Title:
Insurance Credit Scoring: An Ethical Issue
Word Count:
981
Summary:
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.
Keywords:
Car Inurance, Car, Inusrance, Finance, Business
Article Body:
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.
credit disputes letters