By James McNair
The Cincinnati Enquirer
MOUNT CARMEL - Kenneth Smith owns a house and two vehicles free and clear. His only credit card, from Dillard's, has a zero balance. He pays his bills on time, with cash.
Kenneth Smith, who pays cash for most things, recently experienced a rate increase because the company did not like his credit history.|
(Michael E. Keating photo)
| ZOOM |
His reward? A higher auto insurance premium.
In 2001, the 72-year-old retired truck driver paid $248 every six months on insurance for his 1990 Mercury Cougar and 1996 Ford F-150 truck. Then, that November, he received a letter from his insurance company, American Home Assurance Co., saying its adoption of a "credit-based underwriting score" for customers might jack up his premium.
It did. The one-two punch of a statewide rate increase and American Home's use of personal credit information pushed Smith's six-month premium to $317 in January 2002. Six months after that, American Home raised it again, to $387. Smith protested in vain, stunned that his financial austerity could have worked against him.
"They don't like people living within their means!" he railed. "They want you to be in hock up to your rear end."
The nation's property and casualty insurers began incorporating credit data into their underwriting formulas in the 1990s to give themselves another tool to measure the risk of insuring people. But as the practice has become more widespread, opposition has mushroomed into a consumer rights battle.
Insurance companies say there is a statistical correlation between so-called credit scores and the number and size of insurance claims. Consequently, 60 to 80 percent of policyholders - that is, those with good credit scores - will see lower bills, said Dan Kelso, president of the Ohio Insurance Institute.
"Insurers' task is to try to put people into acceptable classes of risk so that they pay a premium that reflects what their potential loss may be," Kelso said.
But the practice has turned off consumer groups, advocates for the poor, several state legislatures and the national association of real estate agents. One of the most vocal opponents, a former Texas Insurance Department chief economist named Birny Birnbaum, says credit scoring is blatantly discriminatory.
"Most insurers are not in the business of writing as much business as they can. They're in the business of making as much money as they can because if they can figure out a way not to write business in poor and minority communities without it being a case of redlining, then they'll do that," said Birnbaum, founder of the Center for Economic Justice, a non-profit advocacy group in Austin, Texas.
Insurance credit scores
Most home and auto insurers utilize credit information in one manner or another. Cleveland-based Progressive Casualty Insurance, the nation's third-largest auto insurer, compiles "insurance credit scores" based on six variables obtained from the credit rating agency Experian.
Ohio Casualty of Fairfield began incorporating credit information into its customer-rating system in October 2001 for new home and auto policies, in March 2002 for renewals. Beth Riczko, executive vice president for personal lines, said 70 percent of Ohio Casualty's customers received discounts, the rest surcharges. The revenue gained from surcharges, she said, was offset by the discounts.
Those who were charged more, Riczko said, "tend to have multiple outstanding payments, tend to be in financial duress, don't pay their bills on time and tend to make more insurance claims that tend to be more sizable than the typical American."
Cincinnati Insurance, Ohio's fourth-biggest property and casualty underwriter, uses credit scoring solely to determine payment plans, said Scott Gilliam, vice president of government relations for the Fairfield company. "The individual who has a favorable credit score, we give the option of paying quarterly or twice a year," he said. "For those whose credit score is not favorable, we ask that they pay the entire premium up front when the policy is issued. We're not raising or lowering premiums on the basis of credit scores."
The two Fairfield companies report no serious customer attrition. Nevertheless, credit scoring has become a point of political contention in Ohio. The Ohio Department of Insurance received 59 complaints about the practice in 2002, up from 29 in 2001. Advocates for fair housing say credit scoring has become another barrier to the purchase of homes.
"We get complaints from people who've been turned down (for insurance) because of bad credit," said Bill Berger, a fair housing specialist with Housing Opportunities Made Equal, a non-profit advocacy group in Walnut Hills. "We've been able to get them insurance from another company, but it's a hassle to try to find other insurers."
The mainstream housing and mortgage markets are also concerned. The Mortgage Bankers Association is looking into the practice because it says home-sale closings are being hampered by the lack of insurance. The National Association of Realtors dislikes the flaws of using credit reviews and sees no correlation between credit and insurability.
Ohio Senate activity
A group of Ohio state senators - all Democrats - introduced a bill this year to ban credit scoring as the basis for issuing or pricing insurance. It died in the Republican-controlled General Assembly.
The bill's lead sponsor, Tom Roberts of the Dayton suburb Trotwood, said consumers and insurance agents brought the practice to his attention. He said it could cause some drivers to do without insurance altogether.
"If more and more credit is denied, that's the next situation we could face," Roberts said. "It's another reason why we need to continue studying the issue."
The University of Texas studied the issue. In March, it said credit scores were indeed predictive of insurance losses.
The study didn't sit well with Texans, who pay high insurance premiums. In Scripps Howard's spring 2003 Texas Poll, 68 percent of 1,000 respondents favored a ban on credit scoring. Perhaps feeding off that, the Texas House of Representatives gave citizens their ban in a 138-0 vote, only to see Senate leadership kill it.
Other states, including Hawaii, Maryland and Washington, have outlawed credit scoring for most insurance purposes. California voters banned it for auto policies, and its legislature is weighing a ban for homeowners policies. The Oregon Senate passed a ban by a 27-2 vote.
Three bills were introduced in Kentucky to eliminate or restrict credit-scoring, but were unsuccessful. A similar effort was made by Democrats in Indiana, which went with industry-supported rules instead.
Nine days ago, Ohio joined several states in adopting the set of rules endorsed by the insurance industry. It gives insurers 30 days to notify consumers of any rate increases stemming from sub-par credit histories. It disallows medical collection accounts, disputed debts and credit inquiries not initiated by the consumer. It forbids insurers from issuing or pricing insurance solely on credit scores.
That last provision solves a problem that apparently didn't exist. Mary Bonelli, a spokeswoman for the Ohio Insurance Institute, said she is aware of no company that writes policies according to credit information alone. Ann Womer Benjamin, director of the Ohio Department of Insurance, said she's going to make sure it stays that way.
Benjamin, a former Portage County state representative appointed to her current job in January, said her staff will investigate credit-scoring for "unfair discrimination."
"We are looking very closely at how it is used in the marketplace to make sure it is not used in a way it should not be used," she said.
No quick resolution
Consumer groups and the insurance industry undoubtedly will be fighting over credit scoring for a long time to come.
But here's a twist: Insurance agents themselves are not entirely convinced of the appropriateness of linking credit and insurance risk. In an article in Insurance Journal magazine, David Swift, president of the National Association of State Farm Agents, wrote that the insurance industry knows full well how to juggle statistics to get what it wants.
"The California Department of Motor Vehicles," Swift wrote, "did a study 30 years ago that showed people with dark hair had significantly worse driving records than those with blonde or red hair. Another study, in Australia, showed Geminis had the worst driving records among the astrological signs, followed by Taurus and Pisces.
"Those studies suggest that hair color and astrology might be considered a rating variable for underwriting. Indeed, the insurance industry may want to hire Miss Cleo as an underwriter."
How one insurer uses credit scoring
Progressive Casualty Insurance Co., the nation's third-biggest auto insurer, sets prices according to a number of factors. They include the kind of car you drive, where you live, the amount and type of coverage you want, your driving record, your claims history - and, in some states (including Kentucky and, beginning July 11, Ohio) your payment and credit history.
Progressive incorporates the following six credit criteria into its pricing formula:
Age at which credit was established.
Months of managing credit.
Duration since last auto loan.
Payment status of installment loans and revolving credit accounts.
Percentage of credit limits used.
Number of credit inquiries initiated by the individual in past 25 months.
Progressive combines those factors into an insurance credit score and compares it to the average score of consumers who received a quote from the company in the past six months. The company lumps customers in average, below average and above average categories. The higher the score, the higher the premium, as in this example:
A married couple living in Covington, Ky. (ZIP 41017), driving a 2003 Ford F-150 pickup (4x2, 6-cylinder) and a 1997 Dodge Caravan Sports Van (4x2, 6-cylinder). Male, 47, has had two speeding tickets in the last three years; female, 45, has no tickets or violations. Bodily Injury/Property Damage Liability limits of 50/100/50, Uninsured/Underinsured Motorists Liability limits of 50/100, PIP $10,000 coverage, no deductible, Comprehensive and Collision with $500 deductible. Couple has prior insurance with no lapse and prior liability limits of 50/100. Rates effective as of 6/5/2003 and are subject to change.
If couple had an insurance score, calculated by Progressive, of 116, premium would be $1,267.
If couple had an insurance score, calculated by Progressive, of 100, premium would be $1,084.
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