Insurance - Use of credit histories might result in higher premiums

Nancy T. Evans of Springfield recalls clearly when her financial history went sour.

"My credit went down after I had the stroke," says the single mother of a teenage daughter. "Most of my bills were from the medical treatment," and, unable to work then, she couldn't afford to pay.

Evans did, however, keep her mortgage payments current, and they included her monthly share of taxes and insurance.

Now living on Social Security disability, Evans last year was stunned when her insurer almost doubled the monthly homeowner's premium, upping it more than $50 a month because of her "credit score" based on her financial history. "I had been with them six years, and I had not filed a claim," she said.

Others were even more taken aback because they had no tarnishes on their credit histories, but faced steep premium increases.

Diane Epperson's 88-year-old mother in southwest Missouri "paid cash for everything, and she has never owned a credit card. She hasn't borrowed anything since she had her house paid for" long ago. Her mother lacked a credit history, so she had no credit score like about 10 percent or more of all Americans.

The insurer her mother had patronized for decades cited that lack of a score when it doubled her rates to more than $600 a year, and she couldn't shop around for more affordable coverage.

"She had been covered under a sort of grandfather clause" that took into account the house's older wiring and use of fuses, Epperson said. "If we had looked for another insurer, she would have been forced to rewire the entire house."

Gov. Bob Holden and Missouri De-partment of Insurance this year responded to growing complaints about the unfairness of credit scoring in homeowners and auto insurance by proposing new consumer protections, but they face an uphill struggle against industry opposition.

Credit scoring converts personal financial histories into a single number that insurers consider a measure of a person's likelihood of filing claims. But this computer profiling downplays or eliminates the traditional evaluation of the individual's claims records and other risk factors like traffic tickets that insurers have used to decide whether to issue a policy and how much to charge.

Insurers say credit scoring provides an objective and administratively cheap way to reject risky owners and set rates for others. By last year, the use of credit scores spread to 92 percent of American auto and homeowners insurers.

But across the country, alleged abuses in credit scoring practices have emerged as the top consumer issue of 2002, with legislative or administrative action ex-pected in more than half the states.

Seniors like Diane Epperson's mother in the Ozarks often do not have enough installment debt to produce a credit score and are penalized with higher premiums. The same holds true for many farmers, Hispanics and Muslims or simply Midwesterners with old-fashioned values about living within their means.

Equally compelling are the stories of persons facing huge, unexpected medical bills like Evans or other personal catastrophes like unexpected job layoffs or company closings that caused financial difficulties.

Agents who must deal personally with these cases have been leaders of the movement to restrict the use of credit scoring nationally and to expand consumer protections against abuses.

A Missouri House committee has endorsed minimal restrictions on the use of credit scoring to deny coverage if it is the "sole" reason. The core of the bill would have little effect because no auto insurer, for example, has yet filed plans to completely rely on credit scores in Missouri. But under the bill, insurers still could use credit scores as the major reason for refusing to write new or renewed policies, and the committee's version leaves out all consumer protections against increasing rates the most common complaint lodged with MDI about credit scoring.

The committee proposal closely resembles an insurance industry-backed proposal designed to derail state attempts nationwide to pass new laws restricting credit scoring. Industry lobbyists are fighting efforts to strengthen the legislation by saying consumers with "good" credit scores would lose "discounts" if the General Assembly limits the use of credit scores.

These so-called "discounts," however, often are misleading. One large insurer, for example, instituted "discounts" last year, based on credit scores, but only after increasing basic rates by more than 30 percent to offset lost income.

If consumers are concerned about credit scoring and the lack of consumer protections in Missouri, they should contact legislators soon. The House, for example, is expected to debate and decide whether to improve the committee proposal early this month.

Only stronger legislation will let Missourians like Nancy Evans and Diane Epperson's mother pay insurance premiums based mostly on their own claims and accident histories.

(Scott B. Lakin is the director of the Missouri Department of Insurance.)