Pet Peeve - Insurers using credit scores to price products

[yowolabi]

Originally posted by: 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

I just wanted to get away from the quoted argument:

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.

No fairness is being gained by using credit scores. You're simply increasing the burden on some people while lessening it on others. Those individuals that now carry more of the burden, did nothing to deserve it. There will be a huge number of good drivers with low credit scores that are now shouldering more of the costs of bad drivers with great scores.

The most "fair" way to do this would be to base premiums on nothing but your own personal driving and claims history. Everyone who had no history would start at the same rate, and people who had no problems would see the rate decrease over time while people who had problems would see it increase over time.

Why don't they do that? It seems to me that separating people into groups is more about identifying groups of people that are willing to pay more. People with low credit scores are used to getting shafted and are more likely to put up with it.

 

[StageLeft]

If insurance companies are doing it, chances are they have found a trend between score and chances of claiming insurance. Since this likely shows people with low scores are more likely to claim it, and given that the last time I checked my score it was something like a sickening 780, banning this practice protects the credit-unworthy and punishes me.

Insurance should take into account everything, really. When insurance companies properly jump on the bandwagon of using GPS to monitor driving and using one can lower your rate, I may jump on board, too.

 

[PingSpike]

Originally posted by: yowolabi

Originally posted by: 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

I just wanted to get away from the quoted argument:

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.

No fairness is being gained by using credit scores. You're simply increasing the burden on some people while lessening it on others. Those individuals that now carry more of the burden, did nothing to deserve it. There will be a huge number of good drivers with low credit scores that are now shouldering more of the costs of bad drivers with great scores.

The most "fair" way to do this would be to base premiums on nothing but your own personal driving and claims history. Everyone who had no history would start at the same rate, and people who had no problems would see the rate decrease over time while people who had problems would see it increase over time.

Why don't they do that? It seems to me that separating people into groups is more about identifying groups of people that are willing to pay more. People with low credit scores are used to getting shafted and are more likely to put up with it.

The reason they don't do that is because its a competitive industry. Perhaps thats how things started at company A. Then company B comes along, it sees based on statistics that even people with more claims cost them less when they are older and female. So they offer lower rates then company A. Company A loses its "cash cows" to company B as the statistics play out as expected and they become less profitable. Eventually company A either has to adapt to the same system or go out of business.

Hey, I'm not a big fan of insurance companies either. But I don't really think they sat around and said "Lets screw people with bad credit scores!"

 

[StageLeft]

The most "fair" way to do this would be to base premiums on nothing but your own personal driving and claims history. Everyone who had no history would start at the same rate, and people who had no problems would see the rate decrease over time while people who had problems would see it increase over time.

That is not fair, it's simply bad business. We all know that a 16 year old is more likely to crash than a 36 year old. It would be folly for insurance to charge them the same and if it did, it would have to pick a middle number, rewarding the 16 year old and punishing the 36 year old, since statistically speaking the 16 year old is more likely to have a net cost for the insurance and the 36 year old a net savings, if they both paid the same rate.

No insurance on the planet works like this. Any insurance broker is always setting policy rates and coverage based on perceived risk. That is precisely how insurance works. It cannot be a flat one-tier system.

Why don't they do that?

Why? Because I would not go to a carrier that does it; they'd charge me too much. I pay $100 month for awesome coverage on two cars. No teen can get that. If a carrier tried doing what you'd do, they'd charge me more than $100/month, so I wouldn't go with them. The only ones who'd go with them are those who find lower rates, which is the group precisely that would kill their business.

 

[TheAdvocate]

Originally posted by: yowolabi

Originally posted by: Zenmervolt
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.

No fairness is being gained by using credit scores. You're simply increasing the burden on some people while lessening it on others. Those individuals that now carry more of the burden, did nothing to deserve it. There will be a huge number of good drivers with low credit scores that are now shouldering more of the costs of bad drivers with great scores.

The most "fair" way to do this would be to base premiums on nothing but your own personal driving and claims history. Everyone who had no history would start at the same rate, and people who had no problems would see the rate decrease over time while people who had problems would see it increase over time.

Why don't they do that? It seems to me that separating people into groups is more about identifying groups of people that are willing to pay more. People with low credit scores are used to getting shafted and are more likely to put up with it.

Excellently stated.

Zen is obviously in the industry, so he's circling the wagons. There's a major underlying disconnect in our conversations, as evidenced by this remark by him which is jaw-droppingly stupifying:

Arguing that you're right because some states have made laws that support your position is pure ridiculousness.

My entire argument is predicated on privacy laws and the tradition of them. Your position is based on your opinion and current practices. Would I rather go to court with law or current prractices? Hmmm...

The other underlying position that you will not discuss that absolutely frustrates me as an attorney and a personal rights advocate is that Corporate "rights" > Individual Rights. Its an attitude that permeates every similar position to yours. I am honestly disheartened to hear that there is any generation in America that would buy into this ridiculous notion. I am sure that Insurance companies want to, and in their minds "need" to access this and lots of other information (I've stayed away from the age and sex thing, because they present additional issues), but just because they want to and believe they need to in order to develop their pricing model, which they believe is fair, does NOT give them the right to invade personal privacy. They've previously successfully lobbied to make these practices legal, but the tide is turning back on the issue, and I for one am glad. Individual rights trump all but the rights of other individuals. And essentially, you are claiming that the folks who "benefit" from this situation have a right to cheap insurance, when insurance is not a right. Privacy however is.

You also touched on the issue of insurance companies as quasi-monopolistic cost allocaters, but I'll save that discussion for another time. It's another huge flaw in the system.

 

[glugglug]

Insurance companies aren't allowed to use race to determine rates because it wouldn't be PC, so instead they use whatever else they can, weak as the correlation can be. Really rates are set based on politics far more than statistics.

If insurance rates REALLY were based on statistical accident/damage rates we'd see the following differences from the current system:

a) Insurance for women would cost more than for men.
b) Very few Asians would be able to afford insurance.
c) Speeding would reduce your rate, not increase it.

 

[jandrews]

Originally posted by: 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.

I have two employees who are frankly two of my very best guys and they made some decisions that were stupid and they have scores in the low to mid 500s. You dont know jack about corelation between credit score and work ethic because there really doesnt seem to be any. So basically your opinion is that if people make mistakes in one area of their life (relationships, fiscal anything that can be measured) it means they are bad at all other areas of their life? For a grad student you are quite stupid sorry to say.

 

[upsciLLion]

The correlation between certain factors in credit scores and the frequency of losses is pretty strong. That being said, if you don't like a company using an insurance score to price your premiums, go to another company that uses tickets and accidents. Don't be surprised if your premium increases substantially in the event of getting a ticket or being in an accident since they don't use insurance scores in their predictive analytics to rate you as a driver.

 

[TheAdvocate]

Originally posted by: upsciLLion
Don't be surprised if your premium increases substantially in the event of getting a ticket or being in an accident since they don't use insurance scores in their predictive analytics to rate you as a driver.

Man, would that suck. I wonder if it would also suck that doing away with insurance (profiling) scores would stop metro dwellars (like myself) from subsidizing the insurance cost of all the suburbanite commuters that cause the congestion that drives the risk and therefore the price of metro area insurance up? Without that profiling, I wouldn't have to pay higher premiums cause they all commute to where I live and work. Man, I bet that would suck.

 

[upsciLLion]

Originally posted by: TheAdvocate

Originally posted by: upsciLLion
Don't be surprised if your premium increases substantially in the event of getting a ticket or being in an accident since they don't use insurance scores in their predictive analytics to rate you as a driver.

Man, would that suck. I wonder if it would also suck that doing away with insurance (profiling) scores would stop metro dwellars (like myself) from subsidizing the insurance cost of all the suburbanite commuters that cause the congestion that drives the risk and therefore the price of metro area insurance up? Without that profiling, I wouldn't have to pay higher premiums cause they all commute to where I live and work. Man, I bet that would suck.

That's why most insurance companies ask if you use your car for pleasure, business, or a daily driver. Insurance agents don't ask that just to chat it up with you while they have you on the phone.

 

[mugs]

Originally posted by: glugglug
Insurance companies aren't allowed to use race to determine rates because it wouldn't be PC, so instead they use whatever else they can, weak as the correlation can be. Really rates are set based on politics far more than statistics.

If insurance rates REALLY were based on statistical accident/damage rates we'd see the following differences from the current system:

a) Insurance for women would cost more than for men.
b) Very few Asians would be able to afford insurance.
c) Speeding would reduce your rate, not increase it.

Can you back that up with facts, or are you just making it up?

(referring to the list at the end of your post)

 

[TheAdvocate]

Originally posted by: upsciLLion
That's why most insurance companies ask if you use your car for pleasure, business, or a daily driver. Insurance agents don't ask that just to chat it up with you while they have you on the phone.

This does nothing to combat the increased premiums for metro area drivers. It is a proven fact that they subsidize the suburban commuters.

In the meantime, you missed my point. Profiling is not justified by the "good" it does. besides being a way to sidestep illegal discrimination, every profiling policy just re-allocates the costs to another group that oftentimes doesn't deserve the increase. The ultimate issue is that the entire insurance industry is a regulatory monopoly (based on a lot of different types of legislation that I dont want to get into) and therefore is ultimately a cost allocator, rather than a true competitor in the capitalistic free enterprise model. With the help of lobbying pressure, they set a target profitability and pass along enough costs to achieve it. It's cleverly talked around, but it's the truth. It's also a big reason why Insurance companies are among the only ones that don't comply with standard GAAP accounting that applies to nearly every other non-governmental industry in the nation. They wanted to and have retained the right to cook their own version of the books.

I never meant to take it this far, because I realize the ultimate necessity of insurance, but the cliche defenses tossed out on this thread demanded that more facts be brought to the table.

 

[Boztech]

My credit rating changes monthly, and varies widely between the three reporting agencies.

Not only that, I have had on two occasions to undergo the drawn out process of removing errors in my credit report, causing my (artificial) scores to be artificially low for quite some time - and as mentioned above, had I not PAID to see my full credit reports from all 3 agencies I would've never known.

Also theoretically were a person to file Chapter 13, that person's credit would take no less than 7 years to repair itself. Does this mean it will take 7 years for the person to improve their driving habits? Of course not.

One algorithmic artificial score for predicting one thing, bolstering another statistical artificial grouping to predict another thing. One inaccuracy compounds another. Seems like a laughably inaccurate overall system to me.

 

[Zenmervolt]

Originally posted by: yowolabi
The most "fair" way to do this would be to base premiums on nothing but your own personal driving and claims history. Everyone who had no history would start at the same rate, and people who had no problems would see the rate decrease over time while people who had problems would see it increase over time.

What about the type of car (expense to repair)? Shouldn't someone with a Mercedes have to pay more than someone with a 20 year old Ford Taurus even if they have the same driving record? (Hint: The answer is "Yes".) Or what about someone who drives 50 miles to work each day instead of 2 miles? Much higher risk that something will happen to the first person just because they are on the road more. Two of my own cars are insured as limited use vehicles and I pay drastically reduced premiums because I don't drive them very often, which reduces the risk.

Your way isn't "fair", it simply transfers almost all the risk onto the insurance company and would simply result in everyone paying higher premiums. It would lead to people playing the system and simply dropping insurance after an accident, leaving the insurance company to find some other way to re-coup the losses incurred (since they start out with a low premium, they don't build up a reserve). So in response, the company would simply raise everyone's rate. Including the rates of the good drivers.

It is ultimately more efficient and more fair (in the sense that the most responsible people have the best rates) to do things the way they are presently done.

ZV

 

[Zenmervolt]

Originally posted by: TheAdvocate

Originally posted by: yowolabi

Originally posted by: Zenmervolt
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.

No fairness is being gained by using credit scores. You're simply increasing the burden on some people while lessening it on others. Those individuals that now carry more of the burden, did nothing to deserve it. There will be a huge number of good drivers with low credit scores that are now shouldering more of the costs of bad drivers with great scores.

The most "fair" way to do this would be to base premiums on nothing but your own personal driving and claims history. Everyone who had no history would start at the same rate, and people who had no problems would see the rate decrease over time while people who had problems would see it increase over time.

Why don't they do that? It seems to me that separating people into groups is more about identifying groups of people that are willing to pay more. People with low credit scores are used to getting shafted and are more likely to put up with it.

Excellently stated.

Zen is obviously in the industry, so he's circling the wagons.

Interesting, I never knew that T-Mobile sold insurance. You must know something that I don't.

Originally posted by: TheAdvocate
There's a major underlying disconnect in our conversations, as evidenced by this remark by him which is jaw-droppingly stupifying:

Arguing that you're right because some states have made laws that support your position is pure ridiculousness.

My entire argument is predicated on privacy laws and the tradition of them. Your position is based on your opinion and current practices. Would I rather go to court with law or current prractices? Hmmm...

I'll type this slowly so you can understand:

"Legality" and "right" are NOT synonymous. You argue that you are "right". I disagree and posit that you are merely legally-correct in 4 states. I could easily argue that since 46 states have not made it illegal, I'm "right", but that would be an absurd position to take.

I will say it again; what is "legal" and what is "right" are NOT one and the same. You have been equating "legal" with "right", which is poor logic at best.

ZV

 

[upsciLLion]

Originally posted by: Zenmervolt
Interesting, I never knew that T-Mobile sold insurance. You must know something that I don't.

Does another company underwrite the $4/mo insurance option on their plans?

Originally posted by: TheAdvocate
This does nothing to combat the increased premiums for metro area drivers. It is a proven fact that they subsidize the suburban commuters.

Show me where it has been proven.

 

[Zenmervolt]

Originally posted by: TheAdvocate
The other underlying position that you will not discuss that absolutely frustrates me as an attorney and a personal rights advocate is that Corporate "rights" > Individual Rights. Its an attitude that permeates every similar position to yours. I am honestly disheartened to hear that there is any generation in America that would buy into this ridiculous notion. I am sure that Insurance companies want to, and in their minds "need" to access this and lots of other information (I've stayed away from the age and sex thing, because they present additional issues), but just because they want to and believe they need to in order to develop their pricing model, which they believe is fair, does NOT give them the right to invade personal privacy. They've previously successfully lobbied to make these practices legal, but the tide is turning back on the issue, and I for one am glad. Individual rights trump all but the rights of other individuals. And essentially, you are claiming that the folks who "benefit" from this situation have a right to cheap insurance, when insurance is not a right. Privacy however is.

You also touched on the issue of insurance companies as quasi-monopolistic cost allocators, but I'll save that discussion for another time. It's another huge flaw in the system.

Show to me where I have explicitly said that corporate rights trump individual rights.

Good luck.

I do not believe (nor have I ever believed) that corporations' rights trump the rights of an individual. However, I disagree with the claim that credit scores represent personal information. I further disagree that the actuarial methods used by insurance companies are unfair, rather I believe that they are currently the most efficient form of pricing the service that they offer. I also believe that a system that starts everyone out at the same rate and increases rates after incidents will ultimately move from penalizing risky drivers to penalizing good drivers since such a system will inevitably raise the minimum rates. Finally, I understand the nature of Actuarial Science (a wonderful branch of applied statistics that I suggest you study) and it is unquestionably clear to me that the addition of credit scores to the current actuarial tables used by the Insurance industry can only improve the industry's ability to accurately gauge the risks associated with a particular group.

Then again, analysts have to understand how to accurately build statistical models of datasets. Lawyers, obviously, do not.

ZV

 

[Zenmervolt]

Originally posted by: upsciLLion

Originally posted by: Zenmervolt
Interesting, I never knew that T-Mobile sold insurance. You must know something that I don't.

Does another company underwrite the $4/mo insurance option on their plans?

Yes. That's sub-contracted and not through T-Mobile, USA. We do not issue our own insurance.

ZV

 

[PingSpike]

Insurance rates are probably higher for city drivers then people who live outside the city but commute because of vandalism/theft risks...which occur at night most of the time, when the commuters cars are at home in their suburban garages.

 

[glugglug]

Originally posted by: mugs

Originally posted by: glugglug
Insurance companies aren't allowed to use race to determine rates because it wouldn't be PC, so instead they use whatever else they can, weak as the correlation can be. Really rates are set based on politics far more than statistics.

If insurance rates REALLY were based on statistical accident/damage rates we'd see the following differences from the current system:

a) Insurance for women would cost more than for men.
b) Very few Asians would be able to afford insurance.
c) Speeding would reduce your rate, not increase it.

Can you back that up with facts, or are you just making it up?

(referring to the list at the end of your post)

Yes, I can, but it would take awhile to google up good links for all 3.

I happen to have read an article on (b) only a few days ago:

http://www.listener.co.nz/issu...6C80A17C72FE0C37F0395A

There was also another article last week about how people think the California Highway Patrol is using racial profiling because the results of a study they did recently showed Asians involved extremely disproportionate numbers of accidents & fatalities, so much so it makes DWA more dangerous than DWI.

 

[jagec]

Originally posted by: Chryso
It isn't putting profitability ahead of anything. They are going to make the same amount of money regardless of where it comes from. Instead of blanketing everyone with higher rates they are charging the people who tend to cost them more money a higher premium than those who tend to cost them less money. How does this affect profitability at all? Their profitability would be exactly the same if they insured 5 people for $100 each as if they insured 2 people for $115 and 3 others for $90 each. Either way they get $500.

Yeah, I'm SURE they're also lowering the rates on people with good credit.

BTW, I have this bridge in New York that I want to get rid of...interested?

I always found it interesting what insurance companies can and can't get away with. They can be sexist, because, after all, accident statistics back them up. They can discriminate based on age...again, accident statistics. They can discriminate against certain factors of lifestyle, but not others...they can ask if you're a smoker (statistics!), but not if you're gay (err...not PC). And they can't discriminate based on race.

Before we ask whether discriminating based on credit history is crossing the line, we need to figure out where the line IS!

Originally posted by: PingSpike
Insurance rates are probably higher for city drivers then people who live outside the city but commute because of vandalism/theft risks...which occur at night most of the time, when the commuters cars are at home in their suburban garages.

That affects the insurance company on comprehensive coverage. Not liability. And yet liability costs more in the metro region than outside, despite the aforementioned suburban thing.

 

[TheAdvocate]

Originally posted by: Zenmervolt
However, I disagree with the claim that credit scores represent personal information.

Which is exactly what I've been saying all along. And by believing so, you are implying that corp rights > individual rights, and indirectly that there is such a thing as a right of insurance, when no such right exists.

You are wrong on every count, and the law is quickly catching up with that fact.

 

[Chryso]

Originally posted by: TheAdvocate
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.

Wow, and you think I have a problem understanding causation?

 

[Zenmervolt]

Originally posted by: TheAdvocate

Originally posted by: Zenmervolt
However, I disagree with the claim that credit scores represent personal information.

Which is exactly what I've been saying all along. And by believing so, you are implying that corp rights > individual rights, and indirectly that there is such a thing as a right of insurance, when no such right exists.

You are wrong on every count, and the law is quickly catching up with that fact.

No, that does not imply that corporate rights trump individual rights. I have no idea how you can make that generalization from a single specific instance. It certainly does not indicate that I believe in a "right" to insurance, nor do I.

If I do not think that credit information is private, then how can I believe that the corporation's right to know is above the person's right to privacy? Logically if credit score is not private, it is not covered by a person's right to privacy (in the same way that a person's address is not private and not covered by a person's right to privacy), then there is absolutely no "right" being trumped by corporations having access to this information.

No, I am not "wrong". I am simply at odds with the present legal opinion. As I have repeatedly stated, legal opinion is emphatically NOT synonymous with what is "right". To equate legal precedent with morally "right" is overly simplistic and, frankly, juvenile. It is very clear to me from this discussion that you lack the ability to deal adequately with abstract concepts and instead continuously fall back upon the sophomoric view that the law must always be what is morally right.

It is useless for me to engage in further attempts to correct your startling misconceptions if you cannot even abstract far enough to see that the law is not always right.

ZV