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Tuesday, December 12, 2006
Insurers’ use of credit data hardly risky
The Atlanta Journal-Constitution
There is no better example of the gap between the liberal and the conservative view of government than the debate about whether insurance companies should be allowed to use credit scoring to set auto insurance rates.
In the liberal view, the happenstance that minorities or “women” — the latter a category often used politically to represent a particular segment of women — may be disproportionately clustered in higher-cost auto-insurance categories by virtue of their credit histories is evidence of a need for government intervention. Well, yes, in two circumstances:
One would be evidence that individuals, whatever their race, creed, gender or nationality, are being scored on the basis of inaccurate credit information. If it’s happening randomly and infrequently, it’s a personal problem. If there’s a pattern, or if it’s commonplace, it’s a regulatory problem.
The other situation that could require government intervention is evidence that auto insurance companies are colluding on price.
Otherwise, we all should rejoice — and conservatives do — that the insurance marketplace has led companies to become more sophisticated in rate-setting. Allstate, the third largest automobile insurer in Georgia, has developed 384 categories of pricing based on a potential customer’s credit history, home ownership, driving and claims history, age, ZIP code and type of car.
That tells me that insurers have developed, using whatever elements they are legally entitled to consider, a software program that more accurately prices coverage based on their assessment of risk.
So what if they’re wrong? Unless they’re colluding, some other company will price its risk more accurately, and the disadvantaged group — either the good drivers or the bad — will flock to the cheaper policy.
Ah, but you say, consumers lack the sophistication to make price comparisons. Two points here: One is that companies with a price advantage have incentive to make consumers aware. The other is that, if government must be involved at all it’s state Insurance Commissioner John Oxendine’s duty to make information available permitting price comparisons.
The notion that government should designate some of its citizens as too incompetent to make rational choices, making it the business of politicians to save them from themselves, is the foundation for big, intrusive government.
Commissioner Oxendine, who should be defending a marketplace pricing system that keeps good drivers from subsidizing the bad, told reporters he can’t explain why using credit information works for insurers. But the inability to explain the computer model to Oxendine hardly makes it illegitimate. The issue for him, as an insurance regulator, is whether components of the pricing model are illegal — race, for example. If not, his role should be to make sure the companies aren’t colluding and that pricing information is readily available and in plain English.
In this instance, the marketplace has done something conservatives should try to replicate in government. It has stopped — or so it appears — requiring people who behave responsibly, who drive carefully, who don’t abuse credit, from subsidizing the irresponsible behavior of others. That is what conservatives designing new government programs should be doing.
State Rep. Rich Golick (R-Smyrna), who introduced the legislation in 2003 allowing credit scoring, defends it still, to his credit. “Insurance companies are in the business of accurately predicting future loss, and if insurance scores weren’t predictive, companies wouldn’t use the criteria,” he writes. The data is “indisputable” that a “clear correlation” exists between credit scores and future loss, he says.
Furthermore, he said, “I have seen no empirical data to suggest” a link between credit scoring and discrimination by race or income. “At no time in the insurance application process is an individual asked about his or her race or income,” says Golick. “The process is blind.”
Golick, as the story noted, represents Allstate, though he denies that it was an Allstate bill. Allstate bill or not, the concept serves consumers. Before its passage into law, most insurers offered only a “handful” of prices and customers qualified or they didn’t. Now the Progressive Group of Insurance Companies, which piloted the scoring system, has overtaken Allstate as the second-largest auto insurer in Georgia. It has 130 categories.
Customers pay, without subsidies from others, for the risk they represent. The marketplace works.
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