Insurance Credit Scoring: An Ethical Issue

This is the issue: auto insurance rates can be underwritten using a consumer’s credit score. What is a credit score, or FICO score? Fair Isaac & Co. has developed a FICO score. This credit score is used to determine the likelihood that credit users are able to pay their bills. In the late 1950s, Fair Isaac started to work on credit scoring. Since then, lenders have accepted credit scoring as a reliable method of credit evaluation. Credit scores are meant to summarize a borrower’s credit history into one number. Fair, Isaac & Co., and credit bureaus don’t reveal how these scores were calculated. This has been deemed acceptable by the Federal Trade Commission.

It is interesting to note that our consumer credit score, which is the most important score in our financial lives does not contain complete disclosure. Fair Isaac & Co has been granted permission by the Federal Trade Commission to not disclose the algorithm used in this process. But what about consumer rights?

It is important to know what a FICO score means, but it is not the only issue. Insurance rates are. What is the connection? Fair Isaac claims that there is a strong correlation between high-risk drivers and people with poor credit. This is a crazy idea. I see no correlation between them.

This reasoning is similar in that it convicts someone of a crime before they actually commit the crime. Let’s take, for example, a study I did that showed a strong correlation between criminals compared to people with poor credit. Does this mean that if you have bad credit, you are more likely than others to commit crimes? If so, you should be profiled and perhaps even locked up.

This system discriminates against minorities, the disabled, and college students in particular. Fair Isaac & Co claim that they are unable to show the complex algorithms they use for calculating these correlations and scores. They fear they might have to give up valuable proprietary information, which was extremely costly to create and maintain. These practices could lead to consumers being denied insurance or paying higher rates.

The Equal Credit Opportunity Act prohibits creditors from considering race and sex. However, we don’t know how these companies calculate these scores. How can we know if they are discriminating? Many government agencies use this smoke and mirror method to subtly discriminate against Americans and extort their money.

How about extortion? Extortion is what comes to my mind when I think about this topic. Webster defines extortion to be “obtained by force or compulsion.” These unfounded tactics force consumers to pay higher rates by forcing them to. This is because 90% of insurance companies use it. Second, this is in the best interest of society legislation that requires every American with a car to have auto insurance. It is almost impossible to live in a country without a car, so it makes sense to pay the rates. Let’s say that you are unable to afford a car and cannot pay cash. In this case, you can get liability insurance only to save money. But if you take out a loan the bank will require that you have full coverage auto insurance in order to cover the loan until it is paid off. Although this is not an extreme example of extortion, it gives you reason to think about the connection.

Although insurance companies claim to offer security and peace of mind, they can also be accused of causing financial hardship. What have I claimed for car insurance? I have paid approximately 20,000 dollars in car coverage over the past 10 years. I paid less than half of the cost and still managed to purchase a car. Is insurance just legalized gambling that is protected by the government? The 1944 McCarran-Ferguson Act exempts insurance from antitrust laws. So, we’re back where we were before; collusion is not the rule but competition. Where is the ethics of legislators? This controversial issue is a hot topic in many states. Some states, such as California, have seen some success. However with the protection of top government, what can consumers do to protect themselves?

I wrote the Governor of Pennsylvania personally about the subject. One of my main questions was:

“I am a concerned citizen. Recently, my car insurance rates have been increasing at a significant rate. I looked into the situation and discovered that it was my credit score, not my driving record, that was responsible.

Here is the Department of Insurance response:

This is a response to your complaint, filed through Governor Edward G. Rendell’s letter office at Pennsylvania Insurance Dpartment about credit being used as an underwriting tool in Pennsylvania for automobile insurance.

I’ve read your concerns and it seems that you are questioning automobile insurance underwriting. I am specifically concerned about credit being used in determining eligibility. A variety of factors are considered when underwriting an insurance policy. These include the type of vehicle, driver, location, and other factors. Credit history, and the most recent credit history. Pennsylvania law doesn’t prohibit insurance companies from using credit as an underwriting tool, provided it is done within 60 days of the policy being written. The law gives insurance companies a 60-day window to evaluate whether the policy is within the company’s guidelines.

You stated that credit scoring is a part of the rating system and it must be approved by Insurance Department. Credit scoring is part and parcel of an organization’s underwriting guidelines. The Dapartment regulates only those underwriting guidelines that aren’t discriminatory.

Federal law, the Fair Credit Reporting Act, allows credit information to underwrite financial and insurance transactions.


Debra L. Roadcap

Consumer Service Investigator

Although the Federal Law preempts all state laws and the Fair Credit Reporting Act allows the use of such information, the real question is “Why?” This question still remains unanswered. This is an unethical practice that allows insurance companies to profit from low-income families, single mothers and disabled people. If the government is going to do the right things, they should evaluate consumers based on their individual actions and not on the historical record of others.