Insurance Credit Scoring: An Ethical Issue

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.

About The Author

My name is Richard D. Schrader, I advocate consumer education on many topics and help consult American consumers with excessive credit card debt. You can visit my website at www.debtjustice.net

webmaster@debtjustice.net

---

10 Ways to Lower Your Auto Insurance

Nowadays, auto insurance is really expensive. A typical insurance policy... Read More

Filing Homeowners Insurance Claim Forms: What Steps to Take

Filing a homeowners insurance claim can be done with ease... Read More

Tips for First Time Insurance Buyers

The are many scary things in this world. Buying insurance... Read More

Health and Dental Insurance Quotes - Applying Online

Since 2001, large health and dental insurance companies such as... Read More

Term Life Insurance and Permanent Life Insurance

Term insurance and permanent insurance are two basic types of... Read More

Finding Health Insurance for Self-Employed Individuals: A Guide For the Freelance Newbie

With a rise in those looking to venture out on... Read More

Online Health Insurance Quotes - Finding The Cheapest Rates Possible

Shopping for health insurance can be very discouraging when you... Read More

How Can I Compare Life Insurance Quotes?

The online life insurance companies offer a free service where... Read More

7 Sure-fire Ways of Reducing Your Home Insurance Premium

Home security improvement:All insurance companies will happily offer you a... Read More

Avoiding The Potholes Of Car Insurance

Car Insurance is an issue that we all of face... Read More

Eleven Money-Saving Auto Insurance Tips for Senior Drivers

Following a few simple tips and taking these measures will... Read More

Finding California High Risk Truck Insurance

California high risk truck insuranceIf your are in need of... Read More

All Auto Insurance is Not Created Equal!

Contrary to what you may have heard all auto insurance... Read More

Car Insurance Rates ? Can You Lower Them?

Car insurance rates are prohibitive nowadays. Many families really struggle... Read More

The Life Insurance Policy and What You Need to Know Before You Buy

Are you looking to buy a life insurance policy? Well,... Read More

An Introduction to UK Home Insurance

Unlike motor cover, home insurance is not a legal requirement... Read More

What Type of Doctor Should I See Under My HSA?

You can withdraw money from your Health Savings Account (HSA)... Read More

Keys To Controlling The Future of Health Care

Several key changes are necessary to get control of the... Read More

Tips for Buying a New Home

My wife and I recently purchased a new home in... Read More

Affordable Life Insurance!

So, you've decided to purchase life insurance. Well then, you... Read More

How Do I Calculate How Much Life Insurance I Need?

Life insurance protects you and your family from economic hardship... Read More

What Is Health Insurance?

What is health insurance and why do I need it?... Read More

Term Or Whole Life Insurance - Which Is Right For You?

One of the most important things you will ever do... Read More

Private Health Insurance: A Sense of Dissatisfaction

The three C's, customization, consumerization and customer-satisfaction, seem to be... Read More

How Much Car Insurance Should You Buy?

Car insurance is one of the most dreaded chunks in... Read More

Credit Card Insurance

A word of warning about Credit card repayment protection schemesThe... Read More

How Does Credit History Affect Car Insurance Rates?

Many personal car insurance companies consider your credit information when... Read More

Term Life And Whole Life Insurance

Which type of policy is best for you, term or... Read More

How Many Homeowner Insurance Quotes Do I Need To Save Money?

Homeowner insurance quotes can vary in the amount they cost... Read More

General Knowledge - Critical Illness Insurance

Critical illness can happen to anyone, and often does. If... Read More

Life Insurance Without Life Value: Why Young People Are Snubbing Financial Advice

This article is written by a 27 year old female... Read More

How To Take The Guesswork Out Of Buying Term Life Insurance

Protecting your family is the single most important thing any... Read More

Health Savings Account (HSA): Do I Lose It At the End of Each Year?

The Health Savings Account (HSA) is an amazing tool to... Read More