her credit rating slipped because of medical bills and other expenses that stretched her finances. Although she has since improved her credit score, she expressed concern that many other Texans continue to pay more for insurance because of circumstances that are often beyond their control.
“It kicks you when you’re down,” said Lensch. “You can be financially hit in so many ways that are not your fault — and it hurts your credit score. And insurance companies hold it against you even though you’ve had no car accidents or filed a claim on your house. To me, it’s a very unfair practice.”
Hanna said banks and insurance companies have long believed that credit scores provide a clear picture of how a person manages his finances and how well his home is likely to be maintained.
He emphasized that insurers use other factors in setting premiums and noted that the state has strong consumer protections to guard against misuse of credit information by companies.
Credit vs. claims
A review of the sample rates in Dallas County indicates that a homeowner’s credit rating has far more impact on the size of the premium than having filed a fire claim in the previous three years. And in auto insurance, a driver with one at-fault accident in the previous three years is likely to pay less than a driver with a poor credit score.
Sandra Helin of the Southwestern Insurance Information Service, an industry group, said companies vary in their emphasis on credit ratings and pointed out that all underwriting policies related to the use of credit history must be approved by the Texas Department of Insurance.
She also pointed to a 2004 study by the department that found a strong correlation between credit history and insurance risk — showing that those with a lower credit scores tend to file more claims.
“It is just a good business practice,” she said.
Credit scores, also used by banks, credit card firms, lenders and even employers, consolidate large volumes of consumer credit information into a single number. The score is based on such factors as the number and type of accounts a consumer has, late payments, collection actions, outstanding debt and the age of accounts.
But a key difference between insurance companies and banks is the purpose of the scores. While banks and credit card firms use the numbers to evaluate creditworthiness, insurers use the scores to predict risk.
That difference raises questions about the use of credit scores by insurance companies, a leading consumer group argues.
“Credit is extended on a promise to repay, while insurance is a product you pay for upfront. If you don’t pay the premiums upfront, you don’t get insurance,” said Alex Winslow of Texas Watch, a consumer group active in insurance issues.
Winslow argued that using credit ratings to decide how much a consumer should pay for insurance is “fatally flawed.”
“It doesn’t make sense that insurance companies set rates based on whether somebody is late on their credit card payments. You’re not more likely to have your house hit by a tornado just because you’re late on credit card payments,” he said.
Texas Watch also notes that 65 percent of drivers with the worst credit scores are minorities, while nearly 90 percent of drivers with the best credit scores are white.
Critics have tried to get the Texas Legislature to restrict or abolish credit scoring by insurers, but those efforts have failed in the face of strong opposition from the industry. Just one state, Hawaii, bans the practice entirely, and several other states have restrictions on the use of the scores.
Texas law restricts companies from using high medical bills or limited credit history to determine premiums. Beyond that, insurers can use any credit history information.
Companies contend that a ban on insurance credit scores would increase premiums for large numbers of drivers and homeowners who have good ratings.
In a study released in January, the Consumer Federation of America found that low- and moderate-income families in Texas and other states are hurt by credit scoring and other rate classification systems regularly used by insurers.
“They pay higher premiums because insurers use rating factors such as location of residence, occupation, education and credit rating, which they claim are correlated with risk. But insurers often have not adequately demonstrated to regulators that these correlations exist or that they adequately affect risk,” the report said.
“From this evidence of disparate treatment, it is difficult to avoid the conclusion that major insurers are far more interested in selling insurance to higher income families,” it read.
The study was directed by former Texas Insurance Commissioner J. Robert Hunter, who is now the director of insurance for the Consumer Federation.