Despite plenty of evidence showing its benefits, credit-based insurance scoringis still under attack. So an American Insurance Association (AIA) executive vicepresident has penned an article in its defense.
Debra Ballen, an executive VP for public policy management, has published anarticle on the Web site of the Washington Legal Foundation that examines ayear-old report from the Federal Trade Commission (FTC) on credit-basedinsurance scoring—and refutes its critics. In 2007, the FTC issued a congressionally mandated report in order to determinethe impact of credit-based insurance scoring on the availability andaffordability of personal automobile insurance. Congress also asked the FTC toexamine the effects of insurance scoring on members of various racial and ethnicminority groups.
The FTC confirmed that the use of insurance scores is a valuable and accuraterisk-assessment tool and may benefit consumers. The commission was not able todevelop a model that predicted risk as effectively while narrowing thedifferences of scores among selected groups.
Despite this report, credit-based insurance scoring still has its detractors.
In her article, Ballen tackles some of the assertions that have been made overthe past year, many of which are “based on misunderstanding regarding theequity and efficacy of this proven risk-assessment tool,” she writes.
The most controversial area of the report is the issue of the proxyeffect. Opponents of credit-based insurance scoring contend that the use ofsuch models leads to an increase in insurance rates for members of certainminority groups. Ballen points out that the results of the analysis conducted bythe FTC left room for only a one percent proxy effect for race or ethnicity.Furthermore, experts who have examined the report say this is most likely aresult of an error in data analysis or methodology.
Another contended aspect of the report is the FTC’s data collection andanalysis. According to Ballen, critics are focusing on the FTC’s datacollection and analysis procedures because they are “unable to refute thatcredit-based insurance scores benefit the insurance marketplace.”
The chairman of the FTC and other commissioners dismissed these attacks on theprocedures when the report was released last year.
Finally, the FTC was asked to evaluate alternatives to credit-based insurancescores that would continue to predict risk while decreasing the differences inscores among racial and ethnic groups. The commission was unable to construct amodel that would produce this desired effect.
The results of the FTC study have done little to pacify the critics.
“While the issue of credit-based insurance scoring will likely remain avolatile political issue, policymakers should not lose sight of the significantconsumer benefits that these scores have brought to the insurance system,”Ballen writes. “To disallow this beneficial underwriting tool would elevatepolitical expediency over sound actuarial analysis and economics, to the ultimate detriment of the very consumers the politicians claim to serve.
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