Credit scores play role in insurance availability, cost

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Tim Mullen is senior regulatory and consumer services manager of the National Association of Insurance Commissioners.|ret||ret||tab|

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The federal Fair Credit Reporting Act permits any consumer-reporting agency to furnish a consumer report "to a person which it has reason to believe intends to use the information in connection with the underwriting of insurance involving the consumer." Because this is a permissible use under the FCRA, an insurer may request such a report without the consumer's permission. |ret||ret||tab|

While the average consumer may not see the relevance of credit history to an insurance risk of loss, insurers believe the use of credit history can help predict which consumers are more likely to file a claim. Most personal lines, homeowner and automobile insurers use credit history during the rating and underwriting process.|ret||ret||tab|

An insurer's rating process will determine how much a consumer pays for insurance. Through the underwriting process, an insurer will determine if it will accept a risk and issue a policy to an applicant.|ret||ret||tab|

Insurers use credit history to create a "credit score" or "insurance score." This score is based upon information in a consumer's credit report with different factors receiving a different weight of importance. Because of this, a good credit report does not necessarily equate to a good credit score. The following factors are used in many models: public records, past payment history, length of credit history, inquiries for credit, number of open lines of credit, type of credit in use and outstanding debt.|ret||ret||tab|

Because credit scores can impact the availability and affordability of insurance, consumers should ask their insurance company or agent whether a credit score is used in the company's underwriting and rating process, and how such a score is calculated. |ret||ret||tab|

While an insurer or insurance agent is not obligated to tell a consumer what his/her score is, the FCRA does require insurers to notify consumers if an "adverse action" is taken because of credit information. The FCRA defines "adverse action" to mean "a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of any insurance, existing or applied for, in connection with the underwriting of insurance." |ret||ret||tab|

In other words, any decision to reject an application, not renew or cancel a policy, or raise rates based on a credit score is an adverse action. Such adverse action also allows a consumer to get a free copy of the credit report used and check for errors.|ret||ret||tab|

State insurance laws offer additional consumer protections. In Missouri, insurers must inform the Department of Insurance that they are using credit history as an underwriting guideline and, effective July 1, may not use a credit report or credit score as the sole factor to reject or not renew coverage. Insurers may use credit scores as the lone reason for setting a rate. |ret||ret||tab|

The state of Kansas is currently considering the adoption of a regulation that would prohibit insurers from denying, canceling, not renewing or setting rates solely on the basis of an applicant's credit score. In addition, the Kansas bill prohibits insurers from raising an insured's rates in response to an insured's request for a credit score recalculation. |ret||ret||tab|

More generally, state insurance laws require insurers to provide consumers a written notice setting forth clear and specific reason for any insurance denial, cancellation or nonrenewal. In addition, states' insurance laws prohibit the use of credit scores for unfairly discriminatory purposes and may also restrict the use of credit scores in other ways. |ret||ret||tab|

For more information on how the use of credit scores is regulated in Missouri or for additional consumer assistance, consumers should contact Missouri Department of Insurance at 301 W. High St., PO Box 690, Jefferson City 65102; phone: 1-800-726-7390; e-mail: askmdi@sdcnotes.state.mo.us. |ret||ret||tab|

As always, it is a good idea to obtain a copy of your credit report from each of the three credit bureaus to make sure there are no inaccuracies in your credit information, although you will need to pay for a copy unless an adverse action was taken. If there are errors, be sure to correct the errors with the appropriate credit bureaus and immediately tell your insurance company or agent about the errors. The three national credit bureaus are Equifax at 1-800-6845-1111 or www.credit.equifax.com; Exper-ian at 1-888-397-3742 or www.experian. com; and TransUnion at 1-800-888-4213 or www.transunion.com. |ret||ret||tab|

Finally, if you have had prior credit problems, create a plan to improve your credit over time and ask your insurer for the top factors adversely impacting your credit score. Once you improve your credit, ask your insurer to re-evaluate your credit score.|ret||ret||tab|

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