Credit history helps shape insurance premiums, but relationship between credit and claims a bit murky

George Altman, Capital Bureau

MONTGOMERY, Alabama — Is a storm more likely to damage your home if you are late paying credit card bills? Most insurance companies think so, and they charge accordingly, according to industry experts.

Spokesmen for State Farm Insurance Cos., the state’s largest property insurer, said that the company’s statistical models demonstrate a clear link between elements of a person’s credit report and the risk that he represents in homeowners and auto policies.

“The fact that the correlation exists is beyond dispute,” said State Farm’s Dick Luedke.

The tie between credit history and insurance claims is strong for auto, fire and theft insurance, Luedke said. It even exists, to a lesser extent, for catastrophic damage from hurricanes or tornadoes, he added.

When asked how those could be related, he said, “We would admit that that is not totally clear.”

Some aren’t buying it.

“I don’t know how many of you all know how your credit score, your FICO score, plays into purchases of insurance, but it is abused, and it needs to be addressed,” Carl Schneider, vice president of Mobile-based Schneider Insurance Agency Inc., told the governor’s insurance commission last week.

The Alabama Department of Insurance is considering action to address the situation, whether by state law or department-issued regulation, according to Charles Angell, acting deputy insurance commissioner.

“It’s totally common. Certainly every large insurance company does it, for both automobile and homeowners insurance,” Angell said.

The FICO credit score is a number between 300 and 850. A higher number indicates a better credit history. The score is based on several factors, including how much credit a person has available, how much is currently borrowed, how many credit accounts a person has, how many late payments the person has made, how many accounts are in collections, how long of a credit history a person has, and how recently the person sought additional credit.

Luedke said that State Farm doesn’t consider a person’s FICO score but instead uses certain elements of the credit report to create a different score. That number is based particularly on the number of late payments that a person has made, the number of accounts a person has in collections, and the number of credit accounts a person has, he said.

Luedke declined to estimate how much of a difference that credit history can make on the total cost of a State Farm premium. Schneider said he has seen credit alter premiums as much as 200-300 percent for some companies.

Representatives of Alabama’s second- and third-largest property insurers, Alfa Mutual Group and Allstate Corp., did not respond to questions about their use of credit information in policy premiums.

Angell agreed that there is a “very strong statistical correlation” between credit history and some types of insurance perils, such as fire. But he described the connection between credit and catastrophic wind risk as “slight.”

Currently, insurers combine all property insurance risks to come up with the premium, so credit history is lumped in with all of the perils. That’s what Angell wants to change.

“We would like to see the wind premiums shown separately, calculated separately, on a policy from the nonwind premiums,” he said. “We would like to see credit scoring applied appropriately to the two pieces, or maybe not applied at all to the wind piece.”

Angell hopes that the Legislature will establish such a requirement. Otherwise, the department could write its own regulation, he said, although there is a downside to that approach. “The industry could take us to court,” Angell said.

Additionally, a change in state law is more permanent than a department-issued regulation, which can come or go at the desires of the insurance commissioner.

Angell and State Farm spokesman Roszell Gadson both said that it often helps consumers for insurers to consider credit history.

“If someone has a very good credit score, but they live in a high-risk area, for instance, then there’s going to be a benefit for them,” Gadson said.