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The issue 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. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders 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 reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.

Isn’t it interesting that the score most important in our financial lives, our consumer credit score does not even contain full disclosure? As stated above the Federal Trade Commission has ruled that it is ok 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 issue of this paper, insurance rates are. So where is the connection? All the public knows is that Fair Isaac tells us there is a high correlation between people with bad credit and high risk drivers. This notion is insane and from what I can see from this black box approach, there is no real causation between the two.

This type of reasoning is similar to convicting a person of something before they have even committed a crime. For instance, let’s say I do a study and that study shows there is a high correlation between criminals and people with bad credit. Is this to say that just because you have bad credit you are more likely to commit a crime and therefore you should be profiled or perhaps locked up because you are a risk to society?

This system is discriminating against minorities, disabled and in my case college 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 that they would be giving up valuable proprietary information that was very costly to develop and maintain. What about the cost to consumer’s who may be paying higher rates or in worse cases even denied insurance based on these practices.

The Equal Credit Opportunity Act forbids 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 in the world could we possibly know whether or not they are discriminating. This smoke and mirror approach is what many government agencies do to subtly discriminate and extort money from the American.

What about extortion? As I reflect on this topic extortion comes to mind. Webster defines extortion as to “obtain by force or compulsion.” By using such unfounded tactics consumers are forced into paying the higher rates. First of all, 90% of all insurance companies use this procedure; secondly in the interest of society legislation requires all Americans with cars to have car insurance. Living in a country where it is virtually impossible to live without a car doesn’t this present some force to pay the rates? Also, lets say you cannot afford to buy a car with cash, in which case you could obtain liability insurance alone and save quite a lot of money; but instead you take out a loan, the bank will require you to obtain 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 tout themselves as representing peace of mind, protection and security, but at what cost. Over the past 10 years, I have spent roughly 20,000 dollars in car insurance, what have I claimed? Easily less than half and I totaled a car. Is insurance just a form of legalized gambling protected by government? The McCarran-Ferguson Act of 1944 exempts the insurance industry from antitrust laws, so here we are again without a choice; collusion is the rule not competition. Where are the ethics of lawmakers? Many states are screaming about this controversial issue and some states such as California have had some success, but with protection from top government what can consumers do?

I have personally written the Governor of Pennsylvania about the subject, one of my main questions was;

“I am a concerned citizen. Recently I noticed my car insurance rates increasing at a substantial rate. I investigated the situation only to find out that my credit rating was making the difference, not my driving record.”

The response I received from the Department of Insurance follows:

This letter is in reponse to your complaint filed with the Pennsylvania Insurance Dpartment 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 through your concerns and it appears that you are questioning the underwriting of automobile insurance. Specifically, the use of credit in determining eligibility. Many different factors go into the underwriting of an insurance policy, such as type of vehicle, drivers, location, etc. and most recently credit history. Pennsylvania law does not prohibit an insurance company fromusing credit as an underwriting tool so long as it is done within the first 60 days of writing a policy. Under the law, an insurance company is granted a 60 day window from the inception of a policy to determine whether or not the policy fits into the company’s guidelines.

In your letter, you stated credit scoring in part of the rating structure and presumable must be approved by the Insurance Department. Actually, credit scoring is part of a company’s underwriting guidelines and the Dapartment only regulates underwriting guideline to the extent they are not discriminatory.

Also, Federal law under the Fair Credit Reporting Act allows credit information to be used for underwriting financial and insurance transactions.

Sincerely yours,

Debra L. Roadcap

Consumer Service Investigator

The response I received is hardly what I would call an answer, of course Federal Law preempts state law and the Fair Credit Reporting Act allows for use of such information, but the real question is why? An answer to this question has still not been received. I believe this is a highly unethical practice in which insurance companies are being given free rule to take advantage of low-income families, single mothers, disabled, minorities and others. If the government wants to do the right thing they should judge consumers on what they have done individually, not what scientist’s hypothesis they might do based on the history of others.

About The Author

My name is Richard D. Schrader, I advocate consumer education on many topics and help consult American consumers with excessive credit card debt. You can visit my website at debtjustice.net” target=”_new www.debtjustice.net

mailto:webmaster@debtjustice.net webmaster@debtjustice.net

No Comments » Posted by Matt Cubb / Uncategorized

Change is the only constant in the world. There was a time when bullocks and horses acted as our modes of transport. In today’s world, bullocks and horses are themselves carried from place to place in trucks and vans. There was a time when all that a girl could hope for was to marry a good and sufficiently wealthy man. These days, women make their own money and once they have achieved enough do they think about marriage. There was a time when the only available insurance plan was on life. Nowadays, all things can have an insurance. From diamond jewelry to pets to footballers’ feet, any and everything is subject to being insured.

The most common types of insurance, of course, are motor insurance and home insurance. You can insure your car so that later on, making repairs will not pump out all your cash. Moreover, several countries insist that no car can go out on the roads without its first having got insured. Are you surprised at that rule? Well, you really should not be. After all, given the large numbers of accidents on the road, it makes sense to insure the vehicles at the very onset. Additionally, the insurance providers of today have come up with a plan that covers third party cars. Thus, if your car rams into another, your insurance deal will furnish the money to pay for repairs for that other car as well.

Getting insurance for your house must never be avoided. Things like fires and burglaries do not need to be invited. They come uninvited and either burn or run away with much of your hard-earned dough. A good insurance plan will take care of these unwanted eventualities. At least you will not have to keep wondering how you can cope up if such a thing does happen. You have insured your house after all.

Medical insurance is another important insurance. It makes sense to cover yourself for possible medical problems. So, if it does happen that you need to undergo an urgent operation, you will not have to put it off because you don’t have the money.

One up-coming insurance type is the travel insurance. Since it is not the most common, make sure to compare travel insurance plans before choosing one. This is a good insurance for those who are traveling to places that are quite a distance away from their homes. You never know what medical problems may occur. To be stuck without sufficient money in an unfamiliar city can be nerve-racking.

Each dawn sees the start of yet another type of insurance. What would you say are the top five important insurance plans?

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No Comments » Posted by Matt Cubb / Uncategorized