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The Ubiquity of the Credit Rating: Are you paying more than you should for auto insurance?

By andrewhy in Op-Ed
Mon Jul 23, 2001 at 09:07:43 AM EST
Tags: News (all tags)
News

A few weeks ago there was a story on K5 about the marketing tactics of credit card companies that generated a lot of interesting discussion. The Associated Press published an article this past Saturday about the increasing use of drivers credit ratings to determine auto insurance premiums. From the article: "Industry watchers say the practice is gaining so fast in importance that, for some insurers, credit history carries more weight than driving record."


I personally find this to be a disturbing trend. According to one insurance company spokesman quoted in the article: "Credit history provides a consistent, reliable tool to evaluate the risk of insuring someone without unfairly discriminating against any specific group of customers." In other words, the insurance companies maintain that those with poor or no credit have a higher chance of getting into accidents than those with good credit.

Even if it were statistically true that drivers with poor credit are more likely to get into accidents (and there have been no independent studies to confirm this), this to me smacks of pure corporate greed. In a time where bankruptcies and debt have reached record levels, it seems that insurance companies are using credit ratings to artificially increase many drivers premiums.

The article relates the story of 80 year-old June Dailey, whose premiums were raised by 47 percent because of a short credit history (June has an almost flawless driving record, but carries no credit cards and pays everything in cash).

The major implication that this scenario poses is that our credit card culture offers no way to opt out of the debt cycle anymore. I meet people all the time who say they will never use a credit card, or refuse to do so anymore due to past experience. But unfortunately these people will be negatively judged when it comes time to get a loan, job, credit card, car insurance, or any other transaction that uses one's credit rating as a determinant.

The discussion from several weeks ago pointed out that there are many advantages to credit card use, if used wisely. But why must one charge one's monthly groceries and gas to a credit card simply to cultivate an acceptable credit rating when cash or check will work just as well? (And remember, not having anything on your credit rating is just as bad as having poor credit).

And why is one's credit rating (which is simply a statistical measure of how ardent and responsible a consumer one is) used as a determinant in things such as auto insurance, employment and other situations unrelated to credit and debt? The hidden implications of this trend is that people who have experienced financial difficulties (primarily the young, the poor or minorities) are being disadvantaged financially, compared to more affluent folks who have more money to spend.

The conclusion is that for one to reap the most benefit in our consumer culture, participation in the credit card culture is almost mandatory. And if one slips up due to financial difficulty or irresponsibility, the consequences will haunt one in many more ways than just the ability to get credit. Since credit reports are inexpensive and easy to get, and the consequences of bad credit are well-established, corporations now have another way of getting more money out of you.

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The Ubiquity of the Credit Rating: Are you paying more than you should for auto insurance? | 18 comments (17 topical, 1 editorial, 0 hidden)
Double Sided Coin (4.00 / 6) (#1)
by sventhatcher on Mon Jul 23, 2001 at 07:23:56 AM EST

There are really two sides to this.

It depends on how you view the demographic of people who have poor credit raitings. Your view seems to be that those already at a social disadvantage will tend to have low credit raitings. That's a valid arguement of course, and certainly any sociologist into social-conflict theory would agree with you.

I think possibly though it might be worth considering that those with low credit raitings could also be viewed as irresponsible. Irresponsibility is certainly an attribute that is worth considering in the auto insurance biz as irresponsible drivers are far more likely to get into wrecks than not.

Admittedly though, without a thorough investigation of the matter, I don't know how they can justify this. Perhaps they've seen some numbers I haven't. Probably actually, but I'd still like to see them myself. =)

I do think it's totally bullshit if auto insurance companies elect to raise rates for those with a blank slate for a credit record. That'd just be punishing someone for no reason what-so-ever. Intolerable really.

It's bad enough that they change rates based on the *color of the car*; I can't see credit raiting as being that much better.

--Sven (Now with bonus vanity weblog! (MLP Sold Seperately))

Punish? (2.33 / 3) (#6)
by PresJPolk on Mon Jul 23, 2001 at 09:22:51 AM EST

These insurance companies are offering a risky financial service. How is it "punishing" people, for them to set a rate according to the maximum of information they have available to them?

This is a competitive market. If higher premiums for poor credit aren't smart business, someone will undercut them and triumph.

[ Parent ]
Business (4.00 / 3) (#9)
by Ken Arromdee on Mon Jul 23, 2001 at 10:48:13 AM EST

The problem is that "bad credit rating" can include different kinds of people. It includes people who are poor risks. It also includes innocent people who aren't poor risks, but who don't have a lot of money, or otherwise have reasons not to have much of a credit history.

The "competitive market" is never going to prevent this practice, because it can be financially beneficial to hurt some innocent people in order to get at some other non-innocent people.

[ Parent ]

"punishing someone for no reason what-so-ever (4.00 / 1) (#13)
by ZanThrax on Mon Jul 23, 2001 at 08:55:38 PM EST

You mean like setting rates for new drivers at nearly the level of "one accident a month" drivers? Or setting rates for males far higher than females? (Adding a female child with a learners permit has no effect on a parent's rate, while adding a male can more than double a parent's rate (assuming that they're not part of the "one accident a month" demographic)) Insurance companies wouldn't know what to do with themselves if they didn't come up with punitive pricing schemes that ought to be intolerable but are accepted with little more than a mild bitching when the bills come, because the law says you have to be insured, and there's no signifigant difference between companies.


If there's nothing you'd die for, then what do you have to live for?


[ Parent ]
Fairness (5.00 / 1) (#14)
by sventhatcher on Mon Jul 23, 2001 at 09:41:49 PM EST

In all fairness, most of the rate setting factors you mentioned have a statistical weight to them.

  • Males as a whole cost insurance companies more money than females.
  • New drivers are far more likely to get in accidents than experienced drivers.
The reason that insurance is madnatory legally is of course to insure that when there is an accident, a frequent occurance, the party that is considered the victim of that accident gets proper compensation without having to go through civil court proceedings. A good thing, IMO.

Insurance companies are ripping us off to some degree, but it's not like they're reaping billions of dollars in profit each year. Some of these policies are just necessary to balance out the system. The credit rating idea seems to be going a little far though in my book.

--Sven (Now with bonus vanity weblog! (MLP Sold Seperately))
[ Parent ]

I have no problem with those perfectly valid stats (5.00 / 1) (#15)
by ZanThrax on Mon Jul 23, 2001 at 10:33:40 PM EST

what I have a problem with is applying that generalisation (despite its accuracy) to individuals. That's called prejudice, and it isn't something we normally tolerate by corporations. When $random_16yearold_male starts getting speeding tickets and causing accidents, they can up his insurance accordingly. In the meantime, its discriminatory and its simple theft.

As for legally mandating insurance, it does simplify the lifes of some, but it allows the insurance industry to be even less competitive than banks and oil companies.


If there's nothing you'd die for, then what do you have to live for?


[ Parent ]
This gets me (3.50 / 4) (#3)
by kyrbe on Mon Jul 23, 2001 at 08:15:53 AM EST

Now, I'm assuming (based on the language of the article) that this is a US based story, but I feel compelled to speak anyway, especially in case it has/does happen on this side of the fish pond.

I've been driving since I was 14 (the pleasures of working on a farming estate), and licensed since I was 17 (the UK minimum age). My motor insurance is claim free, although I've not been driving my own car (and therefore have my own insurance for the last 2 years).

My credit rating on the other hand looks like that of a bankrupt third world nation. Well, perhaps not that bad, but by comparison to my driving record... Well, it's in that state after being a student for too long and looking after an ill partner. Better management could have helped, but it wasn't the most pressing or important thing on my mind.

So, where do I stand. I'm skint now near enough, because I'm sorting out the past problems. Now imagine my insurance premium going up because of my bad rating. It's going to hurt, but to me has no relevance - I always paid my insurance up front and not through monthly installments (a legitimate reason to check a credit rating).

This highlights some important points that would affect me, and others in similar situations:
  • Outgoings go up, so something has to give
  • Clear debt less effectively/default
  • Price you out of owning a car
  • Make your credit rating worse
And has the potential effect of increasing your premiums further, even though my credit rating hasn't made me a bad driver since taking out said "credit-rated" insurance.

If credit ratings are applied to such things, all I can see happening is those with a poor/bad rating will never get to clear/improve them, and also increase the number of people sliding from average/ok ratings towards bad ones. Therefore, entering a neverending, never-improving cycle.

Am I just seeing the worst?

Let's build a new world order/economy
--
Equal Rights, Representation, Education and Welfare
Credit Rating and Corporate Power (4.33 / 6) (#4)
by mcherm on Mon Jul 23, 2001 at 09:04:52 AM EST

I'd like to point out one particularly pernicious point about the expanding use of credit ratings in our society: the vast, unregulated power that it gives to large corporations.

In the USA (others may be more sensible than we), for reasons that I simply cannot fathom, credit reporting bureau do not have a duty to ensure that the information they report is correct.

You can, of course, contest an erronious statement on your report, but normally it will only be removed if whoever originally reported it asks to do so; otherwise the (erronious) statement remains on your report ALONG with your denial. And when rating systems are used, they generally treat that exactly the same as if you hadn't objected. So far as I know, there's no effective way to sue a credit bureau for "slander".

So there's this record, which severely affects many things you might like to do, from renting a car, to finding a job, to purchasing ANYTHING on credit. And WHO can put things in this record? Why anyone who has a reporting relationship with the credit bureaus (ie, just about ANY corporation). And there's no effective way for the individual to respond.

Isn't that a dangerously unbalanced system? All power is one-way, with no checks or balances.

PS: I'm not an expert on credit rating matters. If someone else IS, and wants to correct some misconceptions I have, please, chime in and help out!

-- Michael Chermside

Different elsewhere (UK) (4.33 / 3) (#8)
by simon farnz on Mon Jul 23, 2001 at 09:28:52 AM EST

Here, the Data Protection Act requires the CRBs to maintain accurate information. The process for changing an entry is long, but can solve the problems you indicate:
  1. You obtain your credit file (charge limited by law to 2) and find an inaccurate entry.
  2. You write to the CRB and tell them what is wrong; they immediately put a note on your file, to indicate that the entry may be erroneous, and contact the company concerned.
  3. If the company concerned admits the error, or does not reply within 28 days, the entry is deleted or amended, so that your file is accurate.
  4. If they contest your claim, they have 28 days to explain why. You then get 28 days to contest their arguments, or the item stays.
  5. The previous two steps repeat until you have settled your differences, or you take the case to the authorites (IIRC the Office of the Information Commissioner)
You are also able to sue the CRB for libel if you can prove that the entry was false and that they knew this and refused to act.
--
If guns are outlawed, only outlaws have guns
[ Parent ]
USA Credit Bureau Laws (4.80 / 5) (#11)
by SlydeRule on Mon Jul 23, 2001 at 02:48:35 PM EST

In the USA, the Fair Credit Reporting Act (FCRA) sets out very specific requirements for credit bureaus and those who supply credit data to the bureaus.
credit reporting bureau do not have a duty to ensure that the information they report is correct.
Perhaps you meant to say that they have no duty to assure that all data is correct when originally reported? The onus for the original accuracy is on the supplier of the data. See Section 623 "Responsibilities of furnishers of information to consumer reporting agencies" of the FCRA.

The amount of data reported to credit bureaus is staggering; for example, each revolving account (credit cards, etc.) typically reports its balance every month. Manually investigating each item as it arrives would be an impossible undertaking.

The credit bureau does have a legal obligation to determine the accuracy of all questioned data and to correct or remove all incorrect or unverifiable information. See section 611 "Procedure in case of disputed accuracy" of the FCRA.

You can, of course, contest an erronious statement on your report, but normally it will only be removed if whoever originally reported it asks to do so
Incorrect again. From Section 611(a)(5)(A):
In general. If, after any reinvestigation under paragraph (1) of any information disputed by a consumer, an item of the information is found to be inaccurate or incomplete or cannot be verified, the consumer reporting agency shall promptly delete that item of information from the consumer's file or modify that item of information, as appropriate, based on the results of the reinvestigation.
I recently went through this myself. I found an incorrect negative entry on my report and asked my bureau to investigate. A few days later, the offending entry was deleted, and the bureau offered to send updated credit reports to everyone who had pulled my report in the last two years (as required by FCRA 611(d)).

[ Parent ]
The Answer (2.50 / 6) (#5)
by wiredog on Mon Jul 23, 2001 at 09:15:56 AM EST

why is one's credit rating (which is simply a statistical measure of how ardent and responsible a consumer one is) used as a determinant in things such as auto insurance, employment and other situations unrelated to credit and debt?

Perhaps because employers and insurers are interested in how responsible an employee or customer is? My insurance rates are low. I have a clean driving record, good credit and, the two biggest determinants, I've been with the same company for 10+ years and I'm over 35.

If you want to know how dangerous something is likely to be, see what it does to your insurance rates. I believe in global warming because insurance for beach front property is going through the roof. I believe smoking is dangerous because insurance for smokers is much higher than for non smokers.

Anything that's invented after you're 35 is against the natural order of things

How does this make sense? (3.60 / 5) (#10)
by egerlach on Mon Jul 23, 2001 at 12:09:30 PM EST

If you want to know how dangerous something is likely to be, see what it does to your insurance rates. I believe in global warming because insurance for beach front property is going through the roof. I believe smoking is dangerous because insurance for smokers is much higher than for non smokers.

This doesn't excuse the hike on car insurance rates due to a bad credit rating. This sentence implies that having a bad credit rating means it's more dangerous for you to drive... being as there have been no studies done to that effect, how does this justify the insurers' behaviour?

[ Parent ]
But (5.00 / 1) (#17)
by skim123 on Tue Jul 24, 2001 at 02:32:30 PM EST

This doesn't excuse the hike on car insurance rates due to a bad credit rating. This sentence implies that having a bad credit rating means it's more dangerous for you to drive... being as there have been no studies done to that effect, how does this justify the insurers' behaviour

But it does give the insurers a guesstimate at the person's responsibility. Granted, a poor credit rating does not mean that you are irresponsible, but there is a positive correlation between irresponsibility and poor credit. Furthermore, I would wager there's a positive correlation between fraudulent claims and irresponsibility, or fraudulent claims and poor credit.

Furthermore, people with good credit are usually settled adults, families, static jobs, etc. Granted, there are exceptions in all directions, and such an approach is gross stereotypical behavior by the insurance companies, but, in the end, such generalizations save them money (which ends up saving those with good credit ratings money, in the end... i.e., me).

Money is in some respects like fire; it is a very excellent servant but a terrible master.
PT Barnum


[ Parent ]
No studies? (4.00 / 1) (#18)
by sigwinch on Thu Jul 26, 2001 at 12:56:41 AM EST

This sentence implies that having a bad credit rating means it's more dangerous for you to drive... being as there have been no studies done to that effect, how does this justify the insurers' behaviour?
No studies? The results probably weren't publicized, but they have certainly been done. Once they have a few thousand credit ratings in their database, all they have to do is plot the results of a single database query. Insurance companies do this sort of thing day in and day out.

Although they might not care about what the risk is. A poor credit rating means that you are willing to pay enormous amounts of money without thinking very hard about the benefits you will receive. Such people can be charged higher rates because, quite frankly, they'll take it without complaining.

--
I don't want the world, I just want your half.
[ Parent ]

Wrong issue (3.14 / 7) (#7)
by PresJPolk on Mon Jul 23, 2001 at 09:25:05 AM EST

Isn't the problem here not that an insurance company, in an industry which survives by having as much information as possible, is using credit information? Isn't the problem that this credit information is being made available for these uses?

Just pass some good privacy laws, and the problem will go away.

How to be an insurance company in three easy steps (4.25 / 4) (#12)
by plastik55 on Mon Jul 23, 2001 at 07:03:40 PM EST

  1. Acquire a database of insurance claims with as much information about the claimers as you can possibly get. Height, weight, skin color, habits, political leanings, credit ratings, previous claims made, et cetera. All of this data should be concatenated into a vector X for each person. You should be able to calculate M(X), the profit made off of each person, by subtracting C(X) (the claims made) from P(X) (the premiums paid by each person)
  2. Use your favorite statistical estimator (neural nets work fine, EM methods work well also) to maximize M as a function of P. Neural Networks for Pattern Recognition by Christopher M. Bishop (Oxford Press) provides a good summary of the various techniques and their limitations.

    In order to get step 2 to work properly, you will need to constrain its model to remove dependence on factors that are not politically fashionable at the moment.

    You will have to account for market forces as well; if your premiums are too high, each person will have some probability of defecting to another insurance company.

  3. Charge the premiums obtained from step 2.

    That's basically it. Almost all of an insurance company's premiums are determined from statistical analysis on previous claims made. The important corollary is that an insurance company does not care about cause and effect; they don't care whether people with poor credit ratings get into more accidents, or whether credit rating are caused by getting into accidents, or whether both events are caused by a third factor; all they care about is that their analysis suggests that they are making less than optimal profit from people with poor credit ratings.

  4. The final step is: Hide all the above analysis inside locked doors, and hire some representatives to present a "human" face to the outside world.

w00t!
Its their buisness! (3.00 / 2) (#16)
by threshold on Tue Jul 24, 2001 at 09:56:17 AM EST

The insurance companies can run it any way they want! If they want to charge more if you were born in a month with a 'r' in it they can! You get to choose your insurance company. Don't like that they check your credit rating? Find one that doesn't, they'll exist specifically to target the poor etc. If they're successfull they'll prosper and more of them will come about. If they fail because they don't get enough buisness then more won't come about.


Open Source, Open Standards, Open Minds
The Ubiquity of the Credit Rating: Are you paying more than you should for auto insurance? | 18 comments (17 topical, 1 editorial, 0 hidden)
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