Insurers love data. In an industry centered around calculating risk, often no stone goes unturned. It's in an insurance company's best interest to try and adequately price premiums for the services they offer, and that involves accurately modeling the risk factors for their customers. However, one piece of information some insurers collect has caused the public and legislators to begin questioning the practice: credit scores.
Credit-based insurance scores, which rely on using an individual's credit history as a factor in determining a premium, affect many different lines of insurance, from home to auto. The major concern opponents of the practice raise is whether or not these practices negatively affect minorities and individuals with lower income. In fact, in 2007, the Federal Trade Commission (FTC) found that, in the case of automobile insurance, the use of scores "likely leads to African-Americans and Hispanics paying relatively more for automobile insurance than non-Hispanic whites and Asians". This was attributed to the fact that, as a group, the former have lower scores than the latter. However, the use of credit scoring has predicted risk for members of both groups in the same way. In the case of auto insurance, the FTC also found that credit scores were accurate in predicting the likelihood of an individual filing a claim.
In 2015, the Arkansas Insurance Department published a report detailing the impact credit scores had on different lines of personal insurance. For homeowners policies, the use of scores resulted in decreases in premiums for 57% of consumers. Of the group studied, just 16% saw an increase in cost. Across all personal lines of coverage, the department found over 86% of consumers with credit-based insurance scores saw their premiums decrease or not be affected at all. Because these findings didn't focus on the demographic data of their participants, it's unclear how the prices affected different minority groups.
For better or for worse, a few states have taken preemptive measures to shield consumers from being affected by credit-based insurance scores. In California, for example, insurers are not allowed to use credit scores in pricing auto insurance policies. Given the findings of the Arkansas Department of Insurance, and the fact that California is among the top 10 most expensive states for auto insurance, some of their drivers may be at a loss. Massachusetts was one of the more recent states to ban the use of credit-based insurance scoring, when a bill was signed into law by former-Governor Deval Patrick in 2011.
Mortgage insurance is one of the lines of insurance affected by credit scores. This is especially true in light of recent rate changes filed in the beginning of April. The Chicago Tribune reported that rates from a certain insurer on loans eligible for sale to Fannie Mae and Freddie Mac, for a sample individual with a 660 FICO score, increased by 5%. At the same time, an individual seeking a similar loan with a credit score of 760 would see their premium go down by 7%. Therefore, in the case of mortgage insurance, some individuals with scores below the national average of 695 are seeing their price increase.
What Other Seldom Discussed Factors Can Impact Your Insurance Premiums?
Health insurance. Individuals signing up for health insurance plans may be aware that "Are you a smoker?" is a question found on many forms. It may be obvious that smokers pay higher health insurance premiums, but what exactly is a smoker? Insurers have very strict rules as to the definition of what qualifies a user for that category. The Department of Health and Human Services defined tobacco use as the use of tobacco products an average of four or more times per week within a period no longer than 6 months. If you quit smoking during that period, you should therefore make sure you report that around the time your policy is up for renewal. If you don't, insurers will simply roll over previous details, and your premiums will remain elevated.
Home insurance. Most people may not think of a pool, trampoline, or treehouse as being dangerous, but to insurers they scream liability. If you buy a trampoline without consulting your home insurance company first, they may even choose to cancel your policy. Other things such as having exotic animals, or dangerous pets can also increase your homeowners premiums.
Auto insurance. If you're married, your auto insurance rates will be lower than if you were single. Insurers have determined that individuals who have tied the knot tend to be safer drivers, and therefore apply a discount on policies for these individuals. If you become divorced or widowed, you will lose this discount and your rates will increase—something that has become known as the "widow penalty".