Insurance companies are increasingly consulting consumers’ credit records when deciding whether to issue or renew homeowners insurance.
The insurers say they need to take the extra step to protect themselves against losses. But some regulators and consumer advocates question whether there is a link between credit history and insurance risk, and they say the practice raises the possibility of discrimination.
Insurance companies have been making such checks for years, although applicants are unlikely to know about them unless they have been turned down for a policy.
The practice is drawing increased attention now largely because Allstate Insurance Co., one of the nation’s largest insurers, stepped up its use of credit checks this year. However, a Texas study found that even before Allstate made its changes, about 22% of the dollar volume of policies in that state involved credit checks.
“I think you’re going to see it more and more. There seems to be a big push for credit reports to be used,” said Mary Griffin, insurance counsel in the Washington office of Consumers Union, which is concerned about the trend.
As with any situation involving credit reports, under federal law a consumer must be notified if an application is turned down for credit reasons. He or she then has a right to a free copy of the credit report and to request that any errors in it be corrected.
Because insurance is regulated by states rather than the federal government, rules governing how insurers can use credit checks vary.
Allstate and others in the industry have repeatedly cited two trade journal articles as evidence that the practice is effective. The articles detail a study backed by Equifax, one of the big national credit bureaus, that shows a correlation between credit ratings and losses.
“Based on the data we’ve seen, we think it’s a legitimate predictor,” said State Farm spokesman Jerry Parsons. His company uses the checks only with new applicants, not with renewals, he said.
Still, based on the uproar, the company is examining its procedures to set a national standard, he said. Procedures for using credit checks are now determined locally, he said, adding, “We are certainly looking at what we’re doing to see how we apply it firm-wide.”