A few days ago saw the FTC issuing its report on insurers use of credit scores, finding nothing nefarious going on.
I wrote at the time that I was surprised at how similar the FTC study sounded to some industry claims, and I expected consumer advocates to make a bit of a fuss.
Here it comes. A press release, via Insurance News Net:
Representatives of the Consumer Federation of America, the National Fair Housing Alliance, the National Consumer Law Center, and the Center for Economic Justice said the FTC study is fatally flawed because the insurance industry controlled the data used in the analysis. Instead of requiring the submission of comprehensive policy data by a large number of insurers, the FTC used data handpicked by the insurance industry[...].
The FTC study also confirms that, despite growing reliance on credit-based insurance scores, scant evidence exists to prove there is a meaningful connection between a consumer’s score and auto insurance losses. Without the need to demonstrate such a connection, insurers could use any consumer characteristic, such as hair color, to price insurance products.
“Despite finding no explanation for the alleged connection between insurance scores and losses, the FTC report somehow concludes credit scoring is valid and good for consumers. This is not an impartial analysis, but simply advocacy for insurers,” said Birny Birnbaum of the Center for Economic Justice. Birnbaum, a former insurance regulator, has studied insurance scoring for over 15 years.
One of the fundamental differences in opinion between insurers and the consumer advocates who “love” them is the extent to which causality (or at least intuitive correlation) must exist in rating or underwriting.
I hate to point out that if a stringent test were applied as regards causality, many of the variables we’ve traditionally used as an industry could be forced by the wayside, even though strong relationships can be measured to exist between these variables and future losses.
We could ignore those relationships, but then those insurance products become less attractive to write, which in turn reduces competition and drives up rates for the public in general, over and above the effective discounts many folks see because we are able to identify them as better-than-average risks.
