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

Why Would I Need Auto Insurance Specialists?

If you do not understand the way that auto insurance... Read More

Cheap Term Life Insurance is Available Everywhere

Cheap term life insurance is easier to get than most... Read More

Is Purchasing Travel Insurance Smart?

To answer the question "is purchasing travel insurance smart?" let's... 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

Do Insurance Premiums Increase Every Year?

Many people ask, "If I am supposed to get a... Read More

10 Ways to Lower Your Auto Insurance

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

State Farm Auto Insurance ? Heres A Few Factors That Determine Your Rate

There are many factors that affect the insurance rate you... Read More

What Are The Auto Liability Insurance State Minimums For My State?

As you shop online for the best auto insurance deals... Read More

Medical Insurance - Health Insurance Coverage & Plans Explained

If you're trying to decide between health insurance plans, you'll... Read More

Guide to Home Insurance

Here is a useful guide to Home Insurance. Home insurance... Read More

Online Insurance Quotes California Auto

Finding insurance quotes for California auto is now pretty easy.... Read More

What is Travel Insurance?

Travel Insurance is designed to protect your health, belongings, and... Read More

Health Savings Account (HSA): How Do I Invest It?

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

The Awful Truth about Annuity and Insurance Leads

You see the websites, you see the ads: exclusive, never... Read More

An Introduction to UK Home Insurance

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

Insurance For The Self Employed And Those Seeking Health Insurance

First of all, congratulations on deciding to go out and... Read More

Discover the Fortune Hiding in Your Insurance Premiums!

Ever thought about how to save money? Sure you have,... Read More

Terrorism: Acts of Terrorism: When Will Insurance Respond?

Insurance policies provide financial protection in a broad range of... Read More

Types of Long Term Care Insurance

Regardless of what some people might think, medical insurance will... Read More

Discount Auto Insurance - Keep Your Hard-Earned Money

Finding discount auto insurance is so easy when you do... Read More

Check Out The Variety of Auto Insurance Texas Style

They say everything is bigger and better in Texas, and... Read More

Health Insurance, What Does It Mean?

Your health insurance policy is an agreement between you and... Read More

Life Insurance, the Universe, and Everything

You may have noticed that life insurance is coming back... Read More

Why Boat Insurance Is A Necessity

Boat insurance is necessary for all boat owners who live... Read More

What Is Term Life Insurance?

There are two different types of life insurance, term life... Read More