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Insurance Credi Scoring: An Ethical Issue
By: Richard D. Schrader
The issue at hand is the use of a consumer’s
credit score as an underwriting tool for auto
insurance rates. What is a credit score or FICO score? A FICO
score is a credit score developed by Fair Isaac & Co. Credit
scoring is a method of determining the likelihood that credit users
will pay their bills. Fair, Isaac began its work with credit scoring
in the late 1950s and, since then, scoring has become widely accepted
by lenders as a reliable means of credit evaluation. A credit score
attempts to condense a borrower’s credit history into a single
number. Fair, Isaac & Co. and the credit bureaus do not reveal
how these scores are computed. The Federal Trade Commission has
ruled this to be acceptable.
Isn’t it interesting that the score
most important in our financial lives, our consumer credit score
does not even contain full disclosure? As stated above the Federal
Trade Commission has ruled that it is ok for Fair Isaac & Co
not to disclose the algorithms used in this process, but what about
consumer rights. While it is important to understand what a FICO
score is, it is not the main issue of this paper, insurance rates
are. So where is the connection? All the public knows is that Fair
Isaac tells us there is a high correlation between people with bad
credit and high risk drivers. This notion is insane and from what
I can see from this black box approach, there is no real causation
between the two. This type of reasoning is similar to convicting
a person of something before they have even committed a crime. For
instance, let’s say I do a study and that study shows there
is a high correlation between criminals and people with bad credit.
Is this to say that just because you have bad credit you are more
likely to commit a crime and therefore you should be profiled or
perhaps locked up because you are a risk to society?
This system is discriminating against minorities,
disabled and in my case college students among others. Fair Isaac
& Co claims that they cannot show the sophisticated algorithms
they use to calculate these correlations and scores because they
fear that they would be giving up valuable proprietary information
that was very costly to develop and maintain. What about the cost
to consumer’s who may be paying higher rates or in worse cases
even denied insurance based on these practices.
The Equal Credit Opportunity Act forbids
creditors from considering race, sex, marital status, national origin,
and religion, but if we don’t even know how these companies
are calculating these scores, how in the world could we possibly
know whether or not they are discriminating. This smoke and mirror
approach is what many government agencies do to subtly discriminate
and extort money from the American.
What about extortion? As I reflect on this
topic extortion comes to mind. Webster defines extortion as to “obtain
by force or compulsion.” By using such unfounded tactics consumers
are forced into paying the higher rates. First of all, 90% of all
insurance companies use this procedure; secondly in the interest
of society legislation requires all Americans with cars to have
car insurance. Living in a country
where it is virtually impossible to live without a car doesn’t
this present some force to pay the rates? Also, lets say you cannot
afford to buy a car with cash, in which case you could obtain liability
insurance alone and save quite a lot of money; but instead you take
out a loan, the bank will require you to obtain full coverage auto
insurance to cover them until you pay off the loan. While this case
may not represent an extreme case of extortion it does give reason
to ponder the connection.
Insurance companies tout themselves as representing
peace of mind, protection and security, but at what cost. Over the
past 10 years, I have spent roughly 20,000 dollars in car insurance,
what have I claimed? Easily less than half and I totaled a car.
Is insurance just a form of legalized gambling protected by government?
The McCarran-Ferguson Act of 1944 exempts the insurance industry
from antitrust laws, so here we are again without a choice; collusion
is the rule not competition. Where are the ethics of lawmakers?
Many states are screaming about this controversial issue and some
states such as California have had some success, but with protection
from top government what can consumers do?
I have personally written the Governor of
Pennsylvania about the subject, one of my main questions was;
“I am a concerned citizen. Recently
I noticed my car insurance rates increasing at a substantial rate.
I investigated the situation only to find out that my credit rating
was making the difference, not my driving record.”
The response I received from the Department
of Insurance follows:
This letter is in reponse to your complaint
filed with the Pennsylvania Insurance Dpartment through Governor
Edward G. Rendell's correspondence office regarding the use of credit
as an underwriting tool for automobile
insurance in Pennsylvania.
I have read through your concerns and it
appears that you are questioning the underwriting of automobile
insurance. Specifically, the use of credit in determining eligibility.
Many different factors go into the underwriting of an insurance
policy, such as type of vehicle, drivers, location, etc. and most
recently credit history. Pennsylvania law does not prohibit an insurance
company fromusing credit as an underwriting tool so long as it is
done within the first 60 days of writing a policy. Under the law,
an insurance company is granted a 60 day window from the inception
of a policy to determine whether or not the policy fits into the
company's guidelines.
In your letter, you stated credit scoring
in part of the rating structure and presumable must be approved
by the Insurance Department. Actually, credit scoring is part of
a company's underwriting guidelines and the Dapartment only regulates
underwriting guideline to the extent they are not discriminatory.
Also, Federal law under the Fair Credit Reporting
Act allows credit information to be used for underwriting financial
and insurance transactions.
Sincerely yours,
Debra L. Roadcap
Consumer Service Investigator
The response I received is hardly what I
would call an answer, of course Federal Law preempts state law and
the Fair Credit Reporting Act allows for use of such information,
but the real question is why? An answer to this question has still
not been received. I believe this is a highly unethical practice
in which insurance companies are being given free rule to take advantage
of low-income families, single mothers, disabled, minorities and
others. If the government wants to do the right thing they should
judge consumers on what they have done individually, not what scientist’s
hypothesis they might do based on the history of others.
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