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Secret Scores Influence Auto Insurance Rates

June 30, 2006

Insurance Credit Scoring • Consumers Dispute FTC Report on Insurance Credit Scoring • Secret Scores Influence Auto Insurance Rates • Industry Defends Credit Scoring • States Study Insurers Use of Credit Scores • Credit Rating Can Affect Insurance Premium • Insurance Companies Scrutinizing Customers' Credit Reports --- • More about Insurance ...

Everyone knows that if you hit another car, your auto insurer will probably raise your premiums. But Consumer Reports warns that even drivers who have spotless driving records and have never had an at-fault accident may be faced with higher premiums if they run into a new breed of credit score used by insurers.

Known as credit-based insurance scores, these numbers are computed from bill-paying and loan data collected by the major credit bureaus. They have become as important in determining annual premiums as driving records and neighborhoods.

CR’s investigation found that scores and their uses vary among insurers and that credit-based insurance scoring could cost many drivers hundreds of extra dollars.

Credit scores used by insurance companies weigh credit data differently from traditional lender scores. As a result, insurance scores can penalize even those consumers who use credit reasonably.

Consumer Reports sought and obtained scoring models filed with regulators in Florida, Michigan, and Texas used by 9 of the 10 largest U.S. auto insurers. CR found that there are no standards. Each company uses different models and weighs different credit-report information.

Some big companies find scoring useful only for new customers, not renewals, while others may use it for both. Moreover, CR notes that the credit data from which the scores are derived have a reputation for being inaccurate and out of date. Despite such problems, most states allow insurance scoring, and efforts to limit or ban it have been met with aggressive lobbying by insurers.

Advocates from Consumers Union, the publisher of Consumer Reports, have been urging legislators and regulators in several states to ban the use of credit scoring to underwrite homeowners and auto insurances policies. Those efforts have met with opposition from insurers. This year, insurance industry lobbyists helped to squelch legislation to end credit scoring in Colorado, Delaware, and Minnesota.

To see how insurance scores affect premiums, CR worked with an actuary to calculate premiums charged by preferred/standard-risk companies run by eight of the largest U.S. insurers operating in Florida.

The actuary calculated a "neutral" score for a 28-year-old single man with a clean driving record in Orlando, FL who owns a 2005 Toyota Camry LE. With a neutral score, the hypothetical customer would pay roughly the same annual premium at Nationwide and GEICO, about $1,150.

But with the worst possible insurance scores, the premium would increase 29 percent to $1,468 at GEICO and 47 percent to $1,706 at Nationwide.

Consumer Reports' analysis shows that consumers can take steps to protect themselves when applying for a car-insurance policy:

• Shop harder than ever before: Because each insurer calculates scores differently, only by getting quotes from several insurers are consumers sure to find a low rate.

• Use credit that insurers favor: Scoring models prefer oil- company credit cards. They also like national bank credit cards such as American Express, Discover, MasterCard, and Visa.

• Ask about your score: Farmers and Progressive both give details but only if asked.

• Ask for exceptions: Progressive says that is may rescore you if your score has been adversely affected by divorce, Hurricanes Katrina or Rita, job loss, the death of a family member, or serious medical problems.

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