Tuesday, August 28, 2007

Credit scores are good for auto insurance companies, but problematic for African-American and Hispanic consumers

Asa Aarons:

Those are the mixed findings from a Federal Trade Commission study on credit-based insurance scores and automobile insurance.

The study found credit scores effectively predict the number of claims consumers file and the total cost of those claims. However, it also found that black and Hispanic consumers tend to have lower scores than non-Hispanic whites and Asians. As a result, consumers in those demographic groups, on average, end up paying more for car insurance.

Credit-based insurance scores are tallied on information in a consumer's credit report. Insurance companies use them to predict the claims that consumers are likely to file, and set rates. Consumers with higher scores pay lower rates than consumers who have low credit scores.

Credit scores help insurance companies "better match the risk of loss that consumers pose" so higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums, the FTC explained. "Scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they otherwise would not be able to determine an appropriate premium."

But credit scores are distributed differently among racial and ethnic groups. "These differences are likely to have an effect on the premiums that these groups pay, on average," the report noted.

The FTC could not suggest any alternative that would help insurance firms predict risk effectively but decrease price differences among racial and ethnic groups.

The bottom line: don't expect auto insurance carriers to stop using credit scores any time soon.

The best ways to boost your score: pay your bills consistently and on time, keep balances on your credit cards as low as possible and avoid opening a lot of new accounts in a short time, especially if you don't really need them.

FTC Study Confirms That Credit-Based Insurance Scores Mean African Americans and Hispanics Pay More for Auto Coverage

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At 1:59 PM, Anonymous Anonymous said...

Credit scoring for Auto insurance?
Come on. This is discriminatory and massive rip-of for people of any race. With the right numbers I could prove gravity does not exsist! In most states coverage is mandatory leaving everyone with no choice. It is clear that profit was the only motive on this issue. I cannot beleive our government allows this type of predation on the people.

 
At 5:53 PM, Anonymous Anonymous said...

Using credit scoring are good for Insurance companies because: 1) reduces labor cost (they don't have to check actual driving records) 2) increases revenue because Uninsured premiums will increase as low credit score drivers become unable to afford the insurance even if their actual driving record is spotless.

It is impossible that credit scores can possibly have anything whatsoever to do with a persons demonstrated ability to drive a car safely. Statistically, it could be successfully argued that people who pick their nose while driving pose a higher risk. Maybe that's coming next.

This is either corruption or utter stupidity, or both, on the part of our government officials who approved this request from the insurance companies.

This is outrageous and our elected official should be held accountable.

 
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At 6:54 AM, Anonymous Anonymous said...

Wow, so much spam.

Anyway, I'll respond to this statement:

"Statistically, it could be successfully argued that people who pick their nose while driving pose a higher risk. Maybe that's coming next."

Yes, it could. But insurance companies don't have access to data for each customer that says whether or not they pick their noses while driving.

They do, however, have access to credit scores. And if credit scores are a valid predictor of net benefit to the insurance companies, they should be used.

Along the same lines, insurance companies charge more for male drivers than for female drivers. While this is clearly "discriminatory", the evidence bears out that men are in fact greater risks to the insurance companies. Now if it had turned out that women are a greater risk, I'm sure the government would have banned this "discrimination". But, thankfully, racism/sexism are one-way streets, and women do not have to pay for mens' follies.

Anyway, your socialist worldview - that it's unfair to notice differences among populations - is leading to the absolute destruction of modern civilization. Isn't that enough to celebrate about, without nitpicking every minor grievance that correctly reflects negatively on the less desirable elements of our society?

 
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