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Consumers Unaware of Effect of Credit Score on Premium Rates

By Sally Maison
Published: Monday, December 14th, 2009

Most insurers use a consumer’s credit score to determine the premium rates and availability of insurance. But most Iowa residents are not aware of that, according to a survey by St. Ambrose University in Davenport.

Consumers Unaware of Effect of Credit Score on Premium RatesThe report reveals that Iowa policyholders are barely aware about the fundamentals of insurance. Moreover, they do not know what it means to spread the risk.

The study came along with the completion of an advocate’s study on how a consumer’s rating affects premium rates. Angel Robinson will make a recommendation on whether the permission of Iowa law to use credit-based insurance is at the best interest for consumers. As of present, Iowa does not prohibit insurers from solely using a credit score to determine eligibility and costs.

However, a majority of Iowans believe that using their credit score to determine premium rates is not fair. A survey of 1,240 policyholders from the state reveals that more than 70 percent of them believe that the practice should be banned. They believe that a credit score should not be used to price their auto or home insurance.

While many oppose credit-based insurance, only eight percent of participants know that their credit scores are one of the top three determinants of premium rates. Even fewer, five percent, think that their credit score should be used in insurance pricing.
A recent survey of insurers shows that more than 90 percent of Iowa car insurers, 92 of the 100 polled, are using credit-based insurance. Additionally, a growing number of home insurers are using the credit score of homeowners in calculating premium costs.

Randy Richards, who chairs the managerial studies at St. Ambrose, says they do not know about the practice until they conducted their survey. He adds that people have not yet realized that the financial decisions they make are also affecting their eligibility and rates for insurance. He believes that this causes some of the respondents to disagree with the practice.

Robinson, who was appointed as an advocated for insurers late last year, hopes that she can incorporate her study with the survey of St. Ambrose so they can make a fair recommendation to Iowa Insurance Commissioner Susan Voss.

Robinson says she is not surprised about the survey results because she ran into several complaints filed to the division regarding the use of credit score for auto and home insurance.

The survey further reveals that 14 percent of Iowan respondents think that credit ratings are good indicator of the likelihood to file a claim. Richards supports the idea, to the opposition of several consumer advocacy groups.

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