If your auto insurance premium has changed lately, even though you haven't been in an accident, you can probably blame it on the ratings. Insurers consider a number of factors in deciding how much to charge you.
Depending on the state where you live, those factors may include:
• The make, model and year of your vehicle.
• Your age.
• Your education.
• Your credit score.
• Your occupation.
• Where you live.
• Whether you store your car in a garage.
What do you drive?
One factor every insurer uses is that top one – what car you drive.
Every year, the Insurance Institute for Highway Safety conducts tests on new vehicles to assess how much damage is caused by crashes at various speeds. The cost of repairs then is estimated, and insurers use this information to decide how much they should charge buyers of these cars. Fancier cars from higher-end automakers are more expensive to repair, so insuring them costs more.
In subsequent years, as the insurer gathers actual repair information from its customers, it may revisit that rating factor, says Robert Hunter, director of insurance for the Consumer Federation of America, a nonprofit consumer advocacy group. If the real figures are substantially different from the Insurance Institute for Highway Safety estimates, the insurer may reset rates for drivers of that vehicle.
Younger isn't better
Similarly, as you age, you may move in or out of a higher-risk group. For instance, drivers in their teens or early 20s statistically have the most accidents, so once you hit 26 or so, your rate may fall, Hunter says.
Several decades ago, insurers used fewer factors and simply rejected many applicants for auto insurance, says David Snyder, vice president and associate general counsel for the American Insurance Association, a property and casualty industry trade group. Starting in the mid-1990s, insurers began adding more factors so that more consumers could be offered policies.
"It's helped availability," Snyder says. "Now, insurance companies are able to write a policy for pretty much anyone who comes to them. In the past, they didn't know what to charge, but now they have the data to accurately assess the risk."
Credit scores enter the mix
One of the key factors insurers have added is a controversial one – consumers' credit scores. Currently, most states allow insurers to use your credit rating in determining your insurance rates. California, Massachusetts, Maryland and Hawaii are the holdouts. In 2010, Michigan's high court reversed that state's position and said insurers could use credit scores.
Auto insurers maintain that the lower a driver's credit score, the more likely he is to file an insurance claim.
In states that permit use of credit scores, the rules vary. In Florida, for instance, insurers may use credit scores, but not as the only rating factor. In Kentucky, insurers may not cancel a policy because of your credit history or lack of credit.
Thumbs-down on credit scoring
Attorney Steven Gursten of Michigan Auto Law slams the use of credit scores in setting auto insurance rates as "the new redlining," referring to the practice of charging super-high rates in low-income neighborhoods in hopes of discouraging customers from signing up. Redlining originated in the mortgage industry.
Because redlining is illegal, insurers have turned to credit scores as one of the criteria they can use to try to detect which drivers are more likely to have accidents. The problem, Gursten says, is that there's no data proving any correlation between credit scores and auto insurance claim rates.
Factoring in credit scores actually may ding some wealthy drivers who pay cash rather than using credit cards. But most of the drivers penalized for having a poor credit score are lower-income people – the very drivers who can least afford to pay higher auto insurance premiums.
In addition, there are many reasons a driver's credit score could be low. There could be errors in their credit history that haven't been corrected, for instance, or disputed credit card charges the consumer is refusing to pay.
"About half the people I know have some kind of credit-rating horror story, about some doctor's bill that went into collection," Gursten says. "Using credit ratings is imprecise, and affects a lot of innocent people in a negative way. It's just the poor getting hammered again – it is discriminatory by nature."
Addressing a rating-based rate hike
If you've gotten an unexpected auto insurance premium hike thanks to your rating factors, your best option is to shop around and compare rates, Gursten says. Each insurer calculates its rates based on its actual experience with the company's customer pool, so you may be able to find another insurer that would offer you a lower rate.
Suing an insurer over a rating-based rate hike is extremely difficult, Gursten says. Because you voluntarily signed a contract with the insurer and are free to switch to another insurer, it's hard to make a case that your premiums are unfair without having access to the insurer's rate-setting data, the Consumer Federation's Hunter says.
The National Association of Insurance Commissioners, whose members are state insurance regulators, recommends talking with your insurance agent as your circumstances and needs change. If you're buying a vehicle, research the cost of insuring it before you make a decision. If you now fall into a different age group or you've changed jobs or moved, you can ask your insurer to review your auto insurance rate.