The secret score behind your auto insurance
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C R I N V E S T I G AT E S
CAUTION!
The secret score behind
your auto insurance
veryone knows that if you hit can penalize consumers who use credit sumers are paying lower premiums
E another car, your auto insurer
will probably raise your premi-
ums. But you may not know this: Your
reasonably. For instance, Progressive
Auto Pro’s Financial Responsibility Score
will give premium-boosting black marks
more precisely related to risk. “Before,
there were only a few rating tiers,” says
Keith Toney, president of InsurQuote, a
premiums can shoot up much higher if to a customer whose credit-bureau division of ChoicePoint, an Alpharetta,
you run into a new breed of credit information says he opened three credit Ga., provider of insurance scores.“Credit
score used by insurers, even if you accounts within the previous year, in- scoring allows companies to sort cus-
have a spotless driving record and cluding one credit card in the previous tomers into hundreds of tiers.”
never had an at-fault car accident. four months, and then made two or more Even though scoring has been in
Known as credit-based insurance additional loan inquiries without accept- use for more than a decade, it is a
scores, these numbers are computed from ing the credit. mystery to most consumers. About two-
bill-paying and loan data collected by the Such a system may seem bizarre, but thirds of 1,578 consumers surveyed for
major credit bureaus. In recent years, the insurers contend that there is method to a report last year by the Government
scores have become as important in their math. Because there is a statistical Accountability Office did not know that
determining your annual premium as correlation between scores and claims, their credit histories could affect their
your driving record and the neighborhood scoring “shifts costs from drivers who file insurance premiums.
where you live. fewer claims to those who file more,” And how could they know? Few
An analysis by CONSUMER REPORTS says Robert Hartwig, chief economist for insurers routinely disclose scores or
found that scoring could cost many con- the Insurance Information Institute, an what role they play in setting premi-
sumers hundreds of extra dollars. Here’s a industry trade association. ums. To fill that void, CONSUMER REPORTS
typical example of how scores can hurt: Insurance officials say that most con- sought and obtained scoring models
a 28-year-old single male from Orlando,
Fla., with a clean driving record and no CR Quick Take
accidents would normally pay State Farm Almost all insurers now use insurance scores derived from credit report data to set
Mutual $1,251 a year for a new policy.With premiums and accept or reject customers. Insurers say that people who engage in cer-
one at-fault accident, his premium would tain credit activities, such as carrying high balances, will file more claims than others.
rise to $1,447. If the same driver instead
• Scoring systems can penalize consumers • State studies raise concerns that insur-
fell into the lowest ranking in State Farm’s for reasonable credit usage. Opening three ance scores may discriminate. Studies in
credit-scoring system, however, his pre- new accounts in the last year, including one Missouri, Texas, and Washington show
mium would shoot up to $2,600. credit card in the last four months, and that insurance scores have an adverse
I L LU S T R AT I O N BY D O U G L A S F R A S E R
Even a driver with a great credit score then making two or more loan inquiries disparate effect on blacks, Hispanics, and
whom lenders would normally bless with can increase your score—and boost your the poor. The Federal Trade Commission
a low-interest mortgage could wind up premium. is undertaking a nationwide study.
with a less favorable insurance score • Scores have no consistent effect on pre- • Consumers have no legal right to
miums. Because scoring methods vary from information. Most insurers do not divulge
and thus a high premium.That’s because
company to company, you can’t predict scores to them. So consumers have no
formulations for insurance scores weigh
whether certain credit behavior will land way of knowing what they can do to
credit data differently from traditional you a low premium or a high one. lower their premiums.
lender scores. Indeed, insurance scores
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A U G U S T 2 006 Z w w w. ConsumerRepor ts.org 43filed with regulators in Florida, Michi- so items in the reports correlated with pay- dispute. Lamont Boyd, insurance market
gan, and Texas used by 9 of the 10 outs. That finding led to the creation of manager at Fair Isaac, says,“Two-thirds to
largest U.S. auto insurers. (See CloseUp homeowners- and auto-insurance scores. three-quarters of customers are getting
on page 46.) Then, with the help of A study conducted in 2000 by James better premiums because of credit-based
experts, we deciphered the cryptic Monaghan, a research strategist at insurance scores.” A study by the Texas
wording and algorithms that affect the Metropolitan Property and Casualty Department of Insurance in 2004 found
price of insurance. Insurance Company, found, for example, that half paid more and half paid less
What we found was a mishmash. that people whose oldest account on their than they would have without scoring.
Hundreds of insurers use scoring mod- credit report dated back 25 to 29 years Among insurers we interviewed, only the
els created by ChoicePoint and Fair subsequently filed only $60 worth of Farmers Insurance Group told us how
Isaac, the Minneapolis company that claims for every $100 of premiums paid
invented credit scoring. Other insurers over the next three years. But people youneedtoknow
developed their own systems. The whose oldest account was only a year old
scoring models emphasize bits of credit filed $95 in claims per $100 of premiums WHAT AFFECTS
data that to the average person would over the ensuing three years. YOUR SCORE
seem to have little to do with a driver’s Neither insurers nor the credit-scoring If your credit data has characteristics that
propensity to make claims. There are no companies that discovered the relation- correlate with high claims risk for an insurer,
standards: Each company uses different ship know what causes it, except to insurance-scoring models may penalize
models and weighs different credit- suggest that those with subpar credit are you. The result may be a higher premium.
But many items meticulously weighed by
report information. Some big companies themselves subpar. “People with a pat-
one scoring model are vastly different or
find scoring useful only for new cus- tern of irresponsible financial behavior
not even considered in another. Below is a
tomers, not renewals, while others may and poor credit history have a much sampling of three scoring models we exam-
use it for both. greater chance of being in an accident or ined and what credit-use characteristics
Moreover, the credit data from which filing a claim,” says Joseph Annotti, a they penalize consumers for.
the scores are derived have a reputation spokesman for the Property Casualty
CONSUMER-INITIATED CREDIT
for being inaccurate and out of date. Insurers Association of America, a trade
INQUIRIES:
And several studies have shown that group. The American Academy of
insurance scoring adversely affects Actuaries said in its 2004 recommenda-
Fair Isaac > 1 or more in the last
12 months
blacks, Hispanics, and low-income con- tions to the Federal Trade Commission
sumers. Despite such problems, most that “aggressiveness” and “willingness to
ChoicePoint > 1 or more in the last
6 months
states allow insurance scoring, and take risks” go along with a poor driving
efforts to limit or ban it have been met record. “The correlation with fraud is
Progressive > 5 or more in the last
24 months
with aggressive lobbying by insurers. striking,” says Gordon Stewart, president
of the Insurance Information Institute. NUMBER OF NEW ACCOUNTS
OPENED:
SCORING: FACTS AND FICTION But the Monaghan study, which reviewed
Insurers have long used statistics to those long-standing inferences, says that Fair Isaac > Depends on customer
determine premiums. That’s how they links between responsible financial ChoicePoint > 1 or more in the last
figured out that drivers under age 25 have management and future expected losses 24 months
more accidents than older drivers. The are “unsupported.” Progressive > 1 bank card in the last 4
months, 3 or more accounts
traditional rating factors have been age, Steven Parton, general counsel for the
in the last 12 months
sex, marital status, ZIP code, driving Florida Office of Insurance Regulation,
record, and three-year history of at-fault says, “What they’re really looking to see AGE OF CREDIT ACCOUNTS:
accidents. Insurers determine how much with insurance scores is who is most likely Fair Isaac > Less than 600 months
each factor affects the frequency and size to file a claim, not who will most likely have ChoicePoint > Less than 143 months
of payouts and create a formula for calcu- an accident. If I have the money, I won’t file Progressive > Less than 60 months
lating a premium based on your charac- a claim, because my rates will go up. People
teristics. The formula starts with a dollar of low economic status don’t have that lux- AGE OF APPLICANT WHEN FIRST
LOAN WAS TAKEN OUT:
base rate for each type of coverage, then ury.” Parton adds, “Insurance companies
multiplies, adds, or subtracts amounts are looking at whether they’re relying on Fair Isaac > Not considered
based on each of the rating factors. their insurance in case they have an acci- ChoicePoint > Not considered
In the 1990s, Fair Isaac worked with dent, which is what they’re buying insur- Progressive > 26 years and up
several insurers to test its theory that credit ance for to begin with.” NUMBER OF MAJOR CREDIT CARDS:
scores might predict homeowners- and Fair Isaac > Any number but two
auto-insurance claims losses. Statistical PREMIUMS ALL OVER THE PLACE
ChoicePoint > None
analysis of archived data from more than a How many benefit as a result of scor-
million credit files found that 30 of 100 or ing and how many lose is a matter of
Progressive > Not considered
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A U G U S T 2 006 Z w w w. ConsumerRepor ts.org 45scoring affected premiums for its cus- to each driver’s loss risk, as insurers con- particular difficulty. For example, only
tomers: an $80 annual reduction, on aver- tend. How precise can scoring be when 40 percent of Fair Isaac’s Assist insurance
age, for the 58 percent who saved and a our hypothetical customer with the best score is based on payment history, says
$109 increase for the rest. score gets a 31 percent discount on his Boyd. The other 60 percent weighs bal-
To see how insurance scores affect annual premium at Progressive but only ances and credit limits, the age of your
premiums, an actuary worked with a 19 percent discount at Birmingham earliest account, whether you shopped for
CONSUMER REPORTS to calculate premiums Fire? Or when USAA charges our hypo- loans, and the types of loans you have.
charged by preferred/standard-risk com- thetical customer with the worst score A version of Assist used by the
panies run by eight of the largest U.S. 32 percent extra, why is State Farm charg- Farmers Insurance Group in Michigan
insurers operating in Florida for a 28- ing him 108 percent more? until last winter rated customers on 11
year-old single man with a clean driving Leslie Kolleda, a spokeswoman for factors.With a nearly perfect score of 827,
record in Orlando, Fla., who owns a 2005 Progressive, says that the variation in a 28-year-old single male from Ann Arbor
Toyota Camry LE. First, the actuary calcu- pricing has “nothing whatsoever to would have landed in the top tier and
lated the premium the driver would pay if do with credit scores” and is typical of paid $1,027 a year in premiums if he
no credit score was used—considered a insurer-to-insurer price differences. engaged in optimal credit-use behavior as
“neutral” score. Then he recalculated the Progressive’s comparison of 90,000 multi- defined by Assist: having exactly two
premium using each insurer’s best and company premium quotes in 2002 major bank credit cards, not shopping for
worst possible insurance score. Finally, showed a $524 difference, on average, a loan in the previous year, and paying
each insurer verified our calculations. on six-month policies. bills on time, among other things.
The results were erratic. (See “Good But some state regulators still have But if he shopped for loans, opened
Score, Bad Score,” on page 48.) For ex- doubts. “You can’t say this is the best three new credit-card accounts, and tem-
ample, if insurance scores were neutral, predictor we have, but at the same time porarily ran up balances—all no-no’s in
our hypothetical customer would pay we all do it completely differently,” says Assist’s scoring system—his insurance
roughly the same annual premium at Joel Ario, the insurance administrator score would have plunged like the Dow
Nationwide and GEICO, about $1,150. of Oregon. “Either there’s a core to this Jones Industrial Average on a bad day—
But if the driver received the worst possi- or it’s a farce.” 207 points. That would have kicked him
ble insurance scores, the premium would three tiers down Farmers credit rating
increase 29 percent to $1,468 at GEICO AT-FAULT CREDIT BEHAVIOR factor table and raised his premium $664.
and 47 percent to $1,706 at Nationwide. Insurers say, as Allstate does on its This year, however, partly because
At Birmingham Fire, scoring from best to Web site, that a consumer’s “financial dif- Farmers found Fair Isaac’s model difficult
worst increased the premium by $3,166. ficulties” may indicate a tendency toward to explain to consumers, Farmers switched
Such variations raise questions about greater risk-taking behavior. But insur- to an in-house scoring model called Fire
whether scoring closely customizes price ance scoring also punishes people in no & Auto Combined Evaluation Tool, or
closeup
PRYING THE LID OFF INSURERS’ SECRET SCORING SYSTEMS
Four years ago, CONSUMER REPORTS asked insurers to what degree Many states have since forced insurers to tell consumers that their
credit data figured in scoring formulas used to set car-insurance credit information may be used.
premiums. We were politely rebuffed. “Our insurance-scoring model While the Florida court actions proceeded, Michigan and Texas
is proprietary,” said Michael Trevino, an Allstate spokesman. sent us copies of scoring models filed there, and three of the Florida
Last year, we took a different tack and asked insurance regula- insurers settled with us and handed over documents. Nationwide had
tors in Florida, Michigan, and Texas to give us the rate-setting man- not settled by press time but verified our calculations nonetheless.
uals that contain the scoring formulas. Little did we realize that a A mystery remains. Why would insurers fight for secrecy in
request for such records would set off a legal skirmish in Florida. Florida when the models are public in other states?
Later that year, AIG, Liberty Mutual, Nationwide, and State Farm In an affidavit filed with one of the insurers’ complaints, Fair
sought injunctions against Florida and Consumers Union, our publish- Isaac claimed that details of its algorithms “have never been dis-
er, to block our access to their credit-scoring models, which they said closed to any end-user clients in the insurance industry,” because
were trade secrets. Indeed, Liberty Mutual said that keeping its model insurers would steal them “without having to pay Fair Isaac.” Also,
secret was “in the public interest.” Insurers learned of our request if competitors such as ChoicePoint saw the models, Fair Isaac
from the Florida Office of Insurance Regulation, which gives compa- contended, its $140 million-per-year scoring business “would suffer
nies claiming confidentiality an opportunity to object before release. significant competitive injury.” But Farmers Insurance had the
Insurers haven’t exactly been forthcoming about scoring. When model, and Fair Isaac later conceded in an interview that Choice-
its use became prevalent in the mid-1990s, they “did a horribly poor Point has had access and years to study its models.
job” telling customers, says Joseph Annotti, a spokesman for the The people most affected by insurance-scoring models, con-
Property Casualty Insurers Association of America, a trade group. sumers, may be the last to know, but at least now the secret is out.
46 C O N S U M E R R E P O RT S &Z A U G U S T 2006 • Expert • Independent • NonprofitFACET. Surprisingly, the credit character- cent years by the Consumer Federation of however, declared that it didn’t have
istics that cost our model customer a America, the Federal Reserve, U.S. Public enough data to draw any conclusions.
bundle last year may not raise his pre- Interest Research Group, and CONSUMER In any case, a credit report is a snap-
mium a dime this year. REPORTS have together found significant shot of a moment in time.“Our models can
Are Farmers customers from last year percentages of credit reports with erro- only rely on the data existing in the credit
entitled to a rebate? No, says Bill Martin, neous delinquencies, out-of-date balances, report as of the day it’s accessed,” Fair
a Farmers vice president: “It’s not that and incorrect credit limits, all of which Isaac’s Boyd says. Lenders don’t update
their rate or score was wrong. It’s just that could lower your insurance score. Steven balances with credit bureaus every day.
we’ve changed how we do it.Two actuaries Katz, a spokesman for TransUnion, one of A reporting time lag can show a balance
can look at the same set of data and make the three major credit bureaus, says, “We weeks to months after you’ve paid it,
different decisions about risk.” CR’s exam- believe that credit reports are highly according to a 2004 report by the Federal
ination of credit models used by large U.S. accurate.” A study by the GAO in 2003, Reserve. If you’ve run up your balance on
auto insurers in Florida, Michigan, and
Texas found numerous inconsistencies.
(See CloseUp on facing page.) whatyoucando
Progressive’s A24 credit-scoring model
looks at 12 items on credit records and POLISH YOUR SCORE AND GET A LOWER PREMIUM
will bite you for opening one new credit Insurance credit scoring might raise plain if you think you’ve been incor-
card in the previous four months or your premiums, but CONSUMER REPORTS’ rectly scored.
having a credit-card balance higher than analysis shows that you can take Ask for exceptions. Credit
40 percent of your limit, neither actions steps to protect yourself when reports can be ruined by circum-
indicative of grave financial problems. you apply for a car-insurance stances beyond your control. Progres-
The ChoicePoint Attract scoring model, policy. sive says that it may rescore you
Shop harder than ever before. if your score has been adversely
with dozens of separate factors, has the
Our rate comparisons in Florida affected by divorce, Hurricanes
most complicated formula of any we ana-
showed a wide range of premiums Katrina or Rita, job loss, the death
lyzed. It dings you for having department- that eight major insurers of a family member, or serious
store charge cards and auto loans from charged the same cus- medical problems.
automaker finance companies such as tomer. You have no way Demand a recount. If
GMAC, for not having an oil company of knowing whether your your score is low, ask to
credit card, and for so much as touching score will give you a be rescored as frequently
finance-company credit, which may in- lower or higher pre- as your state’s law
mium, because each allows, which is
clude incentive installment loans from
insurer calculates usually once a year.
appliance, electronics, or jewelry stores.
scores differently. Only Keep credit-card
Why does ChoicePoint deem such by getting quotes from several insurers balances in check. Maintaining any
activities “bad”? The company says it can you be sure to find a low rate. balance can count against you, but the
doesn’t know why, just that there is a Monitor your credit reports. You higher the balance, the more points you
correlation. “It’s certainly statistically true should make sure that they are accurate lose on your score. Avoid letting balances
that people who have finance-company by taking advantage of your right to a free ride, especially on department-store
accounts have higher losses,” says John report from each of the credit bureaus charge cards with a low credit limit. Pay
Wilson, an assistant vice president who once a year. To get the information, you your balances in full each month, and
can go to www.annualcreditreport.com. consider making payments every week,
works on credit-scoring-related analytics.
Avoid certain types of credit. These perhaps over the Internet, to keep the
Your insurance score may also take a
include department-store credit cards; balance from being reported as high rela-
hit if you frequently apply for loans to see credit provided by stores to help move big- tive to your total credit limit.
what rate you qualify for. Progressive’s ticket items; credit accounts at your local Try not to add to your credit. Scoring
model concludes that you are desperately tire dealer, auto parts store, or service sta- systems look askance at frequent new
seeking and being rejected for credit and tion; and finance-company credit. And credit and penalize you for the number of
lowers your score. Monaghan’s research watch out for retailer credit cards that are inquiries related to the shopping and
shows that the average number of in- issued by finance companies, not banks. application process. Installment loans will
I L LU S T R AT I O N BY D O U G L A S F R A S E R
Use credit that insurers favor. Scor- also boost total balances relative to your
quiries on credit reports has doubled
ing models prefer oil-company credit total credit lines and lower your score.
from a decade ago.
cards. They also like national bank credit Pay your bills on time. This is another
cards such as American Express, Discover, money-management given that will pre-
CRUNCHING IMPERFECT DATA MasterCard, and Visa. vent score penalties. Consider automatic
The reliability of insurance scores in Ask about your score. Farmers and bill payment from your checking account
predicting claims depends on the reliabil- Progressive both give details but only if so that you don’t have to worry about pay-
ity of the data on which they are based, you ask. Information can help you com- ments getting lost or delayed in the mail.
and the verdicts are mixed. Studies in re-
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A U G U S T 2 006 Z w w w. ConsumerRepor ts.org 47a vacation, for example, an insurance- criminated against the plaintiffs or vio- gressive and Farmers give customers de-
scoring model could downgrade you for lated the law. Allstate did not respond to tails about their score on request. And
using too large a percentage of your credit our requests for comment. ChoicePoint sells insurance scores to a
line even if you always pay your balance in Some state insurance officials ques- consumer for about $13, but it won’t
full. “The model doesn’t know that you’re tion scoring fairness. Joel Ario, Oregon’s reveal which insurers might use them.
planning to pay that bill off,” Boyd says. insurance administrator, asks,“Should dis- Consumers are largely left to protect
proportionate impact be enough to mean themselves. (See What You Can Do on
AN ADVERSE EFFECT it should be limited or banned? In the case page 47.) Most states allow the use of
Some factors in credit-scoring models of race, we say yes.” So in Oregon, insurers scoring, and insurance lobbyists have
seem to target low-income consumers. can use scoring only with new customers, successfully repelled numerous efforts
For example, 18 percent of lower-income not existing ones who have a track record. to ban or restrict it. Twenty-two states
families use finance-company credit, In May, Florida put insurers on notice have passed model legislation endorsed
according to Federal Reserve research that by Dec. 1 they will have to show by the insurance industry, which pro-
conducted in 1995.The ChoicePoint model that their use of credit scores does not vides only weak consumer protections.
penalizes such credit. Similarly, 67 percent disproportionately affect consumers Chiefly, the laws prohibit scoring models
of all families have a major credit card, because of race, color, religion, marital from counting delinquent medical ac-
while only 45 percent of lower-income status, age, gender, income, national counts. Maryland, New Mexico, Oregon,
families do. ChoicePoint may downrate origin, or place of residence. and Washington have added stronger
those who don’t carry major plastic. Insurers vigorously argue that scores restrictions, while California, Hawaii,
“Credit scoring is a proxy for race and in- are not discriminatory. “We don’t ask for and Massachusetts ban scoring for all
come, and it is a tool to allow insurers to customer ethnicity or income level, so insurance. (Maryland has banned it for
get around redlining restrictions,” says we’re blind to all that,” says Dick Luedke, homeowners policies.) But this year,
Birny Birnbaum, executive director of the a State Farm spokesman. insurance lobbyists helped to squelch
Center for Economic Justice, an Austin, An FTC study may shed new light on legislation to end scoring in Colorado,
Texas, advocacy group for low-income and the issue. “We plan to dig a little deeper Delaware, and Minnesota.
minority consumers. into the discrimination issue,” says Jesse Despite that, some insurers are hav-
Studies by officials in Missouri, Texas, Leary, an assistant director in the FTC’s ing second thoughts. David Snowden, a
and Washington over the past few years bureau of economics. “We’re going to be spokesman for USAA, says, “After two
have shown that insurance scores have looking at how well scores predict risk years, our experience with the policy-
a disproportionately adverse effect on within racial categories. Are scores a holder proves to be more valuable than
blacks, Hispanics, and low-income fami- proxy for race or ethnicity?” the insurance score.” And Bill Martin of
lies. A 2004 Texas Department of Farmers says that if other insurers drop
Insurance study found that, depending on SOME STATES PUSH BACK scoring, his company might also. “If we
the credit model, members of minority Insurers have no legal obligation to can’t explain what we’re doing, we
groups have credit scores that on average disclose their scores, and few do. Pro- shouldn’t be doing it,” he says.
are lower than those of whites, by 10 per-
cent to 35 percent for blacks and 5
percent to 25 percent for Hispanics. Good score, bad score
But Texas concluded it had no legal Depending on each insurer’s method of calculating insurance scores, the approximate
authority to prohibit scoring, because a annual premium for a hypothetical 28-year-old male in Orlando, Fla., who drives a new
follow-up study presented in 2005 con- Toyota Camry can vary from $782 to $4,755.
firmed the strong relationship between ANNUAL PREMIUM
scores and claims. “Credit scoring, if con- With the With the
tinued, is not unfairly discriminatory as Without best score worst score
INSURER insurance score (% discount) (% surcharge)
defined in current law because credit
scoring is not based on race,” wrote Jose Birmingham Fire (AIG) $1,960 $1,589 (19) $4,755 (143)
Montemayor, then insurance commis- Allstate Property & Casualty $1,098 $790 (28) $1,490 (36)
sioner of Texas, in a letter accompanying GEICO $1,142 $947 (17) $1,468 (29)
the report. In June 2006, in a settlement
Liberty Mutual $1,687 $1,410 (16) $2,361 (40)
preliminarily approved by a Texas judge,
Allstate agreed to change its credit-scoring Nationwide General $1,159 $943 (19) $1,706 (47)
model nationwide in response to a class- Progressive Auto Pro $1,127 $782 (31) $1,868 (66)
action lawsuit alleging that the company’s State Farm Mutual $1,251 $1,109 (11) $2,600* (108)
insurance-scoring model discriminated USAA $1,015 $1,015 (0) $1,336 (32)
against blacks and Hispanics. In court *State Farm would place a customer with the worst score into State Farm Sources: Auto insurers.
papers, Allstate denies that it has dis- Fire & Casualty, which generally has higher rates than State Farm Mutual.
48 C O N S U M E R R E P O RT S &Z A U G U S T 2006 • Expert • Independent • NonprofitYou can also read
