Court Weighs Use Of Credit Scores

[NoMoreCards]

Mich. Supreme Court Meets Today To Hear Arguments

October 7, 2009

The Michigan Supreme Court is considering whether insurance companies can use customers' credit scores to set home and auto premiums.

The high court heard oral arguments Wednesday.

The state insurance commissioner banned credit-based insurance rates in 2005 after calling the practice discriminatory and unreliable. A county judge blocked the ban. But the Michigan Court of Appeals reversed the ruling last year.

Most large insurers in Michigan use some form of credit scoring to give customers discounts on premiums. Generally, the better a customer's credit score, the lower his or her insurance premium will be.

Insurers are still using credit scores to set premiums as they await the outcome of the appeal to the high court.

Source:
ClickonDetroit.com

http://www.clickondetroit.com/news/21228412/detail.html

[cupcake]

Thanks for posting this. I live in Michigan and it seems like this has been going on forever. It will probably be another five years until the court hands down it's actual opinion, though...

[shabam]

This should be on a federal level. It's absolutely ridiculous that we are made to believe that our driving capabilities decline when debt increases. If it does, then anyone who files for ch 7 and is debt free should have one of the lowest rates post discharge. Well all know that is not the case.

[frogger]

Credit scores used for insurance purposes should be banned outright. All of the insurance companies subscribe to services that provide loss reports and this is what should be used for pricing.

Those that have speeding tickets and houses burning down should be the ones paying more. Not the people that obey the laws, take care of their property, and are just broke.

[NoMoreCards]

I am hopeful that this practice will soon stop. It is just wrong.

[southernbelle]

I hope insurance companies stop this practice as well. 12 years of perfect payments on my home, car and life insurance with State Farm and my rates went up by 50% after I filed BK. I have a perfect driving record and no missed payments! Heck my credit score was 740 before I stopped paying unsecureds and filed. Why should my rates be affected by my post BK credit score and not actual payments or performance? It makes no sense and is very discriminatory!!

[nc73]

It's statistics. People with lower credit scores tend to claim more often. At least that's how the insurance companies see it. It makes sense. Hell if I couldn't afford to fix something myself I'd file a claim. Alot of people with bad credit can't afford anything. It's a fact of life. Yeah it sucks but insurance companies have every right to especially if we give them the ok.

[justbroke]

It's statistics. People with lower credit scores tend to claim more often.

Exactly. It's all about risk. However, more should be said for someone with a perfect "no claim" or "no loss" history even if they have poor credit!

[Michigan1951]

I am with Safeco. Does anyone know if Safeco will raise my premiums after my BK? I live in Michigan........I have had no claims or tickets or anything for many years too.

[OhioFiler]

If the states would just get out of the insurance regulating business the insurers could probably reduce rates. Many states force insurers to cover high-risk drivers. Rate increases are controlled by the state.

Most insurance companies make nearly zero profit on operations. Their income is derived by investing premiums paid before having to pay losses.

Too often, as consumers, we want to blame the greedy CORPORATION for a perceived slight when in fact we ought to be looking at the government for explanation.

[Pizza]

Poor People Are Punished Enough...

It's statistics. People with lower credit scores tend to claim more often. At least that's how the insurance companies see it. It makes sense. Hell if I couldn't afford to fix something myself I'd file a claim. Alot of people with bad credit can't afford anything. It's a fact of life. Yeah it sucks but insurance companies have every right to especially if we give them the ok.

So in essence, a rich man should have cheaper insurance than a poor man because he's more apt to fix the result of an outside force himself? Well that's just silly.

One reason is that if you are charging your credit cards up fixing stuff yourself, your insurance company isn't paying out a claim. You saved them money by re-roofing your own house after a hail storm rather than forcing your insurance to pay a roofer (which they should have done).

If you truly have the money to fix everything yourself you probably wouldn't even need insurance anyway, unless required by law. Insurance companies charge millions of people to insure property in the case of accidental damage and/or damage caused by an outside force. If the policy states that it covers fire, they should cover fire damage. If a tornado tosses your home and vehicles down the street, they should be expected to act as described in the policy.

Being poor or owing too much money has nothing to do with the risk that your property may be damaged, and insurance exists so that both individuals and mortgage companies (many of which offer their own insurance) are protected. Now if you set your house on fire intentionally (adjusters can usually prove it) or push your car into a creek and report it stolen, that will get you thrown in jail and you don't get your claim anyway.

Raising premiums due to bad credit should be canned nationwide. It's ridiculous to tie property risk to swiping credit cards, especially when the national poverty level is rising and family incomes are being slashed in half. Easy credit is making its way out of our lives while insurance will always be here.

[justbroke]

Being poor or owing too much money has nothing to do with the risk that your property may be damaged,

I for one agree with your statement as it comes to "liability" and property damage... however...

You have to understand, first, what the insurance credit score is. It's not a FICO score. It's a new formula that mostly looks at available balances on your credit cards (your debt load), as well as loss and driving record. (Don't ask me how I found out how an insurance score is calculated, but I did find out from Choicepoint one day.)

What they are looking at is "if" you were to file a claim, would you be likely to file a claim. The insurance credit score, while it does factor in loss history, only generally seeks to determine your likelihood of filing a claim. It looks at the chances of you filing a claim which the insurance company would need to pay.

So in essence, a rich man should have cheaper insurance than a poor man because he's more apt to fix the result of an outside force himself?

So, in essence, yes... a rich person is less likely to file a claim, especially for just damage to the vehicle. The rich person would pay for fixing the car. The liability area is one in which everyone is basically on equal footing, and the insurer would use loss history combined with one's driving record to determine risk for that category.

In all likelihood, a truly rich person would probably own the vehicle and would only be carrying liability anyhow.

[cupcake]

I am with Safeco. Does anyone know if Safeco will raise my premiums after my BK? I live in Michigan........I have had no claims or tickets or anything for many years too.

According to this list from the State of Michigan's website, Safeco uses credit scoring. See page 13:

Personal Auto Insurer Credit Scoring List

I do want to point out, though, that I am insured through Fremont Insurance Company and according to this list, Fremont uses credit scoring. However, my agent recently informed me that Fremont does not recheck your credit score after it was pulled the first time. When I got my first policy with Fremont my score was probably in the high 700s or low 800s. So, my insurance rates are based on my good score from a couple years ago, not my current score. I am not sure how many insurance companies who use credit scoring in Michigan have the same practice, I just know that Fremont does.

[Pizza]

Regardless of the scoring system, I still don't believe they should be comingled.

Ex:

Insured #1) has great credit and $1,500 in a checking account.
Insured #2) has poor credit, $4,500 in checking and $30,000 in savings.

Neither has a greater possibility of having their house struck by lightning or having their car totaled at a 4-way stop sign. Additionally, #2 might have bad credit because he filed BK a year ago, but now that he's saving his money by not paying BK'd bills, he's actually a better risk than #1 who has depleted his accounts by paying down bills. See what I mean?

The only instance that a credit score should be used is when someone opts to pay month-to-month instead of in full. I can see that angle; yet, if you have the money in the bank to pay the full six months, your credit shouldn't matter at all.

[justbroke]

Regardless of the scoring system, I still don't believe they should be comingled.

Ahh, but you miss the whole purpose of a scoring model and modeling behavior. This is what the Supremes in Michigan will decide. Whether creating insurance pools based on a model is the right thing to do!

It doesn't matter if Insured 1 has no money in their account. They are more likely to put it on a credit card. Insurace #2 is likely to file a claim, because they don't want to tie up their cash! These are actual "models" of predictability.

I agree though that overall, models are not a good indicator of every single person who is represented in that model. I know people with low credit scores with perfect on-time payments, never missed anything... only they have high balances on their cards. So they get lumped into the group which the model says they are likely to default on something... but they never do and never did.

The problem is how do you create a model (and pool) which represents collections of insureds which is accurate and not punitive?

When we answer that question, we'll have the answer. I do think, though, that you could have risk pools just based on loss history and driver's record. However, the models may have shown that these aren't the best indicators to assign the level of risk to a particular pool.

(No, I never worked in insurance. )