Credit discrimination seems fair enough. After all, the insurance company sends you bills, and they’re taking more of a risk if you have a history of not paying your bills.
I would think someone with a good credit history is someone who tends to be responsible while someone with a bad credit history has a better chance of being irresponsible and getting into accidents. Someone who is careful in one area can be expected to be careful in other areas.
One thing to consider, an insurance company just wants the correct premium for the correct risk. You still have to group people to together to set rates because using past information you can predict what will happen in a large group, but you cannot predict what will happen to one person.
You can’t only base rates only on frequency of accidents, you must also consider the severity of the claim. I own an insurance agency and I see what money comes in and what is paid out in claims
When you compare a sixteen year old female and a sixteen year old male, my agency statistics show accident frequency is similar, but the amount paid out in the male’s behalf is almost five times greater.
Using an lame but true example, when a sixteen year old girl has an accident she is more likely to be alone in the car backing out of a parking spot or hitting a curb. But it only takes one sixteen year old boy traveling at 94 miles an hour with four people in the car, hitting another car killing four people, to skew the rates for the entire age group.
Most young males drive just as well as most young females but the few huge losses they suffer skew the rate upward for the entire group.
Speaking as someone who recently jumped ship from the insurance industry after three years (and three insurance companies), I can tell you that discriminating against a driver based on their age is actually one of the more respectable underwriting guidelines in the insurance industry. As another poster mentioned, the reasoning behind youthful drivers being charged higher rates is that they have much less driving experience behind them, and experience can be a HUGE issue if it’s your first time driving in heavy traffic on the freeway or on icy roads. To be honest, I’ve never delved into the statistics for teenagers having accidents proportionally with older age groups, but the numbers must be ungodly. Another consideration is that teenagers and young adults have a greater tendency to take risks with their vehicles for a variety of reasons (ie. their parents pay for the car so it’s no loss to them). Of course this doesn’t apply to all teenagers, but it simply isn’t feasible for insurance companies to base their rates on anything other than statistics for large groups.
NOW, that being said, don’t get the impression I’m an apologist for the insurance industry: there are tons of underwriting criteria that I’m totally against, things that I’m amazed insurance companies are legally allowed to do, and at the top of that list is “credit scoring”. That’s right. You may not realize your credit score plays a part in your premium, but the fact is that over 90% of insurance carriers in the US use credit scoring in some aspect of the quoting process. For some “preferred” carriers (ie. the really picky ones) this is just a qualification criteria and doesn’t affect the rate itself. But for many, such as Farmers, it plays a definite part in how you are rated.
I’ll stick with Farmers as an example since it’s the most eye opening and detailed account I can give of the three companies I’ve worked for. When a Farmers agent runs your credit score, your social security number and date of birth are run through proprietary software engineered by an independent company known as FairIsaac. FairIsaac looks over the credit report and assigns a letter score from A (good) to Z (bad) based on a series of around 600 questions, which the credit report is used to answer. Roughly speaking (other factors are involved), a Z credit score can easily raise the base premium by 200% or more. The kicker is that not only are the questions used for rating a trade secret (even the Farmers agent isn’t given them), but even if you can prove you have good credit and your FairIsaac score comes back a Z, there isn’t ANY customer service representation at FairIsaac that either you or your Farmers agent can access to see if a mistake was made. The agent’s only course of action (as recommended by FairIsaac, who holds all the cards) is to point you to Equifax or one of the credit agencies to check your report for errors. Nice, huh?
The reasoning behind the use of credit scoring is that independent companies have been supposedly doing research for over 30 years which has confirmed that people with bad credit continually report more claims and are thus a higher risk. The problem I have with this is that it’s a completely random statistic in my book. If you divided up the number of reported claims for 2001 by the ethnicity of the claimant, it stands to reason that some group would have to have reported more claims than the rest; the only alternative is that every single ethnic group reported the exact same number of claims, which is pretty much mathematically impossible. However, just because, say, Asians report more claims in a given year than Hispanics, that doesn’t mean Asians are worse drivers than Hispanics, it’s merely pure chance that they had bad luck that year. You could make the case that if, on the other hand, Asians continually have more claims year after year, maybe they should be discriminated against. But I’d argue that other factors should be taken into consideration, such as the number of Asian drivers comparable to other ethnic groups, and I don’t know of any such consideration being taken for people with bad credit (finally, I’m just using Asians as a theoretical scapegoat; nothing in my experience indicates that Asians are inferior drivers, and in fact I’d probably have to argue in the other direction).
Anyway, I’ve rambled enough, but before I go, a few other underwriting criteria for the rest of you to debate over (almost all - if not all- insurance companies use these criteria for rating purposes):
[list]
[li]Make and Model of vehicle[/li][li]Prior claims in the last three years[/li][li]Marital status[/li][li]Good grades (discount for younger drivers)[/li][li]County or zip code where you live[/li]
SAustinTx
PS: Sorry for rehashing some of the credit info. I didn’t realize I had unread posts before replying.
SAustinTx
Just a minor correction, Farmers Insurance does not use credit scores to increase a base rate. The credit scores are used to discount base rates from 5% to 39%.
I am against the credit based rating, but the insurance companies have provided statistics that show how the score relates to claim frequency.
<quote><b>If you want to borrow money, the lender must assess their risk that you will meet your obligations to pay it back on time and the full amount. For someone with no credit history, the risk to the lender is higher because you are an unknown.
As you become more involved in borrowing money, say for a car, credit cards, etc., the more you meet, or exceed your legal obligations to pay it back, the lower the risk to the lender. You build up a credit history.
Hence, the concept of a credit score. It is your financial reputation scorecard.
Is this “discrimination?” Yes. It is legal? Yes. Is this on par with gender discrimination, racial discrimination, etc.? It does not even come close.
Credit risk is based upon behavior. It can be measured. It is legal. It meets the merit factor standard.
Gender and racial discrimination are a whole different ballgame.</b><quote>
You are right, however, we are not talking about borrowing money. We are talking about Credit Scores being used to determine your risk as a driver. I have no problem with scores being used for home loans, etc. But, I fail to see how a low credit score means that you are more likely to be a poor driver.
MrPeabody said,<quote><b>I am against the credit based rating, but the insurance companies have provided statistics that show how the score relates to claim frequency.</b></quote>
You’re right, the insurance companies have come up with this evidence. The problem is, the insurance companies, in conjunction with the CRAs, have done this research themselves. As far as I know, no one else has taken their “evidence” and verified it independantly.
Look who stands to gain from this: The insurance companies now have another way to justify raising rates (You’ve been a good driver for 10 years, then have to file a BK when you lose your job. Suddenly your rates go up! Sounds fair right?). The CRAs now have another revenue source: the Insurance companies, the same companies they provided statistics to! It makes me wonder how impartial these statistics were…
As the predictive powers of science increase, we may reach the point that the need for particular insurance will drop sharply but the cost will rise dramatically.
If one could determine a future event or its timing on an individual level with a great deal of certainty, who would freely buy life or car insurance? Only those who would soon have such a claim.
The comments of the unfairness of having to pay a higher premium than consistent with one’s own risk is understandable.
But imagine the cost of insurance if outcomes were predictable on an individual, rather than a group, basis.
Is it “fair” for some to pay much more so future claimants pay much less? Your attitude on this will be greatly affected by whether you are in the non-claimant or claimant group.
True, but it’s about as unlikely that there would be a significant difference unless there’s a reason. That’s the whole point of statistics.
I’m no apologist for the insurance industry either, but I can think of good reasons for all of the following risk factors. Note that these are all guesses, and I can’t provide cites for any of them.
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Some cars are more likely to be involved in an accident due to manufacturing defects, and other cars cost more when they do need repairs. Additionally, people who drive nicer cars tend to be more careful, as they have a greater investment in their vehicle.
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Past behavior is as good a predictor of future behavior as any. People who’ve had a claim in the past three years are probably more likely to have a claim in the immediate future.
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Again, people who have strong family ties probably take fewer risks than those without.
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People who are responsible in one area are responsible in another. That’s the same reason that credit scoring doesn’t bother me, as long as it’s done properly. The Farmers example you gave is not the proper way to do it–the company should review the rating at a customer’s request.
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Some locations have higher crime rates. Also, some locations have higher accident rates due to badly designed roads.