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Industry
vs. Consumer
Did you receive the
dreaded 'adverse action' letter
from your insurance company
at renewal? It stated that after carefully reviewing your driving
record, your premiums have been adjusted or you have been placed
in a new company accordingly. Was credit cited as a reason? Was it
the only reason? Believe it or not, consumers with perfectly clean
driving records are being penalized based solely on
this "insurance credit score".
If you spoke with your
agent, did he/she refer you to the "consumer" reporting
agency listed on the letter? What was the response to your
question of "what does my credit report have to do with my
driving record"? Something along the lines of "we have
proof that credit and claims correlate, there are studies that
prove this is true."?
Agents don't have copies of these
"studies" . This turns out to be true for most
supervisors as well as many people who probably should have seen
the studies.
The studies are discussed here.
It is NOT these
studies that are important. It is what these studies measure
and how they are used by the insurance industry.
One study involves the correlation
of claims filed and credit report characteristics. They took the
information of 170,000 policy holders that filed claims within a
three year period and pulled their credit reports. They found that
consumers with certain credit characteristics filed more claims
and more expensive claims. These characteristics included the
number and types of accounts a consumer holds, the number of late
payments, duration of late payments, adverse public records (e.g.
civil judgments, tax liens, bankruptcies, etc.), and the number of
inquires a consumer had on the report. The insurance industry sees
this as evidence that individuals who take risks in meeting
financial obligations will also incur higher insurance losses.
What these studies do not
take into account are individual circumstances. This practice does
benefit some consumers in that affordable insurance is more
readily available. However, there are several
groups of consumers that are included in the study and
therefore more prone to adverse action through no fault of their
own.
Absolutely nothing.
That is not what the insurance industry is measuring. What they
are measuring is your reaction following an accident. In other
words, the insurance
industry is not concerned about whether you will have an accident
or not, they are concerned as to whether you will want to be
compensated for that accident.
The industry refers to this as:
Claims Consciousness: A
person with the good credit score is more likely to settle the
accident without the insurance company, the person who scored
poorly is more inclined to file a claim and expect to be
compensated for the loss.
Claims consciousness is just one
of many factors the industry speculates is the reason behind their
"evidence" to support the use of insurance credit
scoring, the others include:
Fraud: Increased Frequencies
Fraud: Increased Severities
Maintenance: Improper care of homes and vehicles.
Morale Hazard: Considers insurance a 'safety net'.
Stress that leads to negligence.
When did filing a claim become negligence
or a crime??
And based on these studies,
a "proven history of "bad" driving habits has less
weight in insurance rating than a snapshot of one instant in time
of a person�s credit history."1.
The industry regards insurance credit scoring as a
more accurate predictor of loss.
Why? Because a consumer's accident
will not necessarily cost the insurance company but a claim filed
on that accident will.
How many times have you
heard someone say that he/she is going to settle his/her
accident losses without the insurance company. They claim it
is less expensive than facing the RISK of extremely high
surcharges. (Consumers who pay
for their losses with a credit card are penalized twice. First, by
not seeking compensation from the insurance company and second,
the ratio of their account balances to the credit limit available
on the account scores poorly on the insurance credit score!)
"A 1990 survey of 39 states
and the District of Columbia found that publicly available
records contained information on only 40% of a sample of 27,629
accidents serious enough to meet each states accident reporting
requirements." Insurance Research Council, April 1991.
"The Economic Impact of
Motor Vehicle Crashes 2000" by the NHTSA reports that roughly
half of all PDO (property damage only) accidents go unreported
each year "due to concerns about insurance or legal
repercussions." Full
report.
"In 2001, there were 6,322,795 police-reported motor
vehicle traffic crashes. Of the total crashes, 3,033,000 were
injury-only crashes and 4,282,000 caused only property damage.
The National Highway Traffic Safety Administration (NHTSA) estimates
10 million or more crashes go unreported every year." Full
report.
The insurance industry is set
up to discourage claims. Many times, an agent's pay is
dependent on the losses incurred through the policies he/she
writes. Insurance employees are taught to "talk" clients
out of filing small claims to keep the agent's loss ratios low.
Therefore, those who did file
claims did not have the financial resources necessary at
that time to cover a loss without insurance. They found a need,
for whatever reason, to file the claim and receive compensation.
Regardless of a
consumer's credit history, the consumer who filed a claim had
his/her credit characteristics measured and noted in the studies.
As a result, these credit characteristics are used in the scoring
models to measure risk. Remember, insurance credit scoring does
not follow traditional lending credit scoring guidelines, they are
not measuring "creditworthiness", they are considering
credit characteristics.
So in effect, by measuring it this
way, with claims and credit characteristics, the insurance
industry is creating this correlation and then feeding
the numbers back to themselves in order to have the
"numbers" necessary to justify this practice. They are
measuring your propensity to file a claim, based on your current
financial situation, if you incur a loss. They are selecting
those insurance consumers who they believe will not seek
compensation from the insurance company in the event of a loss.
What about the
"small" claims, just hundreds of dollars more than the
deductible? Small claims make up most of the claimable patterns.
The ones more likely to be filed by those with less disposable
income? Those are the claims that the industry is apparently
targeting.
Lower income Americans
tend not to have the disposable income necessary to cover losses
and need compensation. Therefore, their credit characteristics are
included in the scoring models and as a result,
they are exposed to adverse action.
In the 1998 Joint
Economic Committee Study by the 105th Congress:
"Families at the bottom
end of the income scale have very little disposable income, and
every dollar spent on premiums for auto insurance represents
money that could be spent on other essentials, such as food,
shelter and health care. As previously indicated, owning a car
can be extremely important in terms of finding and holding down
a job."4.
The industry is taking action
against those who need insurance the most! That leaves no doubt
that the use of
credit information by insurers discriminates against lower income
Americans including minorities
and may be just a sophisticated form of "redlining".
Think about it, don't the insurers
have a vested interest in manipulating the market to reward their
"high lifetime value" (those likely to buy their
financial products) with lower rates?
When asked about a potential bias
against lower-income families, the industry says, "We find no
correlation between income level and credit rating. How you manage
your money is not a function of net worth or income." See
the Income vs. Credit Scores Analysis here.
Another significant problem is the
failure of the insurance industry to recognize other factors that
result in certain credit characteristics. Certain lifestyle
choices can very easily affect your insurance credit score and do
not indicate financial irresponsibility at all.
Most Americans, responsible enough
to carry insurance, are by now pretty well educated about their
credit reports. They do strive to keep them "clean". In
most cases, it is due to outside, uncontrollable variables
and lifestyle choices that lead to scoring poorly.
And due to the fact that truly
financially irresponsible individuals are less likely to carry
insurance, there is an additional large group of consumers whom
will be adversely affected by insurance credit scoring due to
circumstances beyond their control.
�There is absolutely
no link between credit score and the likelihood you will have
an accident,� he [Rep. Gregg Underheim, Wisconsin] said Monday.
�What they are doing is severing the link between risk and
premiums, and that is a very bad insurance practice. It is very
bad public policy.�
How does this promote and
encourage good driving habits? Should that not be the goal of the
insurance industry? To make our roads safer for the
consumers?
The insurance industry claims
that 70-80% of consumers benefit from the use of Insurance
Credit Scores.
"A key point is that most
people have good credit and stand to benefit from insurance
scoring. NAII member companies report that nearly 70 percent
of consumers benefit from the use of insurance scores. This is
a tool that is fair for all consumers and means lower
insurance premiums for most consumers," said Joseph
Annotti, assistant vice president of Public Affairs for the
National Association of Independent Insurers (NAII).
Funny thing is, how can that be?
According to Richard Le Febvre of the AAA American Credit
Bureau:
"We found out that 70
to 80 percent of consumers had a least one error in their
credit file.�
And more recently:
" Washington, D.C. - Millions of Americans could
pay more for - or be denied - credit, insurance, or
utilities because of inaccurate credit scores,
according to a new study, Credit
Score Accuracy and Implications for Consumers,
released this morning by the Consumer Federation of America
(CFA) and the National Credit Reporting Association (NCRA)."
Full
article.
Insurers claim they have been
using insurance credit scoring for some time now with success.
It may have worked well for them and allowed for them to keep
it from public scrutiny for a time - but not after September
11th and the resulting new economy. Now that layoffs are
an everyday occurrence and the length of time between
positions is increasing, consumers with traditionally
excellent credit are needing compensation from the insurance
company in the event of a loss. Those with excellent credit
are filing claims resulting in consumers with excellent credit
being adversely affected by insurance credit scoring. At this
point, it appears no one is immune to the adverse effects of
insurance credit scoring. To the point, it is the way
insurance credit scoring models work and not the financial
management of individuals that determines who is affected and
how they are affected.
Scoring model vendors refuse to
divulge the methodology of these studies, the underlying data for
independent verification, or the details of the study results.
They claim these models are a "trade secret" and 'fear'
that disclosure would lead to outside infringement.
Add to this, the ability of the
insurance companies to raise or lower the insurance credit score
they will accept at will! The use of credit scoring models allows
for insurance companies the ability to raise rates without ever
applying to the department of insurance for a rate increase. Rates
are regulated, underwriting is not. Companies can adjust the
underwriting models by changing the cutoff points for the credit
tiers. So, if they want to write more business, they lower the
score the will accept; less business, they raise the score. As
insurance credit scores are also run on existing customers, they
are at the mercy of the insurance companies and are exposed to
rate increases, moves to subsidiaries and losing their insurance
altogether.
Finally, it must be addressed that
there is a loss if and only if the consumer has a
loss. Without evidence of reckless driving, (speeding tickets,
etc.) and prior losses, there is no proof that any
insurance consumer will have an accident and file a claim or will
be hit by a hail storm. The insurance company does not have a
crystal ball.
The bottom line is that
consumers are losing this ballgame and when it comes to insurance required
by law and the banking industry, the insurance industry
shouldn't even be allowed to play the game.
There's more! See
Industry vs. Consumer II
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