Should Credit Scoring Be Used to Determine Insurance Rates?

As many consumers discovered during recent tough economic times, your credit history is being scrutinized now more than ever.

Some consumers worry that their credit history will be used against them when it comes to obtaining affordable insurance, be it auto, homeowners' health, etc.

In the State of Washington, Insurance Commissioner Mike Kreidler is hoping to prohibit the use of credit history, income and education for rating and underwriting personal insurance - the effect of which would likely lead to higher costs for consumers and decreased accuracy in underwriting and rating, according to insurers.

In 2003, Washington's Legislature restricted the use of credit scoring when it came to insurance, prohibiting insurance companies from cancelling or non-renewing a customer based solely on their credit score. Despite that action, the majority of insurers still look at credit as a key factor in setting rates.

While Kreider looks to pass both a house bill and a senate bill in the 2010 Legislative session, he notes that,' What consumers don't understand if they have no claims, their rates can still go up based on their credit score....this is inherently unfair.'

As Kreidler points out given the challenging economic times, many people who have lost jobs have had to run up debt, including those without health insurance. All of that can lead to negative credit reports that will be used by insurers, thereby leading to higher premiums.

On the flip side, the Property Casualty Insurers Association of America (PCI) recently testified before the House Financial Institutions & Insurance Committee that credit scoring actually helps consumers.

According to the PCI, "Insurers consider credit information in their underwriting and pricing decisions for only one reason—to rate and price business with a greater degree of accuracy and certainty. The more accurately companies can price, the better they can compete, and increased competition leads to more choices and lower costs for consumers.'

Another PCI representative adds that, "Credit information is an accurate predictor of the risk of loss, and insurers need to be able to use this tool in their underwriting and rating practices to ensure individuals' risks are properly assessed and policyholders are not paying more than they should.'

Many consumers are still wondering how they're going to keep a roof over their head, put food on the table and meet all their other financial responsibilities.

It would seem only common sense that insurers should not use credit scores to price insurance.

Many people who are going through tough financial times need all the breaks they can catch.

Hopefully the State of Washington does the right thing and puts more pressure on insurers to stop using credit scoring when it comes to assessing rates.