“Credit scoring to determine risk is no more unethical than credit scoring to determine the interest rate on a loan.”
Ethically speaking I don’t see the problem with generating an insurance score based on an individuals credit score. Credit scores exist for the purpose of assessing a person’s risk in certain situations. Whether that risk has to do with if they will pay their mortgage or rent every month or if they will be more likely to file an insurance claim. The Insurance Information Institute (III) has a lengthy and very informative article about credit scoring.
“Insurance scores are confidential rankings based on credit history information. They are a measure of how a person manages his or her financial affairs. People who manage their finances well tend to also manage other important aspects of their lives responsibly, such as driving a car. Combined with factors such as geographical area, previous crashes, age and gender, insurance scores enable auto insurers to price more accurately, so that people less likely to file a claim pay less for their insurance than people who are more likely to file a claim. For homeowners insurance, insurers use other factors combined with credit such as the home’s construction, location and proximity to water supplies for fighting fires.
Insurance scores predict the average claim behavior of a group of people with essentially the same credit history. A good score is typically above 760 and a bad score is below 600. People with low insurance scores tend to file more claims. But there are exceptions. Within that group, there may be individuals who have stellar driving records and have never filed a claim just as there are teenager drivers who have never had a crash although teenagers as a group have more accidents than people in other age groups.”
There are always exceptions to the rule and insurance scoring is no different. The many people who have below average credit but never get into accidents will not be happy with insurance scoring, despite the claim that overall everyone pays less because of the use of individuals credit score.
“Insurers need to be able to assess the risk of loss—the possibility that a driver or a homeowner will have an accident and file a claim—in order to decide whether to insure that individual and what rate to set for the coverage provided. The more accurate the information, the closer the insurance company can come to making appropriate decisions. Where information is insufficient, applicants for insurance may be placed in the wrong risk classification. That means that some good drivers will pay more than they should for coverage and some bad drivers will pay less than they should. The insurance company will probably collect enough premiums between the two groups to pay claims and expenses, but the good drivers will be subsidizing the bad.”
However, on the other side of the issue is the website Insurance Scored, created by Sara Lapham, who says she was a “victim of insurance credit scoring.” A disgruntled citizen decided to take matters into her own hands and built a website devoted to exposing the insurance industry’s practice of using credit scores for insuring people. Lapham poses the question “So, what does my credit report have to do with my driving record?”
“Absolutely nothing. That is not what the insurance industry is measuring. What they are measuring is your reaction following an accident. In other words, the insurance industry is not concerned about whether you will have an accident or not, they are concerned as to whether you will want to be compensated for that accident.
The industry refers to this as:
Claims Consciousness: A person with the good credit score is more likely to settle the accident without the insurance company, the person who scored poorly is more inclined to file a claim and expect to be compensated for the loss.”
I’m interested to hear what you think about this issue.
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