Missourians, along with millions of other Americans, have seen high increases to their insurance rates over the last year, but it's not because they've become poorer drivers, more frequent victims of natural disaster or even that they're filing more claims.
It's because their credit has suffered.
Insurers have taken to looking at credit scores, a number assigned to people based on information found in credit reports, to decide whether to raise or discount premium rates -- or in some cases reject policyholders.
That means if an insurer gets a poor credit score, his rates might double or, in some cases, triple. It may mean some get denied coverage.
"It has to do with personal habits," said Larry Case, executive vice president of the Missouri Association of Insurance Agents. "If people handle their credit responsibly, then they probably are more responsible in other areas of their lives. We see that as a predictor."
Credit scores are based on the number and types of accounts one has as well as late payments, collection actions, outstanding debt and the age of accounts. While the Fair Credit Reporting Act limits some access, credit reports are open to companies for the purposes of insurance underwriting.
Scores generally range from 300 and 850, with a higher score meaning lower insurance premiums.
But thousands of complaints from consumers who wonder why their credit rating makes them worse drivers or shoddy homeowners has led lawmakers in 35 states, including Missouri, to create legislation that would slow the trend of using credit scores in the insurance industry.
In Missouri, the House of Representatives is considering a bill that would, among other things, require insurance companies to disclose how they use credit scores to adjust rates, something that currently isn't mandated and often doesn't happen.
It would also ban insurance companies from using credit scores as the only factor in adjusting rates or declining coverage. For some companies, credit scores is the only factor.
Rep. Dan Ward of Bonne Terre, Mo., who was an insurance agent for 10 years and is vice chairman of the House insurance committee, said he never liked credit scoring.
"I'm not comfortable with it," he said. "But they've been doing it for quite some time. It's a situation where we don't think we can totally get rid of it, but the bill would give us some control over it."
Even the Missouri Insurance Department supports the bill, and director Scott Laken and Gov. Bob Holden are on the record saying that credit scoring is unproved.
"No study has ever demonstrated a relationship between money management and someone's likelihood to file a claim," said Randy McConnell, a spokesman for the Missouri Insurance Department.
McConnell said credit scoring especially hurts seniors and farmers, many who use cash for most transactions and therefore have no credit history, which gives them a poor rating.
"I've probably talked with 70 of these people myself," McConnell said. "Some are single mothers, some got laid off and maybe missed a credit-card payment, one filed bankruptcy because they went broke paying medical bills. How do you explain to these people that these factors are driving up their insurance rates?"
McConnell also said that using credit scoring could cause some to drop auto insurance.
"It's required to have auto insurance, but people were used to not having it before," he said, referring to the time before the law that requires it was passed. "If the cost doubles, that can be a crushing blow, and it may make them more inclined to let it lapse, and that's not good for anyone."
But the insurance industry insists it needs the scores to be able to predict risk accurately so what consumers pay for insurance reflects its costs. The industry says studies have found a very strong link between insurance credit scores and the likelihood of auto and homeowner insurance losses.
Looking for patterns
FICO stands for Fair, Isaac and Company, the developer of the scoring models that rank applicants for insurers. The scores are generated by proprietary computer programs licensed by Fair, Issac and housed at Equifax, Experian and Trans Union, the nation's big three consumer reporting agencies.
Individuals' full electronic credit files are run through the software and evaluated for risk patterns by statistical models. These scores were long kept a secret from consumers by contract requirements.
"It's all about finding patterns," said Craig Watts, consumer affairs manager for Fair, Issac. "Credit reports are very consistent reports of information, even more accurate than the Department of Motor Vehicles. We've done studies that prove a correlation between credit history and insurance loss."
The correlation is there, Watts said, but they haven't done studies to determine why it's there.
"It's a statistical correlation," he said. "As for why, our best common-sense explanation is that the more responsible an individual is, the less likely they are to incur a loss. If they're in and out of credit trouble, and they're reckless with their credit, they're more likely to be a bit more reckless behind the wheel and pay less attention to their home."
However, Watts said, Fair, Issac doesn't think companies should be using its credit scores as the only factor for rates.
"Our intention is the score should be one tool for an underwriter," he said.
Difficult to explain
Insurance agents in this area had various reactions.
Steve Brazil, an agent for 15 years in Cape Girardeau, said he has had a few complaints about escalating rates.
"It's a very difficult thing to explain to people, especially if they haven't had a claim," he said.
Farmers Insurance only started using credit scores 10 months ago, Brazil said.
"So after that short a time, the jury's still out as far as I'm concerned," he said.
Ginny Cline, an independent insurance agent in Cape Girardeau, said she empathizes.
"Lot of people run into financial problems, and they can't help it," she said. "That doesn't make them a bad person or drive any worse. On auto insurance in particular, I don't see why they're doing this. It doesn't make any sense."
But Gene Willis, an agent since 1968, said he sees both sides.
"It's got some pluses and minuses," he said. "But overall, the studies show that people with bad credit have more claims. The only reason for that I can think of is that they're not as careful."
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