How many count a good credit rating among their losses from Hurricane Katrina? Logic suggests more than just a few. Everything in thousands of homes had to be replaced; income, and in some cases, jobs were lost; and, as SLABBED readers know, there are insurance claims that have yet to be paid and untold thousands underpaid.
In a weekend Sun Herald story, Bad credit can mean higher insurance premiums, Anita Lee reports the latest bite-you-in-the-behind news that makes Katrina, the Hurricane that keeps on giving to those on the Coast who saw their credit score go south following the storm.
Coastal policyholders are well aware a hurricane is guaranteed to hike insurance rates, but fewer realize their credit reports also are factored into homeowner and automobile insurance premiums.
Consumers who have suffered financial setbacks because of the economy are seeing higher homeowner and auto insurance premiums…
Insurance companies contend consumers with bad credit tend to file more property insurance claims. Consumer advocates question the accuracy of studies that find a correlation between credit and risk.
Stories like this are a reminder that there are lies, damned lies, and statistics – and that many insurers are guilty on all three counts – but for the moment, let’s just focus on the statistics used to justify credit-based premium increases.
Insurers defend their use of credit reports to develop insurance scores, which dates to the mid-1990s.
They cite a 2007 Federal Trade Commission study that found credit-based insurance scores do predict risk for automobile policies. Studies sponsored by insurance companies, and the state of Texas, have reached similar conclusions.
Among the documents linked in her story, Lee includes a link to FTC study and a quick look at the Commission’s findings and conclusions (page 12) indicates insurers are misrepresenting the agency’s position:
Several alternative explanations for the source of the correlation between credit-based insurance scores and risk have been suggested. At this time, there is not sufficient evidence to judge which of these explanations, if any, is correct.
Use of credit-based insurance scores may result in benefits for consumers. For example, scores permit insurance companies to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they would otherwise not be able to determine an appropriate premium. Scores also may make the process of granting and pricing insurance quicker and cheaper, cost savings that may be passed on to consumers in the form of lower premiums. However, little hard data was submitted or available to quantify the magnitude of these benefits to consumers.
In other words, the information Lee cited from Robert Hunter appears closer to the truth than any other:
Robert Hunter, former Texas insurance commissioner and National Flood Insurance Program administrator, does not buy the correlation between insurance risk and credit history. He said the FTC study relied on numbers the insurance industry was willing to provide.
The FTC is currently studying the link between credit-based insurance scores and homeowners insurance. Hunter, now director of insurance for the Consumer Federation of America, hopes this study will be more meaningful because the FTC has ordered insurance companies to turn over data related to use of credit reports.
Nationwide has renewed its request for a statewide rate increase of 11.7 percent in homeowner insurance rates, the company confirmed Wednesday.
“Isolated hail storms, tornados or even heavy winds can result in more claims and increased claims costs,” company spokeswoman Nancy Smeltzer said. “We have experienced all of those in Mississippi and we have also seen an increase in fire-related losses.”
As always, SLABBED thanks Anita Lee and the Sun Herald for the continued coverage of insurance issues.