Pet Peeve - Insurers using credit scores to price products

[ponyo]

When was this article written? Because the U.S. Supreme Court ruled this summer that insurance companies can check your credit to determine your insurance rate.

 

[mugs]

Originally posted by: TheAdvocate

And on an unrelated note, I have a real problem with the insurance/actuary position that correlation = causation. There is a direct, unabashed statement to that effect in the story.

Where? I didn't notice one.

I did see this:

A report issued by his group suggests that people who are careful money managers tend to also be attentive to how they drive, service their vehicles and maintain their homes.

There is no claim there that one causes the other, just that one indicates the other. There could be (and probably is) some common cause for both.

 

[DrPizza]

I'm just wondering where the study is that supports this correlation.

Just a few thoughts that ran through my head: People with poor credit scores would be more likely to not have full coverage. People who are poor with their finances (it seems to me) would be more likely to carry the bare minimum insurance they can, i.e. liability only. If they hit a tree, scratch their car, etc., the insurance company won't have to pay out a dime.

Furthermore, (it seems to me) people with poor credit can't afford more expensive vehicles. Last I checked, newer, more expensive vehicles often had corresponding higher repair costs for the same type of damage. i.e. replacing the bumper on a Hummer is going to cost a lot more than replacing the bumper on, say, a 2000 ford escort.

Unless I'm mistaken, on average, African Americans have lower credit scores than other groups. Wouldn't that imply that on average, they'd cost the insurance companies more money? And wouldn't that in turn imply that they have more accidents??

"People with higher credit scores are more careful" sounds like a rationalization to slide by a bigger idea: people with low credit scores are the least likely to pay attention to minute details in their finances, i.e. we can charge them more without them complaining.

 

[mugs]

Originally posted by: DrPizza
I'm just wondering where the study is that supports this correlation.

Just a few thoughts that ran through my head: People with poor credit scores would be more likely to not have full coverage. People who are poor with their finances (it seems to me) would be more likely to carry the bare minimum insurance they can, i.e. liability only. If they hit a tree, scratch their car, etc., the insurance company won't have to pay out a dime.

Furthermore, (it seems to me) people with poor credit can't afford more expensive vehicles. Last I checked, newer, more expensive vehicles often had corresponding higher repair costs for the same type of damage. i.e. replacing the bumper on a Hummer is going to cost a lot more than replacing the bumper on, say, a 2000 ford escort.

Unless I'm mistaken, on average, African Americans have lower credit scores than other groups. Wouldn't that imply that on average, they'd cost the insurance companies more money? And wouldn't that in turn imply that they have more accidents??

"People with higher credit scores are more careful" sounds like a rationalization to slide by a bigger idea: people with low credit scores are the least likely to pay attention to minute details in their finances, i.e. we can charge them more without them complaining.

Based on what I know about you, I'd say you probably have a good credit score. What do you drive? I have a great credit score. I drive a 2003 Civic. You and I make smart financial decisions. People with bad credit make poor financial decisions. I was listening to Suze Orman once and she had a caller who was living paycheck to paycheck and bought a $50k SUV. :Q So I wouldn't assume people with bad credit drive less expensive cars.

But that's really irrelevant. Insurance rates are based on an aggregation of various indicators - sex, age, weight (of the vehicle - more weight causes more damage), cost of replacement parts, etc. You can't say factor A is invalid because it might affect factor B when factor B is also considered independently.

 

[TheAdvocate]

Originally posted by: DrPizza

"People with higher credit scores are more careful" sounds like a rationalization to slide by a bigger idea: people with low credit scores are the least likely to pay attention to minute details in their finances, i.e. we can charge them more without them complaining.

That's what it all boils down to. Anything said in defense is just posturing. As Chryso said, the insurance companies determine how much profit they are going to make (implying that unlike any other capitalist endeavor that involves risk and competition, they have an absolute right to do so). It's pretty easy when you have the govt in your lobbyist's back pocket, and have had laws passed requiring your coverage and okaying your practices, especially the ones that violate personal privacy.

 

[Regs]

To me, discrimination is abundant in this country just as long as the rich get richer.

A 18 year old drunk behind a wheel of a car is no safer than a 21 year old behind the wheel drunk.


A 17 year old smoker will not die any earlier than a guy who started at age 19.


A man convicted of smoking an oz of weed will sleep no less on a job than a person with a clinical medical condition (and medical conditions are growing at an alarming rate to sell prescription drugs.)


We've clearly went from enforcing laws, to enforcing morals and standards.

 

[mugs]

Originally posted by: TheAdvocate

Originally posted by: DrPizza

"People with higher credit scores are more careful" sounds like a rationalization to slide by a bigger idea: people with low credit scores are the least likely to pay attention to minute details in their finances, i.e. we can charge them more without them complaining.

That's what it all boils down to. Anything said in defense is just posturing. As Chryso said, the insurance companies determine how much profit they are going to make (implying that unlike any other capitalist endeavor that involves risk and competition, they have an absolute right to do so). It's pretty easy when you have the govt in your lobbyist's back pocket, and have had laws passed requiring your coverage and okaying your practices, especially the ones that violate personal privacy.

You think that's what he said? That's not what he said.

The insurance industry is pretty competitive. With the high level of information availability we have today, if an insurance company charges one group of people more than another insurance company charges, people will go to that other insurance company. The way they improve is by finding new ways to predict how much a person will cost the insurance company so they can decide how much they should charge that person to effectively compete.

 

[jdobratz]

How is this violating personal privacy? One voluntarily participates in the credit scoring systems and voluntarily submits that information to a limited amount of scrutiny. If you don't want companies using this information, then remove yourself from systems that report your credit data to a semi-public forum.

 

[Vette73]

Originally posted by: spidey07
Insurance is all statistics anyway. If one group cost more, then they should pay more. So, more responsible people can get a competitively priced product. Insurance happy because they can lower their costs and gain customers without profit being driven down.

This isn't about privacy, this is about sound business decisions. I'm curious about the average insurance costs of the states where it is prohibited. Radar says they are more expensive.

Define group. I could come up with statics that show people born on Monday have less tickets then people born on tuesday. Does that have anything to do with driving no. Just like someone came up with one showing that days with the sun having flare up and sun spots the market went up. Just because 2 things happen at the same time does not mean they have anything in common.

Everytime I see a fire truck there is a fire, we should get rid of fire trucks.
Serial killers drink milk, milk drinkers must be serial killers.
See how that works even though someone with common sence should be able to tell they are not a direct cause on each other. I miss a payment on my CC, does not that mean I will drive drunk and speed? they have nothing in common.

 

[mugs]

Originally posted by: Marlin1975

Originally posted by: spidey07
Insurance is all statistics anyway. If one group cost more, then they should pay more. So, more responsible people can get a competitively priced product. Insurance happy because they can lower their costs and gain customers without profit being driven down.

This isn't about privacy, this is about sound business decisions. I'm curious about the average insurance costs of the states where it is prohibited. Radar says they are more expensive.

Define group. I could come up with statics that show people born on Monday have less tickets then people born on tuesday.

Go ahead and do it. Show me that there is a statistically significant difference between the number of tickets received by people born on a Monday compared to people born on a Tuesday.

Does that have anything to do with driving no. Just like someone came up with one showing that days with the sun having flare up and sun spots the market went up. Just because 2 things happen at the same time does not mean they have anything in common.

Everytime I see a fire truck there is a fire, we should get rid of fire trucks.
Serial killers drink milk, milk drinkers must be serial killers.
See how that works even though someone with common sence should be able to tell they are not a direct cause on each other. I miss a payment on my CC, does not that mean I will drive drunk and speed? they have nothing in common.

See, no one is saying that one thing causes the other. The mistake that you're accusing the insurance companies of is a mistake that YOU are making, not them. They know statistics, they know better. But just because A doesn't cause B, that doesn't mean A doesn't INDICATE B.

An example from Freakonomics - the presence of books is a predictor of success in school. But READING to a child has no measurable effect on success in school. The books don't cause the kid to do better in school by their mere presence in the home. The presence of the books and the success in school are both effects with a common cause - intelligent, well-educated parents. Intelligent, well-educated parents tend to have more books, and they tend to have more intelligent, well-educated children.

Bringing it back to the topic at hand - a person's credit score does not cause them to be a good driver or a bad driver. But apparently it is a useful indicator, probably because a person who is responsible financially is also a responsible driver. They are both effects with a common cause - the personality of the driver.

 

[dainthomas]

People with preventable health conditions such as type 2 diabetes should be charged more for insurance. If they don't pay attention to their health, they probably don't pay attention while driving. So we should give auto insurance companies all our health records. It would also be a good idea to give them DNA samples, so they could scan for any other factors that could affect our driving.

 

[Zenmervolt]

Originally posted by: TheAdvocate

Originally posted by: Zenmervolt
Firstly, what a reporter put in his story is not an authoritative statement of what the insurance companies think.

No, but what the insurance companies say they think is a pretty good example of what they think:

The company tells applicants that it will use their credit score as a factor in determining rates...

... "History has shown that people who have spotty credit are more likely to file claims, and are more likely to be not as careful with their automobile and their driving records as people who have pristine records," Cannon said.

It really is stated that directly.

I see nothing in there indicating that the insurance company believe this is causation. What is said there is nothing more than "the two items are correlated". It isn't even remotely close to implying causation.

Originally posted by: TheAdvocate

Originally posted by: Zenmervolt
Secondly, insurance companies are not saying that correlation is causation. What they are saying is that, statistically, the overall group of people with low credit ratings will incur more cost to the insurance company. They are not making specific claims about any single individual within that group. However, it is unfair to the lower risk groups to assess the cost of the higher-risk groups on everyone, so the high-risk group is given a blanket increase in premiums.

ZV

But that's not my point. The assumption in what you just said is that it is okay to put profitability ahead of personal privacy rights. It's mind boggling how this is just assumed to be okay nowadays. The lobbyists and PR/marketing folks have completely sold the public. Job well done!

If you are with a mutual company, like State Farm, there is no "profitability". Policy holders are investors in the company and dividend cheques are issued to policy holders when the company makes more money than is needed to cover expenses. I've gotten dividend cheques from State Farm quite often. And a credit record is not "private" information.

Originally posted by: TheAdvocate
Meanwhile, as stated several times, there is absolutely no correlation between the two. As Watt says, you might as well price mortgages off of driving records.

Wrong. It has been stated several times that there is correlation. What there isn't is causation. And including driving records in the pricing of mortgage rates would be a great idea. People with poor driving records are a higher risk. Just because other companies aren't doing similar things does not automatically make it invalid. That's just piss poor logic. By that same exact logic, the Wright brothers should have never bothered with the airplane. After all, if heavier than air flying machines were a valid idea, other people would be building them.

ZV

 

[TheAdvocate]

Originally posted by: jdobratz
How is this violating personal privacy? One voluntarily participates in the credit scoring systems and voluntarily submits that information to a limited amount of scrutiny. If you don't want companies using this information, then remove yourself from systems that report your credit data to a semi-public forum.

You think being credit scored is voluntary??

Wow. Just wow.

 

[TheAdvocate]

Originally posted by: Zenmervolt

Wrong. It has been stated several times that there is correlation.

And you typed all of that out, again, and again missed the point. Correlation /= Causation. There must be causation, and there is none. Stop fighting the semantics battles. Credit scores and reporting were passed, despite being privacy violations, TO REPORT REPAYMENT TENDENCIES. Not to report your tendency to drive fast, drink blue koolaid, or powder your nose with your grandmothers ashes. There is no causal link or other legitimate reason to probe someone's REPAYMENT TENDENCIES for a NON CREDIT TRANSACTION.

It's that f'ing simple. And because I'm right, 4 states have already outlawed it, others are contemplating it, and there is now a move to present federal legislation to the same effect.

 

[Svnla]

All I am going to say is the credit data collection industry is making big money with our data yet we have to pay $$$ to see our own data/score and it is a big pain to correct mistakes/errors.

There have to be law to make it free for us to check our own credit score (free data report is a good step) and make it much much easier and faster to correct errors.

 

[PingSpike]

Originally posted by: Zenmervolt

Originally posted by: TheAdvocate
And on an unrelated note, I have a real problem with the insurance/actuary position that correlation = causation. There is a direct, unabashed statement to that effect in the story. So now, logical fallacies are an accepted basis for violation of the personal freedoms that comprise what being a free man is (in this country at least).

Firstly, what a reporter put in his story is not an authoritative statement of what the insurance companies think.

Secondly, insurance companies are not saying that correlation is causation. What they are saying is that, statistically, the overall group of people with low credit ratings will incur more cost to the insurance company. They are not making specific claims about any single individual within that group. However, it is unfair to the lower risk groups to assess the cost of the higher-risk groups on everyone, so the high-risk group is given a blanket increase in premiums.

ZV

Ultimately, this is no different then men paying more, people with sports cars paying more, young people paying more. I don't understand the pet peeve in this case. Now if you feel everyone should have a blanket insurance rate regardless of their age and sex as well, then I can understand your arguement. But frankly, I feel the credit check is a much more fair measure to decide rates on then whether I have a penis or not. I mean, I mostly have control of my credit score whereas I didn't choose to be born male. (I'm not really complaining about being male, but I do pay higher insurance rates on pretty much everything because of that simple fact)

 

[erub]

How about using credit scores for hiring purposes, should that be irrevelant too? Your credit score shows how responsible you are. When my parents have been looking for household help for my grandmother, you better believe that with all of the valuables around and her fragile health that they wanted the most responsible person that they could find, not a poor person who was just trying to make ends meet who might be more tempted.

As a ccurrent job seeker, personally I have no problem with a company checking my credit background to prove that I am responsible. It should also make my fellow employees more responsible as well, assuming that they were hired after this sort of screen was in place (not sure how many years this has been a common practice, I'm a grad student). You don't want to be working with people who can't complete their work on time, or even people who are constantly trying to bum money off of you. Same thing goes for driving.

Like another poster said, I think its better to use credit scoring than age/sex in insurance pricin, we all have some control over our use of credit. They can go ahead and use it for homeowners insurance as well, if there is such a correlation.

 

[mugs]

Originally posted by: TheAdvocate

Originally posted by: Zenmervolt

Wrong. It has been stated several times that there is correlation.

And you typed all of that out, again, and again missed the point. Correlation /= Causation. There must be causation, and there is none. Stop fighting the semantics battles. Credit scores and reporting were passed, despite being privacy violations, TO REPORT REPAYMENT TENDENCIES. Not to report your tendency to drive fast, drink blue koolaid, or powder your nose with your grandmothers ashes. There is no causal link or other legitimate reason to probe someone's REPAYMENT TENDENCIES for a NON CREDIT TRANSACTION.

It's that f'ing simple. And because I'm right, 4 states have already outlawed it, others are contemplating it, and there is now a move to present federal legislation to the same effect.

They say insanity is doing the same thing over and over again and expecting a different result. Call me insane if you will, but I'm going to try to explain this to you one more time.

This has NOTHING to do with causation. You are bringing that into the discussion. It is irrelevant. From the perspective of an insurance company, it doesn't really matter what CAUSES you to drive poorly. What matters is how they can PREDICT that you will drive poorly. Apparently credit score is a useful predictor (see my more in-depth explanation in my previous post).

Suppose a Mazda 3 is in more accidents than a Honda Civic. Do you think they care WHY the Mazda 3 is in more accidents? Not really. But they do care that it happens, and it does affect your insurance rates.

 

[PingSpike]

Originally posted by: TheAdvocate

Originally posted by: Zenmervolt

Wrong. It has been stated several times that there is correlation.

And you typed all of that out, again, and again missed the point. Correlation /= Causation. There must be causation, and there is none.

No...there really musn't! Does being 24 cause be to get into more accidents then being 36? Does the simple unalienable fact that I am say 24 years old cause me to get into more accidents?

 

[BoberFett]

Originally posted by: jdobratz
How is this violating personal privacy? One voluntarily participates in the credit scoring systems and voluntarily submits that information to a limited amount of scrutiny. If you don't want companies using this information, then remove yourself from systems that report your credit data to a semi-public forum.

Yeah, good luck with that Mr. Unabomber.

 

[erub]

Curious, is credit scoring heavily utilized in Europe as well?

In China, the lack of credit made everything really annoying. Paying for a travel itinerary involved bringing $1000 in cash to the travel agency. Also same think with our apartment, we paid the guy with $1500 cash for the summer. Somehow this doesn't seem very safe to me..

 

[yowolabi]

Originally posted by: Zenmervolt

Originally posted by: TheAdvocate
And on an unrelated note, I have a real problem with the insurance/actuary position that correlation = causation. There is a direct, unabashed statement to that effect in the story. So now, logical fallacies are an accepted basis for violation of the personal freedoms that comprise what being a free man is (in this country at least).

Firstly, what a reporter put in his story is not an authoritative statement of what the insurance companies think.

Secondly, insurance companies are not saying that correlation is causation. What they are saying is that, statistically, the overall group of people with low credit ratings will incur more cost to the insurance company. They are not making specific claims about any single individual within that group. However, it is unfair to the lower risk groups to assess the cost of the higher-risk groups on everyone, so the high-risk group is given a blanket increase in premiums.

ZV

Isn't it just as unfair to assess the cost of the lower risk group on a particular person who has a good claims history? It's no different to penalize an individual because of a group, than to penalize one group because of a larger group.

I wouldn't even be so against this if it wasn't for the fact that insurance is mandatory in order to drive. So I can't opt out of a process that I find intrusive and ridiculous except by not driving, which is unrealistic.

 

[Zenmervolt]

Originally posted by: TheAdvocate

Originally posted by: Zenmervolt

Wrong. It has been stated several times that there is correlation.

And you typed all of that out, again, and again missed the point. Correlation /= Causation. There must be causation, and there is none. Stop fighting the semantics battles. Credit scores and reporting were passed, despite being privacy violations, TO REPORT REPAYMENT TENDENCIES. Not to report your tendency to drive fast, drink blue koolaid, or powder your nose with your grandmothers ashes. There is no causal link or other legitimate reason to probe someone's REPAYMENT TENDENCIES for a NON CREDIT TRANSACTION.

It's that f'ing simple. And because I'm right, 4 states have already outlawed it, others are contemplating it, and there is now a move to present federal legislation to the same effect.

No, there does NOT need to be causation. There is zero causation that says because someone has a fast car they are a higher risk, but there's plenty of correlation and that means that they can use that.

There's plenty of correlation between credit risk and insurance risk and that makes the practice valid.

Legality has absolutely nothing to do with being right. Arguing that you're right because some states have made laws that support your position is pure ridiculousness. The states and the Federal government passed an amendment to the friggin' Constitution once that prohibited alcohol. Was that right? By your logic it must have been, since if it's in the law books, it must be right according to you.

You're wrong. The laws are wrong. Both are misguided, knee-jerk reactions that show a pitiful lack of logical thought process.

ZV

 

[jdobratz]

Originally posted by: BoberFett

Originally posted by: jdobratz
How is this violating personal privacy? One voluntarily participates in the credit scoring systems and voluntarily submits that information to a limited amount of scrutiny. If you don't want companies using this information, then remove yourself from systems that report your credit data to a semi-public forum.

Yeah, good luck with that Mr. Unabomber.

I never claimed that my solution was easy or preferreable. Simply that it exists. And credit scoring is voluntary, I work at a bank and come across many people who are unscorable. If you do not engage in business with entities that report their clients to a credit bureau, you will not be scored. Simply because one possible solution is highly undesirable by a vast majority of people does not invalidate it as a solution to a given issue.

Back to the main point I was making; no one is forcing you into dealings with companies that record and transmit your data to the credit reporting bureaus. So, entering into business with ones that do must be done with the understanding that the information will be disseminated to other parties.

 

[Zenmervolt]

Originally posted by: yowolabi
Isn't it just as unfair to assess the cost of the lower risk group on a particular person who has a good claims history? It's no different to penalize an individual because of a group, than to penalize one group because of a larger group.

I wouldn't even be so against this if it wasn't for the fact that insurance is mandatory in order to drive. So I can't opt out of a process that I find intrusive and ridiculous except by not driving, which is unrealistic.

No more "unfair" than the fact that someone who is, say, single, male, and 25 with a clean driving record and a Mustang GT has to pay more than someone who is, say, married, female, and 30 with one accident and the exact same car. It doesn't matter how good that 25 year old guy's record is, he's going to pay more than the 30 year old married woman for the same car. Why? Because he's in that risk group.

It is impossible for an insurance company to accurately gauge individual risk. It is only possible to assess group risk and then assign policy holders to those groupings.

ZV