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Employment Losses & Credit Restrictions Cause Auto Insurance Rate Increases: What YOU Should Do About It
Unearned and unfair increased auto insurance premiums loom for millions of Americans because their credit scores have precipitously fallen during this economic crisis through no fault of their own. Consumers can LEARN and TAKE ACTION to prevent these increases by reading and following the suggestions on this and ensuing pages at www.Settlement
SUMMARY: Most people have no idea that their auto insurance premiums are tied to their credit score. Millions of citizens have lost their jobs—or suffered a reduction in hours—and as a consequence of falling behind on their obligations, they have suffered reduced credit scores. Banks have recently lowered credit card limits on millions of credit card holders, most with satisfactory payment records. That makes their debt-to-limit ratio (also known as the "credit utilization" ratio) less favorable, which in turn likely leads to a lower credit score. Hence, while these insureds have not become worse drivers overnight, their auto insurance premiums could increase for no reason other than a reduction in their credit score. This is what is known as a windfall profit, since the increased rates have NO CAUSAL CONNECTION to any increased insurance risk.
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OUTLINE OF TOPIC:
1. Auto Insurance Companies Benefit by Economic Misfortunes of Innocent Drivers
2. Drivers Get Lower Credit Scores by Not Paying Bills on Time: Insurance Score
3. How Reductions in Credit Card Limits Decrease Your Credit Score
4. What CAN One Do if Your Credit Score Plunged and You Wish to Avoid an Increase in Your Auto Insurance Rates?
1. Auto Insurance Companies Benefit by Economic Misfortunes of Innocent Drivers
Economic misfortunes suffered by millions of citizens will translate into UNEARNED WINDFALL PROFITS for auto insurers, since they are allowed to consider the financial stability of insureds when setting their rates.
The recent credit squeeze and the losses in the employment numbers are BOTH VERY GOOD NEWS for auto insurance carriers. Why? Because these two factors ALONE will lower credit scores around the nation, and when your credit score goes down, your auto insurance premiums go up! Most of the insurance industry uses an "insurance score", which is based in largest part upon the way in which consumers handle their credit—including some version of their credit score.
The insurance industry presented a credit scoring model to the various state legislatures (and state insurance commissioners) in years past and convinced them that there is a logical connection between a consumer's credit score and her risk for insurance loss as a driver. Hence, in most states, the auto insurers get to set their rates based in part upon what is called an "insurance score" for each insured, the main component of which is the credit score.
Let's be clear: yes, your driving record (and especially any at-fault accidents) will be an important factor influencing the cost of your auto insurance. But because (in all but a few states) the insurance industry now gets to increase your rates based upon your credit score, the fact that you suffered an employment loss or that your credit card limit was recently lowered will likely result in a lower credit score, and hence, higher auto insurance premiums.
Did you become a worse driver or a greater risk just because of economic conditions not of your making? Of course not! Did your loss of a job or reduction in your credit card limit make you into a different person: one who takes unnecessary risks? Again, NO. But your rates are likely to increase SOLELY for these reasons, and since the insurance company gets to collect extra money when there is no added risk, it has just reaped a windfall profit.
Can we say it another way? Many millions of our countrymen have lost their employment. Tens of millions have had their credit card limits lowered. Unless somebody in government at some level does something to change the system, these economic misfortunes of insured drivers will likely mean that they are also punished by having to pay higher auto insurance premiums SOLELY BECAUSE OF THEIR ECONOMIC PROBLEMS. Those who are suffering because of the economic crisis are also the ones who get to fund this gift to the insurance industry.
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2. Drivers Get Lower Credit Scores by Not Paying Bills on Time: Insurance Score
Most people are aware that if a consumer does not pay her bills on time, eventually her credit score will be reduced. Same thing for mortgagors who fail to pay on time or suffer a foreclosure. Bankruptcy will also lower a person's credit score.
People know this happens, but they probably did not know that the lower credit score translates to higher auto insurance premiums. But the use of credit scoring per se in good economic times is a different topic in and of itself. And so we leave it to others better qualified than us to debate the use of credit scores to govern the availability and pricing of insurance products. After all, most every state does have some kind of restriction on the use of those credit scores, and a few prohibit any increase in rates based upon a reduction in the credit score. .
What concerns us in these troubled times is the unwarranted piling-on against the victims of our economic crisis. So, for this discussion, let's pretend that the credit scoring system put in place years ago was fair UNTIL 2007—2008, when we really started to see those very high unemployment numbers and the gross reductions in credit card limits.
The arguments propounded to sell this credit scoring system to state officials tied irresponsible credit behavior to higher risk for auto insurers. But that supposed logical connection totally breaks down in the case of the tens of millions whose credit scores have been lowered through no fault of their own. The basic premise of credit scoring simply DOES NOT WORK in these times of crisis inasmuch as there is no logical connection between the loss of economic well-being and one's insurance risk as a driver. There is no way to have a fair use of credit scores if the insurance score is lowered through no fault of the consumer in this economic crisis.
It is not a worker's fault that the corporate world and our politicians may have made mistakes. Why should that fired worker now suffer higher auto insurance premiums because of our political and business errors? She did nothing wrong, yet she has lost her job. And, with the domino effect, the retail clerk who used to sell to that worker when she was employed has now suffered a reduction in hours. Both of them have fallen behind on bills that they used to pay and now their credit scores have taken a nosedive. Ask your insurance commissioner, your state legislative delegation, and your governor to explain WHY the insurance industry gets to reap a windfall by increasing the rates of both of these victims of our economic crisis?
Heretofore, consumer spending was almost encouraged as the patriotic thing to do for employed consumers. We were encouraged to borrow on our credit cards in order to keep the consumer society game afloat. Now these people have lost their stream of income and they cannot keep current on their obligations. Is that behavior we can agree would predict some risk as a driver?
The problem now for these folks is: how does one go about convincing her insurer that just because she lost her job or just because her credit card lowered her limits, that DOES NOT MEAN her driving became more of a risk to an insurer? Until the various states take action through their insurance commissioners, she will have to write letters herself. See paragraph 4, below.
According to the National Association of Insurance Commissioners, forty-eight states have taken some form of legislative or regulatory action limiting the use of credit-based insurance scores, including:
Some states have limited the use of credit-based insurance scoring, requiring that it not be the sole rating factor used by insurers to evaluate risk.
Some states believe that the process itself is not intended to be discriminatory, and any disparate impact based on race or ethnicity is merely coincidental.
Some states believe that a majority of policyholders benefit from the use of credit scoring.
Some states have taken issue with the use of credit scores and other rating criteria, such as occupation and education.
Some states prohibit the use of credit-based insurance scores as the primary basis for any rate increase.
A few states prohibit the use of credit-based insurance scores as the basis denying access to purchase of any insurance product.
A few states do ask the insurer to consider an appeal by a consumer who contends that his credit score is skewed because of his lifestyle, and he therefore deserves an exemption from the credit scoring system.
If a consumer has any input on this topic, the place to start is with your state insurance commissioner. If that office is not responsive, petition your state legislator. Please see Paragraph 4 below.
An EXCELLENT example of how insurance scores work and the laws one progressive state has enacted is posted online by Washington's Mike Kreidler, one of the nation's leading state insurance commissioners:. Any consumer who is going to petition her state officials, should visit that site and become familiar with the arguments for and against credit scoring. For example, Commissioner Kreidler posted this summary of historical arguments plus comments on how the law works and implementation:
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3. How Reductions in Credit Card Limits Decrease Your Credit Score
Since we at www.Settlement
First, let's look at the HUGE NUMBER of consumers impacted. According to Simon, in an effort to stem the losses inflicted by widespread cardholder delinquencies, banks SHARPLY LOWERED credit card limits on over 60 percent of non-prime borrowers, and even dropped the limits on 20 percent of the prime borrowers.
Those reductions in credit limits—by cutting or closing consumers' credit card accounts—totaled $123 billion in the third quarter of 2008 ALONE, according to a Federal Deposit Insurance Corp. report. As a result, millions of credit cardholders, even those who consistently pay their card bills on time, have seen credit scores lowered.
But, "Lowering credit limits automatically reduces many consumers' credit scores because it changes a key ratio that Fair Isaac Corp. and VantageScore— the chief suppliers of credit scores— use in calculating scores. In the credit scoring formulas, having a high amount of unused credit says you're a responsible borrower. Having a high amount of unused credit is rewarded with a higher credit score. Lowering that ratio lowers credit scores."
In fairness, Mr. Simon cites others in the industry who feel that the single act of changing the debt-to-limit ratio is not going to make a dramatic reduction in the credit score. But that is not the norm. According to Liz Pulliam Weston, expert on moneycentral.msn.com, "The leading FICO credit scoring formula is quite sensitive to how much of your available credit you're using. When your limits are lowered or an account is closed, your existing balances loom larger and can seriously damage your scores."
Typically, reduced credit scores translate into reduced insurance scores, which means insurers get increased premiums. So, when a responsible driver with $4,000 of outstanding debt on a $20,000 card limit, suffers a credit limit reduction down to $5,000, her credit utilization ratio is greatly increased, and her credit score will suffer, according to Mr. Simon.
"The companies that create credit scores say they feel no obligation to adjust their credit scoring formulas to recognize the new credit landscape." Simon notes that a change in the works for later in 2009 will offer no benefit whatsoever to those whose credit scores have been harmed by the credit limit reductions to date. He surmises that once your insurance rate has been increased, it is NOT going to be reduced, even in the event Fair Isaac or VantageScore should ever decide to tweak the system.
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4. What CAN One do if Your Credit Score Plunged and You Wish to Avoid an Increase in Your Auto Insurance Rates?
This is a four-pronged CALL TO ACTION for all victims of our economic crisis AND those of us who know anyone who lost employment or suffered a major reduction in their credit card limits. They can and SHOULD take action right now.
The same applies to anyone whose credit score has precipitously declined for reasons not related to poor handling of credit. Examples might be an accident or an injury, or family emergency, or medical expenses, or any other reason you fell behind in paying your bills that does not bear any relevance to your driving habits. You also should consider taking some action to fight any increase in your insurance premiums.
FIRST, learn. You need not become a true student of credit scoring, but one should learn enough to be able to argue for relief. Hence, the following pages are offered for whatever value a consumer may find in them.
Credit Scoring Auto Insurance Premiums & Helpful Resources
ACTION PAGE: Sample Letters to Insurer, to State Insurance Commissioner & to State Legislative Delegation
Resources to Investigate & Correct Your Own Credit Scoring Files
SettlementCentral.Com Letter to National Association of Insurance Commissioners re: Credit Scoring
SECOND, send a letter. Do NOT wait for your rates to increase; be proactive. Write to your insurance company and demand some relief. Tell them that you have suffered economic consequences not of your making (unemployment, reduction in hours, significant reduction in credit card limits, or the other reasons listed above). Then ask them to confirm to you in writing that they will:
(1)grant you an exception from using your credit score; or
(2)take this information into account when setting your rates, instead of relying solely upon the insurance score that will be generated for you; or, if they cannot agree to either of these, then
(3)they will grant you an arbitration forum in which to resolve this dispute.
THIRD, make a complaint. If your insurer fails to make a satisfactory response as requested, then send your correspondence to your state insurance commissioner". You should make a summary of your economic plight or other reason for the reduced credit score, discuss the letter to your insurer and its lack of satisfactory response, and make it a formal complaint and demand for action.
FOURTH, state legislative delegation. Since so many state insurance commissioners appear to be more oriented toward the insurance industry instead of the consumer, you might not get much positive action out of that office. In that case do not be at all shy about sending a letter to your state governor and your state legislative delegation. Insist that SOMEONE take some action to correct a manifest injustice that inures solely to the benefit of the insurance industry
SITE NOTE:
The usual insurance claim business of www.Settlement
Insurance Claim Help & Demand Letters for Auto Accident, Dog Bite, and Slip/Trip & Fall Accident Victims
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