Insurance Quotes & Advice

On Wednesday, congressional hearings were held on the insurance industry’s controversial use of credit scores in their risk models for calculating premiums.

At a lengthy congressional hearing in Washington on Wednesday, Florida Insurance Commissioner Kevin McCarty brought the state’s long-running battle with the insurance industry over these issues to the forefront. He argued that credit scores are not “fair and valid” criteria for setting insurance rates.

“Studies do show that credit scores can be predictors of future claim activity,” he noted in his prepared testimony. “But the same studies also show that the use of these scores disparately impacts certain classes of people.”

The auto and property insurance sectors have long used credit scoring as a basis for premiums, as it is allowed in much of the country.  The use of patient’s credit reports has also started to appear in the healthcare industry.

Consumer advocacy groups have been up in arms over the practice and claim that it is discriminatory.  The insurance industry meanwhile has fought strongly against any type regulation that would limit it’s use.

It wouldn’t surprise me if the bills banning the use of credit scores were passed.  The industry has faced a large public backlash ever since the aftermath of Hurricane Katrina over their claims paying practices.

A report released yesterday by A.M. Best, a leading credit rating agency, casts concerns about the claims paying ability of insurers, due the credit crisis embroiling the nation’s financial markets.

Investors are showing a limited appetite for capital-market offerings designed to raise cash for claims payments, Best said.  In addition, insurers’ exposure in hurricane-prone states to properties foreclosed and abandoned as a result of the subprime mortgage crisis has come under review.

More than 500,000 properties in coastal areas from Maine to Texas have been foreclosed on due to the subprime mortgage crisis. Florida alone has more than 100,000 properties currently subject to foreclosure.  The report says insurers may not realize the extent to which their books of business are exposed to foreclosed properties.

Weather forecasters are predicting an above average hurricane season that kicks off in less than two weeks.  If a major hurricane were to strike the U.S. this year, the results could be devastating to the entire industry and to the property insurance sector especially.

The industry has already been hit hard by the subprime collapse, with losses to date exceeding the amount paid out in claims after Hurricane Katrina.  With the current financial crisis far from over, the final total has yet to be tallied.

The current instability in the stock market also has many analysts predicting a weak outlook on the industry’s future investment income which make up the bulk of their profits.  Homeowners may see rates rise in the near future even without a major catastrophe occurring.

The bond insurance sector reported more losses for the first quarter, renewing concerns of ratings downgrades.

Moody’s Investors Service said deepening losses at MBIA Inc. and Ambac Financial Group Inc. may imperil their Aaa credit ratings less than three months after affirming the top grade.

The two largest bond insurers recorded a total $6.7 billion of first-quarter charges for losses on home-equity loans and collateralized debt obligations, “elevating existing concerns about capitalization levels relative to the Aaa benchmark,” Moody’s said yesterday in a report.

This has been an ongoing headache for the financial sector and for the normally stable bond market in general.  It has caused severe disruptions for both bond issuers and investors.

Borrowing costs have skyrocketed for a number of municipal lenders as a byproduct with many states getting fed up with bond insurance all together.  Investors are finding the secondary market growing increasingly illiquid as the prices of bonds are tied into the ratings of the underlying insurer.

The auction rate bond market has completely collapsed with many analysts feeling it will never recover.  Auction rate bonds are a type of bond that provide short term interest rates for issuers of long term debt.  It was also popular for investors as it provided higher yields than regular money markets.

As the market collapsed the investors were stuck with securities they were unable to sell and the interests rates for borrowers shot up to as high as 20 percent, forcing many of them to refinance their debt into fixed securities at substantial costs.