For the first time, Heritage Property & Casualty, Florida’s fourth-largest homeowner insurer, is using credit histories to help set pricing for new and renewing customers.
That announcement started going out in letters to customers within the last month, Heritage President Richard Widdicombe said.
The letters state that upon policy renewal, the company will be ordering a “Financial Insurance Score” from the data-gathering firm LexisNexis that “may include a consumer report and your Heritage claims history.” Customers have the option to opt out by notifying Heritage no less than 65 days before their renewal date, the letter states, adding, “by allowing this service, you may be eligible for a lower rate.”
The new policy comes to light a month after a nationwide study found that credit histories had zero effect on homeowner insurance policy pricing in Florida. Experts said that probably was connected to the fact that Florida insurance costs are already so high, factoring in credit scores wouldn’t be worth the effort.
In the analysis of 47 states where use of credit histories in insurance pricing is legal, Florida was the only state in which no connection was found between policyholders’ consumer credit histories and what they were charged for property insurance, according to the study released in August by InsuranceQuotes.com, a Bankrate company. The practice is outlawed in Massachusetts, Maryland and California.
The study analyzed policies of six companies that together insure 60 percent to 70 percent of their states’ market. Some companies with smaller market shares in Florida may have been using credit scores to determine risk but weren’t included in the study, an InsuranceQuotes.com analyst said.
Florida tightened rules on what’s known as “risk-based pricing” in 2003, and state Insurance Commissioner Kevin McCarty denounced the practice before a congressional committee in 2008.
Although auto insurers routinely check credit reports, property and casualty insurers in Florida typically don’t bother with the practice. One reason, insurers say, is they know McCarty and the Office of Insurance Regulation don’t like it. Plus, the potential effect of credit scores on insurance premiums is minor compared with hurricane risk, rebuilding costs and proximity to the coast, said Lynne McChristian, Florida spokeswoman for the Insurance Information Institute, an industry trade group.
In states that use credit scores, effects on prices can be dramatic, the InsuranceQuotes.com study found. A Montana homeowner whose credit dropped from “excellent” to “fair” would see premiums rise from $871 to $1,443, and a drop from “excellent” to “poor” would result in rate increases of at least 100 percent in 39 states, including a $975 to $2,445 hike in Georgia. In an interview, Widdicombe said the company’s intention is to give existing customers with good credit a rate discount of up to 20 percent so Heritage can offer rates more competitive with other insurance companies in Florida that charge less.
“This isn’t something designed to increase rates,” he said. But he acknowledged that rates could be increased for existing customers if the company discovers what it considers a bad credit score along with a history of filing excessive claims.
But for potential new customers, their credit scores will affect the rate they are offered, Widdicombe said. Applicants with a history of bad credit and excessive claims won’t be offered policies at all, he said.
Widdicombe said Heritage’s new policy is his first experience using credit checks in property insurance pricing in his 35-year history in the industry.
Formed in 2012, Heritage is one of several Florida-grown insurance companies that owe their existence to the state’s decision that year to downsize the state-run Citizens Property Insurance Corp., which had swelled to 1.5 million policies.
As of June 30, 73 percent of the company’s 221,700 policies resulted from the state’s policy of encouraging newly formed insurers to select Citizens policies for “take-out.” Under the law governing takeouts, companies select the most attractive Citizens policies and upon approval by the Office of Insurance Regulation send letters to the Citizens policyholders informing them their policies will be transferred unless they complete and return opt-out forms stating they want to remain with Citizens.
About 60,000 Heritage customers will receive the credit check notice. Policyholders that Heritage took over from Citizens won’t be subject to credit reviews because of restrictions that limit Heritage’s ability to modify their rates for three years, Widdicombe said.
Citizens, now with about 600,000 policies, has never conducted credit checks on its policyholders, spokesman Michael Peltier said. “The proper use of credit scores involves a thorough analysis of the various credit factors and their correlation to actual loss experience. That type of analysis is an expensive undertaking that we have chosen not to include in our underwriting process,” Peltier said.
State law allows companies to use credit scores to price policies if they receive prior approval from the state, which Heritage has, Amy Bogner, spokeswoman for the state Office of Insurance Regulation, said in an email. Some homeowner insurers use credit histories “but most do not,” she said, adding that credit-based insurance scores can be applied only to the non-hurricane portion of the homeowners premium. The hurricane or windstorm portion represents roughly a third to half of a policy’s cost in Florida.
When a credit score results in an “adverse decision,” the insurer must notify customers of the reasons for that decision in a manner understandable to the customer, Bogner said.
Universal Property & Casualty Insurance Company, the state’s second-largest insurer by number of policies, declined to answer questions about whether it uses credit reports in pricing policies.
Security First Insurance Company, the state’s third-largest company as of March 31, doesn’t look at credit reports because with the cost of hurricane coverage, “it has less overall impact as a differentiator,” Werner Kruck, the company’s chief operating officer, said in an interview.
Also, the amount of time it takes to analyze a credit report would delay the company’s ability to quote a competitive rate when an agent is comparing prices for a customer, he said.
But if enough competitors adopt the practice, Security First might have to follow “for defensive purposes,” Kruck said.
Critics object to use of credit scores to price insurance because it tends to disproportionately affect low-income policyholders. But supporters contend that low credit scores are a reliable predictor that a customer will file more claims, and claims that cost more, Kruck said.
While there’s no evidence people file more claims because they have low credit scores, people with low scores are charged higher rates “because people with the same credit scores have higher loss experiences,” he said.
Opinions vary widely within the industry over use of credit scores, says Jay Neal, president of the Fort Lauderdale-based Florida Association for Insurance Reform. Neal says many in the industry, including him, oppose the practice because a low credit score doesn’t reflect possible reasons, like job losses or medical problems.
However, he called Heritage “an exceptionally good operator” and said he believes that they want to use credit scores to offer discounts. “If every company was doing it, it would be a lot more of a problem,” Neal said. “But there are plenty of companies, big companies, that don’t believe in it. So if you have bad credit, you’re going to find a place in the private market.”
Heritage had 64,357 policies in the tri-county area as of Dec. 31, according to a filing with the Securities and Exchange Commission.