Posted On: March 18, 2009, 7:45 am CDT

Posted By: Stat Guy

Wudchuck, I have followed your posts for some time and always found your reasoning sound but on credit scoring I think the confusion is because you don't understand WHAT it impacts. (from the article): Opponents say....."the use of credit-based insurance scores unfairly discriminate against lower-income individuals" . The question here is whether credit scores somehow affect the rates charged such that it is UNFAIR for some but not for others. If it is unfair, does that meant they pay a higher rate? If so, then it would seem that for others it is also UNFAIR that they would pay a rate lower than they otherwise would. This is not how credit scores are used. Credit scores merely identify insurance consumers who may be economically distressed, who may have trouble paying their premiums and let their insurance lapse. They may have an overreliance on insurance (morale hazard); or if you can assume that lower scores translates into not having a lot of resources, such as money, in savings or on hand or whatever, they may inflate a claim to increase the payout (moral hazard). Or if they have an accident, after letting their insurance lapse, who pays that claim? The other driver, who is probably insured and so his company pays an uninsured motorist claim, thereby transferring the risk from the tortfeasor to the claimant. Is this FAIR? For credit scoring to be UNFAIR for a particular consumer, then it would follow that someone else benefits by having lower scored consumers pay a higher rate, thereby subsidizing those with higher scores. But again, this is NOT how it is used. What the score does is identify consumers who have few assets to protect and ensure that the rates charged are based on the increased probability of having some other financial condition that makes them different from others in their "class". the problem I have with this debate is that the question of FAIRNESS is not appropriate at all to the discussion....why should insurance rates be "FAIR" at all? Why should my kid pay the same rate I do, when he is as careless with his finances as he is with his driving? He can't keep a job, is late paying his bills, and drives as he sees fit, all the while secure in the fact that if he has an accident, he is covered and he'll get a check for damages when he turns in a claim. He doesn't even think about protecting himself and his assets by exercising due caution and diligence.....this is the type of individual who should be identified and treated differently in the underwriting of his risk. My condition is not the same as his; is that FAIR? Any increase in potential exposure should be accounted for when pricing risk. If there was a need for FAIRNESS in underwriting, why bother at all and make one rate for everyone? Well then those with better attributes would actually be paying more money to subsidize those with less than good attributes. People are different, why should those differences be ignored? The only ones who will benefit from banning credit score are exactly those on the lower end of the scale.....it that FAIR? NO! and that is why fairness should not be a part of this discussion....