Tighter underwriting

Last reviewed: September 2009

If you haven't shopped for homeowners coverage lately, be prepared: The landscape has changed. Insurers are getting pickier about whom they will take and whom they will keep. And they're using new tools to determine who will get the best price.

An increasingly important pricing factor is your credit-based insurance score, which includes some of the elements that make up your credit score. The industry maintains that there's a correlation between credit history and the likelihood you will make a claim. To get the best price from a new carrier, you will need a stellar record. "What people don't realize is most, if not all, quotes are based on credit," says Laurie Salkin, personal lines client manager for William A. Smith & Son, an insurance agency in Newburgh, N.Y.

An insurer can use credit-based insurance scores to squeeze current customers, too. As of March 2008, Amica Lloyd's of Texas told Frank Sulzbach, 67, of Dallas, that his home-insurance premium would rise by a third, to $2,636, due in part to his credit-based insurance score. Sulzbach, who knew his credit was excellent, found coverage elsewhere for $1,368.

Robert Hunter, director of insurance for the Consumer Federation of America, says the use of credit records for underwriting and pricing "simply makes no sense." The industry, he says, hasn't adequately explained how a job loss or mortgage trouble makes the homeowner a more risky policyholder. "A consumer's insurance price change following a credit shift due to the economy, illness, outsourcing, and other events beyond the homeowner's control can be precipitous and costly," Hunter says. "It is unfair, particularly to the poor and all those living on tight budgets, where even a small illness can cause a deterioration of credit score."

Consumers can also be pinched when insurers leave regions and entire states they find unprofitable. Last year Florida state insurance regulators rejected a request for a 47 percent rate increase. In response, State Farm's Florida subsidiary announced it would no longer sell new policies, effectively signaling the insurer's exit from the market. The company said it was paying out $1.21 for every $1 it collected in premiums.

In New Jersey, the insurer took a different route. Barbara Eckhardt, 81, a State Farm customer for more than 30 years, got a letter last year from the company notifying her that it was canceling the policy on her home in coastal Cape May County. But it offered to keep Eckhardt's auto and other coverage. "They're happy to keep anything that doesn't look like it's going to be costly to them," she says.

"It's a continual process of managing our risk, of deciding what policies we can write and what policies we can't," says State Farm spokesman Dick Luedke.

Our advice

Compare prices at least every five years, even if you're not being elbowed out. "You may have shopped 5 or 10 years ago, but those results may be irrelevant, given the changes in the market," Hunter says. You might lose the "loyal customer" discount that can be 10 percent or so of the premium, but he notes, "It may be 10 percent of a rate that's double."

Our Ratings for claims service, on the facing page, is a good place to start shopping. Make sure you compare costs of identical policies. Check with an independent agent or insurance-shopping Web site for a wide selection of quotes.

Also take into account the insurer's financial viability, particularly in this economy. Recently Consumer Reports Money Adviser, our monthly personal-finance newsletter, determined that the most stringent life insurer financial-strength ratings can be found at TheStreet.com (formerly Weiss Ratings), which also rates property/casualty insurers. Go to www.thestreet.com and click on "Portfolio and Tools”; a drop-down menu will take you to insurance ratings. Type in the full name of your insurer, not just the name of the group that owns it, to find its financial strength rating. Look for insurers with a rating of A (excellent) or B (good).