Credit Scoring — A Biased Report

The Consumer Federation of America (CFA) has long been a very loud critic of the use of credit scoring to set insurance rates. To pump up its criticism, the CFA and the Climate and Community Institute (CCI) commissioned a study and issued a report titled, Penalized: The Hidden Cost of Credit Score in Homeowners Insurance Premiums.

It was done in response to a credit score controversy happening in Illinois and led the two groups to suggest a nationwide ban on the use of credit scoring.

The CFA and the CCI consider 630 to be a low FICO score, an average score is somewhere around 740 and a super good score hits 820. Their report said a nationwide average shows a low credit score can add $1,996 more to the cost of insurance for a year than for someone with a good credit score.

That’s about 99% more than someone with a good credit score would see.

However, there the report says there is an asterisk attached to that statement. Someone with excellent credit living in a not-so-safe area, or one in danger of a climate-related disaster, could end up paying a higher rate than someone with a low credit score in an area deemed safe.

PIA Western Alliance Executive Vice President Kim Legato said a national ban on the use of credit scoring is not a good idea.

”Traditionally, the PIA membership and company members have supported the use of credit scoring to set insurance rates,” she told Weekly Industry News. "Credit scoring does not unfairly penalize the poor, and people in minority groups. In fact, it helps them by keeping insurance rates lower for all consumers, including the rates of the poorest among us.”

Robert Passmore of the American Property Casualty Insurance Association (APCIA) says the report is flawed. Credit scoring, he said, lets insurers access risk more accurately and that enhances “competition and resulting in savings for most drivers and fairer insurance rates overall.”

Insurance Information Institute (Triple-I) spokesman, Scott Holeman said doing away with credit scoring could push insurers into relying too much on factors like age, the location of a claim, or the history of the claimant.

“Industry data has shown that credit-based insurance scores are strongly correlated with claim frequency and severity,” he said. “Without them, insurers might lose a statistical tool that helps differentiate high-and low-risk policyholders.”

The study is based on 600,000 quotes in all U.S. states and the data, it says, is covers about 57% of the nation’s homeowners insurance market. According to the CFA and the CCI, these are the states most impacted by credit scoring. Two of them, Arizona, Oregon are PIA Western Alliance states.

1. Pennsylvania

Low credit penalty percentage: 181%

Low credit penalty cost: $2,038

2. Arizona

Low credit penalty percentage: 168%

Low credit penalty cost: $2,125

3. Oregon

Low credit penalty percentage: 154%

Low credit penalty cost: $1,466

4. West Virginia

Low credit penalty percentage: 152%

Low credit penalty cost: $1,863

5. Virginia

Low credit penalty percentage: 145%

Low credit penalty cost: $2,048

6. Indiana

7. North Carolina

8. Ohio

9. Utah

10. Georgia

Source link: Chicago Sun-Times — https://bit.ly/45Yid9i