The issue at hand is the use of a consumer’s credit score as an underwriting
tool for auto insurance rates. What is a credit score or FICO score? A FICO
score is a credit score developed by Fair Isaac & Co. Credit scoring is a
method of determining the likelihood that credit users will pay their bills.
Fair, Isaac began its work with credit scoring in the late 1950s and, since
then, scoring has become widely accepted by lenders as a reliable means of
credit evaluation. A credit score attempts to condense a borrower’s credit
history into a single number. Fair, Isaac & Co. and the credit bureaus do
not reveal how these scores are computed. The Federal Trade Commission has ruled
this to be acceptable.

Isn’t it interesting that the score most important in our financial lives,
our consumer credit score does not even contain full disclosure? As stated above
the Federal Trade Commission has ruled that it is ok for Fair Isaac & Co not
to disclose the algorithms used in this process, but what about consumer rights.
While it is important to understand what a FICO score is, it is not the main
issue of this paper, insurance rates are. So where is the connection? All the
public knows is that Fair Isaac tells us there is a high correlation between
people with bad credit and high risk drivers. This notion is insane and from
what I can see from this black box approach, there is no real causation between
the two. This type of reasoning is similar to convicting a person of something
before they have even committed a crime. For instance, let’s say I do a study
and that study shows there is a high correlation between criminals and people
with bad credit. Is this to say that just because you have bad credit you are
more likely to commit a crime and therefore you should be profiled or perhaps
locked up because you are a risk to society?

This system is discriminating against minorities, disabled and in my case
college students among others. Fair Isaac & Co claims that they cannot show
the sophisticated algorithms they use to calculate these correlations and scores
because they fear that they would be giving up valuable proprietary information
that was very costly to develop and maintain. What about the cost to consumer’s
who may be paying higher rates or in worse cases even denied insurance based on
these practices.

The Equal Credit Opportunity Act forbids creditors from considering race,
sex, marital status, national origin, and religion, but if we don’t even know
how these companies are calculating these scores, how in the world could we
possibly know whether or not they are discriminating. This smoke and mirror
approach is what many government agencies do to subtly discriminate and extort
money from the American.

What about extortion? As I reflect on this topic extortion comes to mind.
Webster defines extortion as to “obtain by force or compulsion.” By using such
unfounded tactics consumers are forced into paying the higher rates. First of
all, 90% of all insurance companies use this procedure; secondly in the interest
of society legislation requires all Americans with cars to have car insurance.
Living in a country where it is virtually impossible to live without a car
doesn’t this present some force to pay the rates? Also, lets say you cannot
afford to buy a car with cash, in which case you could obtain liability
insurance alone and save quite a lot of money; but instead you take out a loan,
the bank will require you to obtain full coverage auto insurance to cover them
until you pay off the loan. While this case may not represent an extreme case of
extortion it does give reason to ponder the connection.

Insurance companies tout themselves as representing peace of mind, protection
and security, but at what cost. Over the past 10 years, I have spent roughly
20,000 dollars in car insurance, what have I claimed? Easily less than half and
I totaled a car. Is insurance just a form of legalized gambling protected by
government? The McCarran-Ferguson Act of 1944 exempts the insurance industry
from antitrust laws, so here we are again without a choice; collusion is the
rule not competition. Where are the ethics of lawmakers? Many states are
screaming about this controversial issue and some states such as California have
had some success, but with protection from top government what can consumers do?

I have personally written the Governor of Pennsylvania about the subject, one
of my main questions was;

“I am a concerned citizen. Recently I noticed my car insurance rates
increasing at a substantial rate. I investigated the situation only to find out
that my credit rating was making the difference, not my driving record.”

The response I received from the Department of Insurance follows:

This letter is in response to your complaint filed with the Pennsylvania
Insurance Department through Governor Edward G. Rendell's correspondence office
regarding the use of credit as an underwriting tool for automobile insurance in
Pennsylvania.

I have read through your concerns and it appears that you are questioning the
underwriting of automobile insurance. Specifically, the use of credit in
determining eligibility. Many different factors go into the underwriting of an
insurance policy, such as type of vehicle, drivers, location, etc. and most
recently credit history. Pennsylvania law does not prohibit an insurance company
from using credit as an underwriting tool so long as it is done within the first
60 days of writing a policy. Under the law, an insurance company is granted a 60
day window from the inception of a policy to determine whether or not the policy
fits into the company's guidelines.

In your letter, you stated credit scoring in part of the rating structure and
presumable must be approved by the Insurance Department. Actually, credit
scoring is part of a company's underwriting guidelines and the Dapartment only
regulates underwriting guideline to the extent they are not discriminatory.

Also, Federal law under the Fair Credit Reporting Act allows credit
information to be used for underwriting financial and insurance
transactions.