The truth behind Insurance Credit Scoring

Industry vs. Consumer II

Previous Theory #1 - The "700 Club"

What if the use of "insurance credit scoring" is also a measure of how profitable you will be to an insurance company's partners, subsidiaries, and third party affiliates and non-affiliates? Perhaps the better your credit score, the more they will pay for this information?

The number one theory on the 'Pure Speculation' page has just earned it's place on the Industry Vs. Consumer II page. New information has lent credence to this theory and points to evidence that this may actually be fact.

"Insurers no longer want to take risks on uncertain things like weather losses or major lawsuits, but instead want to finance cars and homes. The way to get good loans is by pre-qualifying auto and homeowners policyholders. If a customer doesn’t have excellent credit, regardless of a clean insurance record, the carrier quotes higher rates because it will presumably be unable to finance the client’s car or sell him/her a mutual fund. All the major insurance companies have their own banking sources, many of which have been established in the last two years." See complete article.

"Consumer advocates also decry the use of CBUP (credit based underwriting and pricing) because the practice forces consumers to divulge private and sensitive information that may not serve to measure risk in order to apply for insurance. Credit information, which is highly marketable, falls under the relatively lax financial privacy protection provisions of the Gramm-Leach-Bliley Act. Leading consumer advocates point out that insurers may collect credit information for resale, or cross-marketing, value alone." See complete article.

Auto Insurance is required by law in most if not all states. Due to this and the practice of insurance credit scoring, the insurance industry now has one of the most complete files on any individual. This information includes:

Your name, address, beneficiaries, Social Security number, family member information, assets, income, property locations and values, your transactions with them, their affiliates, and others, your account balances, policy coverage, payment history, the premium you pay, the shares you purchase, preferences, claims information, method of purchases, reports from consumer reporting agencies, motor vehicle and driver data, loss history reports, additional driver data, and in some cases, even your medical and employment information.

This information is very valuable, not to mention private and they can share it with anyone. And just try to find a way to opt out of this, if you did not find the enclosure in tiny print in your envelope, you have no way of opting out. (And you can only opt out of third party sharing, affiliate sharing is a given.)

If you want a copy of the file, you must send a notarized request to them. They do not have to send the complete file and they state they do not charge for this information but if you request it, they can decide to charge a reasonable fee. All this for your file that they share with their affiliates freely! In addition, any mistakes in this file must be taken up with the third party supplying the information, they have no control over the information the file contains.

In addition, now that insurance companies now are owning banks, they can share information on credit internally thereby circumventing Gramm- Leech- Bliley and the FCRA, and do not have to give consumer an opt-out notice. Additionally this will allow them to prospect within their client base for customers who have more financially and possibly market better products and or financial rates to these people.

*Update: Received from a consumer in North Texas:

"Also, my agent told me I have excellent credit and the inquiries have nothing to do with why I was switched to their high risk subsidiary, but because they were not issuing stand alone policies - meaning I did not have additional business to bring them (my offer of putting my personal property insurance with them did not count they said). They have an answer for everything!"

The industry recognizes that some of their "high lifetime value consumers" (consumer who purchase additional insurance and/or financial products) are very poor drivers and they have found a way to give them a "second chance" in order to secure their business. If you are not part of the "700 Club", insurers are less likely to want your business.

Good drivers are already paying for the losses of poor drivers. Now, if good drivers score poorly on an insurance credit score, they pay for the poor drivers and even previously convicted drunk drivers with good insurance credit scores because they represent, through an insurance credit score, a "high lifetime value" to the insurance company. Are you going to stand for this?

Why Insurance Credit Scoring is Discriminatory and Unfair:

1.	The insurance companies claim that insurance credit scoring is intended to reflect responsibility; a good scorer manages their finances better and therefore most probably maintains their car and home better. This is unfairly discriminatory. There has been no solid and available proof as to causation. Insurance credit scoring has been used for close to six years now and still they have not proved the link between credit history and driving skill or ability. Scholars in such fields as psychology, safety engineering, occupational medicine, consumer research, and risk perception have been studying this link and have yet to offer a plausible explanation.
2.	There is also no way to identify exceptions within the current scoring models. Being unable to meet obligations is not the same as being unwilling to meet them. A poor insurance score may reflect irresponsibility but it can also reflect financial hardship through a layoff, divorce, or a multitude of other reasons.
3.	Insurers who only use insurance credit scoring only at the initial underwriting is unfair. Attitudes and credit history can change over time.
4.	Insurance credit scoring is a "black box". It has been in use for years and just now are consumers learning about it. We have even wasted time and money to have legislators enact laws to enforce the notification requirements of the FCRA. They use ICS and say the FCRA lets them use the practice yet they choose to ignore the notification requirements. Why is this? Obviously, it is not something the insurance companies want us to know about. Common sense tells you that this means it is most likely not good for the consumer.
5.	They also do not have sufficient evidence that this is not a discriminatory practice. There is an analysis (not even a full study) by the Virginia Department of Insurance back in 1999 and they determined that income or race could not be identified by and insurance credit score. Every industry spokesman cites this study as evidence that this is not a discriminatory practice. The study by the Maryland Department of Insurance indicates it is indeed discriminatory. Update: "At the request of the NAIC, the Academy of Actuaries has evaluated four studies on insurance credit scoring. The concluded that these studies do not directly address of whether this practice has a disparate impact on people of color/and or the poor. This is significant because the insurance companies have cited these studies as evidence that insurance credit scoring does not have a disparate impact.* "Effects of Credit Scoring on Auto insruance Underwriting and Pricing", State of Washington Office of Insurance Commissioner.
6.	The public was not warned. Being armed with information is half the battle. If a consumer knew the insurance company was going to use credit history, they would have had time to prepare. Consumers are under the assumption that the insurance companies request SS# to: 1. Confirm your identity 2. see if you qualify on a "creditworthy" (as in , will you pay the bills) basis.
7.	When there is an error in your credit report and it is corrected, insurance companies are not obligated by state or federal law to reverse any adverse action against you.
8.	Lower income Americans are more likely to have less disposable income and resources to cover an incident themselves and not need compensation from the insurance industry. Thus, I believe you would find that there are more claims filed by lower income Americans and therefore they are more likely to be penalized by the insurance company.
9.	Homeowner's insurance credit scoring is meant to field out fraud. Many, many other factors go into whether or not a person will commit fraud. This cannot be determined by a credit score alone.

So what now? Get Involved!