Farmers Insurance News Alert, your first source for legal news related to the Farmers Insurance group

What your auto insurer knows about you

By Joe Frey

When you apply for an insurance policy or submit a claim, you're probably unaware of the streams of information about you that flow among your insurance company, private businesses, and your previous insurer. Mark Twain once wrote that insurance companies are a "power behind the throne that [is] more powerful than the throne itself," but that was 120 years ago. Today, the true power lies in the hands of the information-gathering companies that make their money by selling information about you.

ChoicePoint, ISO, and Fair Isaac

ChoicePoint, with the help of a Fair Isaac credit scoring formula, and the Insurance Services Office (ISO) offer insurers nationwide extensive resources that contain your name, address, phone number, credit report, claims history, and motor vehicle report — and that just scratches the surface.

The ISO, based in New York, also has information related to any of your claims that might have ended up in court. ChoicePoint, based in Atlanta, also compiles aliases, criminal records, and histories of vehicles. "If you've got a car that's been in 35 accidents, that's something the insurance company is going to want to know," says Mark Wheeler, spokesperson for ChoicePoint.

What's a credit score?

Fair, Isaac, based in California, says a credit score is a snapshot of a person's level of risk. The company uses a "scientific method" of assessing credit risk and calculates a person's score by using statistical models and mathematical tables that assign points to "factors indicative of repayment," like bankruptcy, liens, and timely bill payments. Fair, Isaac will not reveal the methods it uses but the company maintains that its scoring system represents an objective portrait.

The number Fair, Isaac assigns as your credit score is meaningful only to the company that requested your credit information. For example, if you score 750, you might qualify for a gold Visa card. A score of 675 may mean a standard credit card is better for you. If you score 875, it may mean you're a high risk in one system and a low risk in another. "It's hard to say what's a good score," even Fair, Isaac says.

The company does offer tips on how to improve your credit score:

· Pay bills on time
· Keep credit card balances low
· Apply for and open new credit accounts sparingly
· Use credit only when needed; lots of activity can negatively affect your score.

The credit scoring system can speed the home-loan process, allowing you to take advantage of low interest rates. Fair, Isaac also claims that credit reporting is a "colorblind" process, eliminating possible discrimination because of race, religion, or gender.

However, the usefulness and fairness of credit scoring when applied to auto insurance is another matter entirely. Fair, Isaac stresses that credit scoring is good for people applying for home loans, but the company doesn't mention auto insurance. Many auto insurers have begun using credit scores to assess an applicant's risk level, but insurance sources and legislators have doubts about the effectiveness and ethics of using credit scores when evaluating auto insurance applications. One source told insure.com, "I hate our company's use of [credit scoring] because it has nothing to do with auto insurance."

CLUEing insurance companies in

A spokesman for the ISO says the databases that his company maintains, called the All Claims databases, are strictly for detecting fraud and expediting the claims process. If the ISO sees a series of claims that looks suspicious — for example, the same name appears on all the claims with a different social security number — the company will notify the insurance company and the insurer will investigate.

However, the ISO currently has no way to measure how well its databases detect fraud. The company is in the initial stages of developing a system, but an ISO spokesperson tells Insurance News Network that the company has no idea when the system will be in place. The ISO farms out information to almost all insurance companies, which pay between $3 and $4 for each requested ISO report.

ChoicePoint, which is an offshoot of the Equifax credit-reporting company, maintains a database called CLUE (Comprehensive Loss Underwriting Exchange). The company uses the information it gathers and maintains for credit scoring, claims history reporting, and driving-record reporting. When a consumer fills out a new auto insurance application, the potential insurer queries ChoicePoint for a credit score and claims history.

ChoicePoint caters to 98 percent of the market share for property casualty insurers and took in $406.5 million in 1998. Ten insurance companies represent 40.1 percent of the property casualty market share.

It should be noted that not all insurance companies use credit information when evaluating a policy application. Frank Burns, an underwriter for State Farm, says the company "wants to make sure something is right before they use it," explaining why State Farm does not use credit scoring for auto insurance applications. "We're in the midst of finding out whether there's a definite correlation between credit history and driving record," Burns says.

Scoring your finances

Sources tell insure.com that the credit scores — which are basically your full credit report boiled down to one number — are flawed and insurance companies know it, but they continue to use them. Credit scores are generally based on credit activity, and if you have some unusual activity within the month before you buy auto insurance, your credit score will be downgraded. In many cases, that means your credit score would go from average to poor; insurers will not write coverage for consumers who have poor ratings.

If your score is good and downgraded to average after a slew of credit transactions, you may be able to buy auto insurance but you probably won't get the best rate. Consumers who are financially responsible may not be getting the best rate or service from their insurance companies because of the insurers' use of credit scoring.

What's more, in just the past two years, insurance companies have looked to obtain credit scores as part of their underwriting evaluation. Several United States Representatives will propose legislation in Spring 1999 that will limit or even eliminate insurance companies' ability to use credit information when reviewing auto applications.

If lots of credit activity and your search for insurance coincide, you're probably not going to get the best deal on insurance, if you're able to get insurance at all. However, if you decrease your credit activity and wait a month to purchase your insurance, chances are a company will write your policy. Unfortunately, credit scores don't accurately reflect your overall financial soundness or your driving behavior, two risk-assessment aspects insurance companies generally look at before writing a policy.

The Travelers Group will not write coverage if an applicant's credit report has what's called the "big five": Foreclosure, repossession, lien, claims judgment against you, and bankruptcy. Travelers actuaries have determined that applicants with any of the "big five" on their credit report file 30 percent more claims than people who don't have credit problems.

Checking your records

Most of the information insurance companies collect and use for rating purposes is available from government agencies or credit reporting companies. For example, you can get a copy of your motor vehicle report from the department of motor vehicles, and you can get your credit history from Equifax, TransUnion, or Experian. You can also get a copy of the ChoicePoint CLUE report at any time; you can acquire a copy of the ISO All Claims report if you dispute the information it contains.

ChoicePoint says that anyone can obtain their ChoicePoint profile at any time by calling ChoicePoint's Consumer Disclosure Center at (770) 752-6000. The report will cost between $8 and $10, depending on how the consumer wants the information, says Wheeler of ChoicePoint.

Getting an ISO report works much the same way. An ISO spokesperson says consumers who dispute the information in the ISO All Claims database should call (212) 898-6000 and ask for the American Insurance Services Group. Then ask for a copy of your All Claims report, known as "A-PLUS." The copy of your report is free.

Last updated Feb. 1, 1999