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Homeowners Insurance

Premium Games

Paying More and Getting Less

Insurance companies are finding new ways to get more money from homeowners than ever before. Increasingly, insurers use policy­holders’ credit scores to hike premiums, push those who live in high-risk regions toward higher deductibles and try to get policyholders to add coverage for identity theft.

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If you own a home, chances are good that you had something bad happen to you in the past few years. For many, it’s the bubble-bursting bummer that the value of your home dropped. For some, it’s that you’ve been forced to sell a home that you no longer can afford. And for others, it’s that a hurricane, flood or wildfire wiped out your dwelling. In response to losses from natural disasters and the housing crisis, homeowners insurance companies are forcing their customers to shoulder more of the cost—often even before there’s a need to file a claim.

Since 2005, the average premium for a homeowners insurance policy increased 15 percent, according to National Association of Insurance Commissioners and Insurance Information Institute (III), which is an insurance-industry-funded educational group. And in the coastal regions of hurricane-prone states, such as Florida and Texas, insurance rates increased from 2005 to 2007—the most recent data that is available—by up to 42 percent.

But even those whose homes have been relatively unaffected by all of the storms, both natural and manmade, might feel the pinch when it comes to homeowners insurance these days. Insurance companies also are trying to pump up revenues by selling add-ons to policies, which not only increase the price of the policy but also add dubious value. And it’s disturbing to see insurers increasingly use customers’ credit scores to recalculate premiums, which means that homeowners whose scores were damaged by the recession could end up paying higher premiums even if the replacement value of their home hasn’t changed. The result: Homeowners now pay more for insurance and get less in return.

TAKING CREDIT. Using credit scores to help to set insurance rates isn’t new, but the approach takes on more ominous tones in the wake of the economic recession, which left more than 43 million consumers with black marks on their credit records because of delinquent payments, foreclosures or bankruptcy. According to a report by credit-score analyst FICO, 1 of every 4 consumers has a FICO score of 599 or lower. If you have a FICO score below 600, you probably will have to pay a higher interest rate for a mortgage, car loan or credit card—if you can get one at all—and you’ll probably pay a lot more for homeowners insurance.

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But just how much more that you’ll pay is a bit of a mystery. Insurance companies will say only that a low credit score is just one of many factors that can determine the cost of your rates. That response is maddening to insurance company critics. For instance, the website of Washington state Insurance Commissioner Mike Kreidler declares: “Despite disclosure requirements, credit scoring remains a secretive process. It’s nearly impossible for consumers to determine how their credit history impacts how much they’ll pay for coverage.”

The insurance industry says that, statistically, consumers who have low credit scores are more likely to file claims and therefore are a greater insurance risk. To support that view, the insurance industry points to a 2007 Federal Trade Commission study that concluded that drivers who have low credit scores were more likely to file accident claims.

Consumer advocates argue that the FTC study used data that were hand-picked by the insurance industry. They also argue that the FTC study fails to support the notion that people who have low credit scores have more car accidents or file more property claims. (Not to mention the fact that comparing drivers as a group to homeowners is a bit preposterous.) In fact, the recession provides evidence that there’s no correlation between credit scores and insurance claims, says Robert Hunter, who is director of insurance for Consumer Federation of America (CFA). For example, although the recession has led to a drop in credit scores, it also has caused car owners to drive less, which leads to a drop in accident-related claims. “The whole thing makes no sense,” Hunter says.

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