The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance - Part I
National News • September 24, 2008
Following is the testimony presented by Lawrence S. Powell, PhD before the United States House of Representatives Financial Services Committee Oversight & Investigations Subcommittee on May 21, ...
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Subject: Re: The Impact of Credit-Based Insurance Scoring on the Avai
Posted On: September 24, 2008, 4:55 pm CDT
Posted By: Rolf Neuschaefer
Comment:
Mr. Powell's thesis that the use of "Insurance Scores' in rating of insurance - principally personal automobile insurance- is a valid rating criteria is substantively flawed. Insurance Scores are effectively Credit Scores given his description of the variables commonly used to estimate insurance scores such as performance on credit obligations, credit-seeking behavior, use of credit, length of credit history, and types of credit used.
For Dr. Powell to claim that these variables don't include income, wealth, race, ethnicity, or any prohibited factor is ludicrous. Who is most likely to be laid off work or have their hours reduced? Who is most likely to obtain credit from a small loan company? Who is most likely to exhibit questionalble credit seeking behavior such as applying randomly for credit cards to obtain a free gift or to perhaps 'roll-over' credit to new card with a teaser rate? Who is most likely to use a larger percentage of their modest credit line? Who is most likely to have 'performance' issues on their credit due to layoffs, unexpected medical bills?
The answer of course are the indigent, minorities, immigrants, people lacking education, single or divorced women, single parents and/or low wage earners. The 'Insurance Score' is effectively a surrogate or shadow for those factors that if used explicitly would be unlawful but are nontheless discriminatory.
The inner-city poor person may be more prone to submit a small claim than the upscale suburbanite because even a small loss has real financial consequence. Also, if that person is uneducated on the insurance process, they are unaware that submitting a small claim may actually cost them more in the long run in terms of higher premiums..
Do people with lower Insurance Scores have more accidents? Probably not but more accidents may happen within the zip codes where they reside. Reason is that heavy commuter traffic through their neighborhoods. If you lived in proximity of downtown Los Angeles or Philladelphia you would have thousands of travelling through your neighborhood. Should accidents occuring by commuters within a zip code of a heavily travelled urban area adversely affect the people who reside in that zip code. The answer is no but when you look at the premium rates for people living in Los Angeles or Philadelphia you will find thm to be higher for those residents than their suburban counterparts.
The insurance Industry has in whole or in part funded these studies to establish a link between a person's credit habits and their alleged propensity for filing claims. The industry marches in lock step on this issue and will repeat their same nonsense till the cows come home. The fact is there is no more real correlation between credit score and propensity for claims than between your astrological sign and claim frequency.
Subject: Re: The Impact of Credit-Based Insurance Scoring on the Avai
For Dr. Powell to claim that these variables don't include income, wealth, race, ethnicity, or any prohibited factor is ludicrous. Who is most likely to be laid off work or have their hours reduced? Who is most likely to obtain credit from a small loan company? Who is most likely to exhibit questionalble credit seeking behavior such as applying randomly for credit cards to obtain a free gift or to perhaps 'roll-over' credit to new card with a teaser rate? Who is most likely to use a larger percentage of their modest credit line? Who is most likely to have 'performance' issues on their credit due to layoffs, unexpected medical bills?
The answer of course are the indigent, minorities, immigrants, people lacking education, single or divorced women, single parents and/or low wage earners. The 'Insurance Score' is effectively a surrogate or shadow for those factors that if used explicitly would be unlawful but are nontheless discriminatory.
The inner-city poor person may be more prone to submit a small claim than the upscale suburbanite because even a small loss has real financial consequence. Also, if that person is uneducated on the insurance process, they are unaware that submitting a small claim may actually cost them more in the long run in terms of higher premiums..
Do people with lower Insurance Scores have more accidents? Probably not but more accidents may happen within the zip codes where they reside. Reason is that heavy commuter traffic through their neighborhoods. If you lived in proximity of downtown Los Angeles or Philladelphia you would have thousands of travelling through your neighborhood. Should accidents occuring by commuters within a zip code of a heavily travelled urban area adversely affect the people who reside in that zip code. The answer is no but when you look at the premium rates for people living in Los Angeles or Philadelphia you will find thm to be higher for those residents than their suburban counterparts.
The insurance Industry has in whole or in part funded these studies to establish a link between a person's credit habits and their alleged propensity for filing claims. The industry marches in lock step on this issue and will repeat their same nonsense till the cows come home. The fact is there is no more real correlation between credit score and propensity for claims than between your astrological sign and claim frequency.