Wednesday, January 7, 2004

12. Our credit is used unfairly

It used to be that an individual's credit rating was established to define the ability of that individual to borrow money and his or her reliability in repaying loans. Today, one's credit score may also be used in employment background checks (with consent) and in determining one's insurance rates. Employment background checks make sense, especially if that individual will be responsible for large amounts of money- although the argument may be that the reason an individual is looking for a job is to earn money to improve his or her financial standing.

The use of credit ratings as an insurance rate factor is, however, a bit more controversial. It is estimated that currently 90% of all insurance companies factor in credit rating when determining an individual's insurance premium. I will suppose that there is indeed credibility in the claim of insurance companies that those who are financially more responsible file less claims than those who are less financially stable. The issue, however, is much deeper than this statistical claim; in fact the entire process of rate determination ought to be questioned.

Insurance companies base their premiums on driving record, residence (rural or urban/ driving distance to work), age (under 25), gender, marital status and type of vehicle. That is, they have determined this set of factors as key in determining the risk assumed by the insurance company in insuring individuals. However, only driving record and driving distance to work is a truly objective rate factor. The balance is, depending on the definition, discriminatory in nature. If discrimination is defined as "inflicting hardship on a individual based on attributes for which he or she has no control over," the evidence is clear. In addition, insurance companies, through both good fortune and skill, tap dance their way through the politics of societal defined discrimination. For example, males pay more for insurance than females, and those under 25 years of age pay more than those older. Societal backlash might be encountered if insurance companies charged more for females and the elderly. However, when statistics are not on their side, insurance companies hide behind terms such as "urban residence" rather than the poor, or worse, poor minorities. Incidentally, it is the poor who might experience the effects of using one's credit rating as a premium-setting factor.

What should be of fear to all individuals is the insurance's company use of seemingly private (or at least unrelated) information against an individual in determining insurance rates. And what should fear the poor is the use of their social-economic status to further subsidize the rates of the affluent.

There are many other, perhaps even more relevant, factors that can and might yet be used by insurance companies to aid their rate setting. Consider some other real factors of bad driving, factors such as the number of kids in the car. What about smoking, drinking, eating, and talking on cell phones while driving? What is to stop insurance companies from requesting cell phone statements to aid in rate determination? For should not those who engage in excessive cell phone conversations while driving, not have their rates increased accordingly?

What is the limit to the endless amount of statistical factors that may be fairly or unfairly used by insurance companies to set insurance premiums? How about driving licensure test results, high school grade point average? Aren't these at least as indicative and considerably less discriminatory than credit rating?

Insurance companies argue the responsibility of the financially stable as represented by credit scores. Isn't responsibility the product of values? For example, which individual might be excising greater societal irresponsibility, one who drives a Hummer with gas mileage so low that it requires its own oil well, or an individual who pays his credit card a couple days late following a layoff?

Through statistical methods and groupings, also known as stereotyping, insurance companies are permitted to discriminate against individuals whose only fault is to be part of a statistically inferior group. One's credit rating is influenced by many factors, some of which are beyond one's control (illness, job loss, rich parents) and most of which have no influence on one's ability to operate an automobile. Moreover, the use of credit rating scores in insurance premiums disproportionately affects the poor- those who may already being paying more for premiums if they also reside in urban areas.

Insurance is meant to be a pool of risk sharing, with individuals paying proportionally. This proportional amount should be based on past performance and the experience of the INDIVIDUAL, not the group of which one belongs. Under the current system, insurance companies are penalizing the responsible members of a class because of the performance of the class as a whole. Where else in society is this permitted?

Finally, it is ironic to note that, through risk assessment, insurance companies commit considerable time and resources to determine insurance premiums; however when their statistical methods fail- and claims are filed- rates are promptly raised.

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