The problem 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. The credit score is a method of determining how likely it is that credit users will pay their bills. Fair, Isaac began his work with credit scoring in the late 1950s, and credit scoring has been widely accepted by lenders ever since 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 disclose how these scores are calculated. The Federal Trade Commission has ruled that this is acceptable.
Isn’t it interesting that the most important score in our financial lives, our consumer credit score, doesn’t even contain complete information? As stated above, the Federal Trade Commission has ruled that it is okay 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 topic of this document, but insurance rates. So where is the connection? All the public knows is that Fair Isaac tells us that there is a high correlation between people with bad credit and high-risk drivers. This notion is crazy and from what I can see in this black box approach, there is no real causality between the two.
This type of reasoning is similar to convicting a person of something before they have committed a crime. For example, let’s say I do a study and that study shows that there is a high correlation between criminals and people with bad credit. Does this mean that just because you have bad credit you are more likely to commit a crime and therefore need to be identified or perhaps locked up because it is a risk to society?
This system discriminates against minorities, the disabled and in my case university 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 they would be delivering valuable proprietary information that was too expensive to develop and maintain. What about the cost to consumers who may be paying higher rates or, worst case scenario, even being denied insurance based on these practices?
The Equal Credit Opportunity Act prohibits 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 could we know if they do. or not? they are discriminating. This smoke and mirror approach is what many government agencies do to subtly discriminate and extort money from Americans.
And extortion? Reflecting on this topic, extortion comes to mind. Webster defines extortion as “obtaining by force or duress.” By using these unfounded tactics, consumers are forced to pay higher fees. First, 90% of all insurance companies use this procedure; Second, in the interest of society, the law requires all Americans with a car to have auto insurance. Living in a country where it is practically impossible to live without a because, doesn’t this present some force to pay the fees? Also, let’s say you can’t afford to buy a car with cash, in which case you could get liability insurance on your own and save quite a bit of money; But instead of getting a loan, the bank will ask you to get 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 themselves represent peace of mind, protection and security, but at what cost. Over the past 10 years, I have spent approximately $ 20,000 on auto insurance, what have I claimed? Easily less than half and I totaled one car. Is insurance just a form of legalized gambling protected by the government? The McCarran-Ferguson Act of 1944 exempts the insurance industry from antitrust laws, so here we are again with no choice; collusion is the rule, not competition. Where is the ethics of legislators? Many states are yelling about this controversial issue and some states like California have had some success, but with superior government protection, what can consumers do?
I have personally written to the governor of Pennsylvania on the subject, one of my main questions was;
“I am a concerned citizen. I recently noticed that my auto insurance rates increased at a substantial rate. I investigated the situation only to find that my credit rating was making a difference, not my driving record.”
The response I received from the Insurance Department is as follows:
This letter is in response to your complaint filed with the Pennsylvania Department of Insurance 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 your concerns and it appears that you are questioning the auto insurance underwriting. Specifically, the use of credit to determine eligibility. Many different factors go into underwriting an insurance policy, such as the type of vehicle, drivers, location, etc. and the most recent credit history. Pennsylvania law does not prohibit an insurance company from using credit as an underwriting tool as long as it is done within the first 60 days of writing a policy. Under the law, an insurance company is given a 60-day window from the inception of a policy to determine whether or not the policy conforms to the company’s guidelines.
In your letter, you indicated that the credit rating is part of the rating structure and presumably must be approved by the Department of Insurance. In reality, credit rating is part of a company’s underwriting guidelines and the Dapartment only regulates underwriting guidelines to the extent that they are non-discriminatory.
Additionally, federal law under the Fair Credit Reporting Act allows credit information to be used to underwrite financial and insurance transactions.
Sincerely yours,
Debra L. Roadcap
Consumer service researcher
The response I received is not what I would call an answer, of course, Federal Law is ahead of state law and the Fair Credit Reporting Law allows the use of such information, but the real question is why? No response to this question has yet been received. I think this is a very unethical practice in which insurance companies are being given the freedom of government to take advantage of low-income families, single mothers, the disabled, minorities, and others. If the government wants to do the right thing, it must judge consumers by what they have done individually, not by scientific hypotheses they might make based on the stories of others.