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Late on your mortgage payment? Forgot where that credit card bill went? You might find yourself paying more for auto or home insurance as a result.

The use of "credit scoring" in insurance has been a lightning rod issue over the past several years, as insurers have sought a new way to trim their losses. The companies have increasingly used the information to help their underwriting, while consumers and their advocates denounce the practice as needlessly intrusive and discriminatory.

But while insurance companies praise scoring and insist they'll continue using it, regulators and independent agents say the practice hasn't been as effective as the companies had expected.

"Score is not the end-all. I don't think they're seeing the results they were told they were going to see all those years ago when they made such a stink about it," said Kathy Bett, personal lines manager at Lawley Service Insurance Group in Buffalo.

Federal law allows insurance companies to use credit scores in deciding who qualifies and how much they should pay for auto and home insurance. The companies calculate a special "insurance score," which places customers into premium levels.

Insurers say there's a relationship between bad credit and too many insurance claims. They argue that using the scores helps them confidently evaluate how much risk they face of their customers filing claims.

That allows them to charge higher premiums for riskier customers and better rates to customers with good scores instead of spreading the burden equally across all customers. And the companies say they are more comfortable writing more policies, even approving customers whose accidents or tickets might otherwise disqualify them from coverage.

"It's accomplished what we've set out to do. It's a good thing for the insurance consumer as well as Allstate," said Bill Goff, New York field product manager for Allstate Corp., the state's No. 1 auto and home insurer and No. 2 in the nation.

"It does certainly help insurers in determining someone's likelihood of filing a claim," said MetLife Auto & Home spokesman David Hammarstrom.

The insurers say they're using the scores as one of many factors they consider, not as the sole factor. That's still not much of a reassurance to consumers and activists, who are outraged that regulators have allowed the practice at all.

"I don't think there's any justification for the use of credit scoring," said J. Robert Hunter, director of insurance for the Consumer Federation of America and former Texas insurance commissioner. "I think it's intended to discriminate against the poor."

But independent agents and New York state Insurance Commissioner Greg Serio say the industry's current practice is still a change from a few years ago, when a bad credit score could rule someone out from the get-go. Now, they'll just pay more.

"It used to be that you would run the score and if you weren't spit-spot clean, you couldn't get a quote from that company," Bett said. "Now, you're just not going to get the best rate."

They say insurers no longer rely too heavily on the insurance scores as a primary factor, in part because of laws and regulations in most states restricting how insurers can use them. The practice has even been banned to some degree in Maryland, California and Hawaii.

"A lot of them have taken a more tempered approach to it," said Serio, the insurance superintendent.

Companies deny any change in their practices, except as required by state laws, but say they do look at traditional criteria, such as driving records. That's a relief for frustrated insurance agents, who have had to explain credit-scoring to angry customers. And the insurance market has opened up again for people who a few years ago couldn't get coverage.

"We're finding it's much more competitive and we're writing a lot more business," said Lori L. Kozuch, vice president of personal lines at Niagara National Insurance Group.

Traditional credit scores are numerical summaries of a person's credit history and record. The scores -- commonly known as FICO scores after Fair Isaac Corp., the San Rafael, Calif., company that sells them to lenders -- are most often used to judge whether a consumer qualifies for a loan.

Insurers don't use the same score, since they're interested in different factors. Pre-calculated insurance scores can be purchased from Fair Isaac or rival ChoicePoint, or many large insurers have developed their own models that take raw data and churn out their own figure on a different scale.

Insurance scores do not include information such as race, religion, gender, family or marital status, handicaps, nationality, age, address or income. They don't consider disputed information or medical debts.

Instead, they focus on credit-related activities in the past 12 months, like how many accounts were being collected, the number and types of accounts you have, whether you pay your bills on time, how much of your credit line is used, age of your accounts, and how many accounts were opened recently.

The law requires insurers to tell you if credit scores are being used and if negative information hurt you. If the credit report is wrong, federal law allows you to get the information corrected, and you can ask insurers to recalculate the score.

And several insurers interviewed by The Buffalo News, including MetLife, St. Paul Travelers, Progressive, and State Farm, said they also have internal appeals units to consider special circumstances.

That includes situations where a borrower's credit may have been affected by sudden events such as medical conditions, a death of a spouse or other family member, identity theft, layoffs or divorce.

Insurers have been authorized to use credit data since 1970 under the federal Fair Credit Reporting Act, but most didn't. That began to change after internal company studies and independent research consistently showed a statistical relationship between a person's credit score and insurance losses. The lower the score, the worse the credit history and the more likely someone is to have a claim.

The companies universally admit that they can't explain the link, though they insist it exists.

They say that a lower credit score shows a consumer isn't financially responsible, and speculate that such habits extend to the rest of their lives as well, such as how they maintain a home, or how they drive.

"Someone who is not responsible in their credit often is not responsible with the way they take care of their home. They may drive unsafely," said Loretta Worters, vice president at the Insurance Information Institute in New York.

"It's not the most intuitive connection, the way it is for making a mortgage," admitted Joseph J. Annotti, spokesman for the Property Casualty Insurers Association.

But confused and angry consumers and advocacy groups don't buy it. They question what a person's credit history has to do with how they drive or whether a disaster strikes their home.

New York regulators also say there have also been some studies that question whether any relationship exists -- something insurers never mention.

"They have no thesis, just a correlation. I think that's totally insufficient," Consumer Federation's Hunter said. "It's one thing to say you won't pay off your mortgage because of bad credit. It's another to say you're a bad driver because of it."

More than 50 percent of insurers began using credit data after 1998 and there's been a surge of use in the last three years. Today, more than 90 percent of personal auto insurers use insurance scoring models, according to a 2001 study by industry consultants Conning & Co.

In New York, Chubb Group and New York Central have never used scoring, preferring instead to rely on traditional criteria. And Buffalo-based Merchants Insurance Group said it relies less on scoring than other companies, although it's still "one of many tools that we use to select individuals," said Paul Saccomando, director of personal lines for the insurer.

"Does it work? Yeah, but it's not the sole determinant that we use," he said.

Insurance companies say the use of scoring helps them to be more accurate in their pricing, and to break down their customer base into more tiers than in the past. For example, Progressive Corp., a Mayfield Village, Ohio-based company, now has 47 different tiers.

"The more information we have about how likely someone is to file a claim, the more accurately we can price a policy for that person," said spokeswoman Cristy Cote.

Insurers even say the scores actually help two of every three people to get better rates.

"It just gives one more factor to use to somebody's benefit," said Jennifer Wislocki, spokeswoman for St. Paul Travelers Companies. "If they did have a moving violation, but they had an excellent insurance score, it could work in their favor."

Finally, the companies insist they're not making more money. They're just making it from those most likely to cause them losses in the first place.

"What we're trying to do is not penalize someone for someone else's bad habit," said Bob Cunningham, Nationwide spokesman.

However, the public outcry prompted many states like New York to impose limits on insurers by legislation or regulation, barring them from using credit scoring as the sole or primary determining factor in qualifying someone or setting their premium. A few went further: Maryland banned the use of scores in home insurance, California for auto insurance, and Hawaii doesn't allow it for either one.

New York's law, Senate Bill 5618 that was passed this summer, also requires that companies file their scoring formulas with state regulators. Insurers cannot penalize someone because they have no credit history.

And it bars insurers from using credit scores to cancel or nonrenew a policy, or to raise the premium on renewal, although they can lower premiums.

Consumer Federation dismisses that as ineffective. In the meantime, use of insurance scoring is being studied by the Federal Trade Commission. Consumer activists are hopeful the results will be in their favor.

"It's hardly over. People are outraged and up in arms," said Hunter.


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