Credit history cuts insurance rate for many

Payment record predicts claim risk, State Farm says

Insurance premiums for almost 1.4 million car, homeowner, and other property and casualty policies were lower last year because of policyholders’ credit history information collected by insurance companies, according to a report by the state Insurance Department.

Meanwhile, 422,428 policies had higher premiums because of the credit information. For an additional 1.3 million policies, the information had no effect on the premium, according to the report.

The department presented the report Tuesday to the state House and Senate insurance and commerce committees, which accepted it without discussion.

The report is required by Act 1452 of 2003, which also limits the type of credit information that can be used in calculating a premium and prohibits the information from being the sole reason for declining to issue or renew a policy.

Insurance companies also are required to notify consumers that they may collect credit information about them and of any increase or other “adverse action” taken as a result of the information.

Consumer groups have criticized the use of the information, saying it unfairly targets low-income people and members of minority groups.

Gary Stephenson, a spokesman for State Farm Insurance in Arkansas, said the company uses only a few pieces of credit information, such as late payments and defaults on revolving loan accounts, in calculating premiums for auto and homeowner’s insurance.

Studies over the past several years have shown that such factors are correlated with a high number of claims, although the reason for the correlation isn’t known, he said.

“To the extent that we are better able to assess risk or claims activity, we are better able to charge a correct premium for a certain individual, and that makes it more fair to everyone else,” Stephenson said.

The company is the largest provider of auto and homeowner insurance in Arkansas and nationally, Stephenson said.

Of the more than 2 million auto insurance policies in which credit information

was used to calculate a premium, about 941,000, or about 46 percent, had a lower premium as a result.

That was a slight increase from 2011, when credit information resulted in lower premiums for about 45 percent of the auto insurance policies for which such information was used.

In 2004, the first year the Insurance Department collected the information, the use of credit information resulted in lower premiums for about 31 percent of the auto insurance policies.

The percentage of auto policy premiums that were raised as a result of credit information fell slightly, from 13.8 percent in 2011 to 13.6 percent last year. In 2004, credit information resulted in higher premiums for 9.9 percent of the auto policies.

For homeowners insurance, the percentages were similar. Last year, for instance, credit information resulted in lower premiums for 48 percent of the 657,259 policies.

For 17 percent of the policies, the information resulted in higher premiums.

Insurance Commissioner Jay Bradford said that use of the information to calculate premiums “doesn’t sound right to the consumer.” But, he noted, if companies didn’t use it, many automobile owners and homeowners would pay more for insurance.

“The statistics unfortunately show that someone with very poor credit — that translates to their claims history,” he said.