Wherever you look these days, it's all bad news. More unemployment, more foreclosures, more problems to overcome. This week has seen President Obama sign the new Stimulus Package into law, but that is somehow a bit distant. New laws always sound great, but it takes so long before we all get to see any results. That means state laws are more interesting. If they get passed, their effect can be more direct and immediate. So what is happening in Connecticut? Well, there's a bill going through the process aimed at reducing car insurance premiums for city residents — something that should be popular with everyone except the insurance companies and their shareholders. The plan is simple. All insurance companies licensed to sell policies have been allowed to use credit histories as part of their risk management scoring system to decide whether to write car and home insurance policies. They have never been allowed to reject business just because the applicant has a low credit score, but it has always been a significant factor. The Governor and Attorney General both believe the time has come to remove credit histories as a factor in the decision. The economy is weakening into what looks like a major recession. As more people are laid off, credit scores will fall. This means rising premiums at a time when people can least afford them.
Consumer groups argue that using credit history is unfair because many of the "defaults" that appear on these histories are the result of predatory terms operated by credit card and other lenders. Even the most minor and technical of infringements can result in retrospective penalties designed to boost the lender's profits. Such blemishes are not truly representative of a person's overall responsibility in managing debt. Indeed, the use of histories by a wide range of individuals and organizations increases consumer distress as they are increasingly denied access to credit and other services. The insurance industry counters with the report from the Federal Trade Commission 2007 which accepted credit scores for insurance risk management as an effective tool. Many consumers pay less because they have good scores. Which is better - that the risk is divided equally among all policy holders or that those who represent the greatest risk pay more? Politically, can states insist that all the most creditworthy people pay more?
The bill also proposes to remove the current territorial rating system that imposes higher premiums on city rather than rural drivers. The plan would call for equal treatment so that no matter where the car is garaged and driven, the same basic premium will be paid.
Auto insurance is a for-profit business so there will always be arguments that the market will decide what represents a fair premium. With a recession looming, everyone wants
cheap auto insurance. If this bill passes in Connecticut, perhaps other states will follow suit and make the US a more affordable place for drivers.
