Posted On: August 25, 2008, 5:09 pm CDT

Posted By: Underwriter

Credit scoring is merely another tool to help companies splice and dice consumer risks. The point was made earlier in the thread about how someone who has no accidents and no tickets is suddenly a worse risk because he has poor credit. Statements like this miss the point entirely.

Credit is one rating factor - like the car you drive, your gender, marital status, driving record, and where you garage your car. Is someone with a clean driving record, a Honda Accord, and a nice suburban neighborhood (but with poor credit) a bad risk? No. But he is a worse risk than someone with a clean driving record, a Honda Accord, a nice suburban neihborhood, and great credit.

In the old days of insurance (a whopping 10 years ago), there was one price for insurance. The price was set in the middle of the driver pool - basically the "average" rate to establish profitability. The result is that good drivers paid more, subsidizing the not-so-good drivers. Poor drivers got to pay relatively less because the "average" price was less than their fair share of the losses.

In recent years, insurance companies have developed very sophistocated models that evaluate dozens of factors, alone and in combination with another factors. The result is that there are, literally, hundreds (and sometimes thousands) of pricing points. The average customer pays less per policy on average now than they did five years ago - all of the data show that average and above-average drivers benefit from having a variety of rating factors. By limiting a company's ability to splice risks, the direct result is that good drivers have to subsidize the not-so-good drivers again.

I am also disturbed with the statements about discriminating against the poor with credit rating. That implies that people with low incomes are inherently incapable of managing their money. Poor credit is color blind, and it's blind to socio-economic factors. If anything, people who roll the dice and try to start small businesses are more likely to be hit hard with credit issues.

I also understand people are concerned about identity theft showing up on a credit report - customers can always ask the insurance company not to use credit to score a policy. A simple phone call - potentially a copy of the fraud report from a credit bureau - and the situation can be resolved.

The end result for Michigan will be higher prices in a state that is already being squeezed economically.