Insurance Scoring in the Crosshairs
June 10th, 2009 by Jeb Foster
Insurance scoring—insurers loooove it, and they think everyone else should heart it too. They insist that prices stay low because insurance scores (which include but are not limited to a person’s credit score) have an impressive knack for predicting risk.
But the public and state regulators need regular convincing, with fairness their primary concern. The NAIC recently convened a public hearing on insurance scoring, and industry representatives were forced, once again, to defend the practice, largely against a 2004 study conducted by the Missouri DOI.
The Missouri study revealed that the strongest predictors in a consumer’s insurance score were race and income, a fact which—rather understandably—created some hostility among the public and nervousness among policymakers.
The Insurance Information Institute (III) criticized the report when it came out in 2004, pointing out methodological errors that they said were the result of a pre-existing bias against the practice. Further, the III said, the Missouri department of insurance failed to acknowledge the benefits bestowed by insurance scoring: “The study’s opinions imply that the MDOI is prepared to eliminate the credit-related discounts currently offered by insurers to thousands of minority families living in Missouri as well as to homeowners and drivers throughout the state.”
Most states allow credit-based insurance scores, which is a fact commonly touted by insurance industry groups. (They’re less excited about mentioning that 48 states have laws putting certain restrictions on the practice.)
The faltering economy and tightening credit markets have sparked new criticism of insurance scoring. Critics predicted that the poor (whose ranks are swelling and whose credit scores have suffered) would be dealt another blow with worsening insurance scores and thus higher premiums.
“If insurance prices started to rise for no good reason, at a time when the public was least able to pay more, it would be a political, regulatory, and public relations disaster,” said Brian’s Sullivan’s May 18 Auto Insurance Report (print only, subscription required). “Insurers would be headed for a fierce beating, and worse, it would be well-deserved.”
Sullivan reports that while insurance scores are indeed dropping, they have not dropped as steeply nor been as volatile as credit scores, and that is good news for the insurance industry, because it means that insurance scores are calibrated well enough that they don’t simply mimic credit scores. (Many people falsely equate the two.)
Ultimately, though, the insurance scoring debate will probably stick around for a long time to come, with neither side landing a fatal blow against the other. Part of the reason is that the two sides approach the issue from radically different places. The insurance industry’s arguments, which center around efficacy, accuracy and low prices, don’t hold sway with opponents, who think that there is some larger issue of fairness at stake.
Tags: insurance scoring
