The Insurance Credit Scoring Scam

“Don’t let Bill Sizemore raise your insurance rates – or ours.” That’s the final sentence in a homey sounding letter, which recently was distributed to voters all across the state of Oregon. A friend sent me a copy this morning and I admit I had to chuckle as I read it. I didn’t even know I had the power to raise insurance rates.

The letter purports to come from one Peggy Browne of the “Browne Family Farm”. Sounds friendly enough. In fine print, however, at the bottom of the page, there is a disclaimer, “Paid for by Oregonians Against Insurance Rate Increases”, meaning the letter is really a clever bit of propaganda paid for by the insurance industry, which is spending millions in a desperate attempt to defeat Measure 42.

Measure 42, which I wrote, would prohibit the obscene practice of using credit scoring to establish consumer insurance rates or premiums. In case you weren’t aware of it, insurance companies across the country routinely check your credit before issuing you a policy and base their rates largely on the credit scoring models they have created. Consumers beware: The entire system is a scam.

The truth is, companies generally do not use your real credit score. They create their own “unique scoring model”, which conveniently is a proprietary trade secret. Your insurance credit score may bear no resemblance to your real credit score. Insurance scoring models are so convoluted that people with 750 or higher credit scores often do no qualify for preferred rates, for such reasons as “having too many credit cards”. Never mind that their balances are low and they have never been late on a payment in their life.

Consumer Reports Magazine performed an investigation to test the accuracy of insurance credit scoring, which the companies claim is amazingly precise. The magazine created a fictional person with a fixed history of bad credit and requested rate quotes from several of the larger insurance companies, all in one part of the country. Just how precise were the credit scoring models? The rate quotes for this one fictional person ranged from approximately $1,400 per year to $4,800 per year, all using the same credit history.

Consumer Reports also stated that one out of every four Americans has serious errors on his or her credit record, which adversely affects both the person’s credit and the rates insurance companies charge for coverage. Heaven help you if you are widowed, recently divorced, or going to college. All of these factors statistically can make you a likely victim of inflated rates due to weakened credit scores.

Victims of Katrina or 9/11 type disasters are also likely to suffer temporarily lower credit scores and thus higher insurance rates. In other words, for decades you pay premiums for insurance coverage, then when you actually use the product you bought, they hit you twice. Once for filing a claim and then again for the reduction in your credit score due to the effect of the disaster on your personal finances.

What if you are buying a house and have applied for several mortgage loans in an attempt to find the lowest interest rate. Every time a lender checks your credit, he lowers your credit score and potentially increases your insurance rates. (Multiple credit checks lower your credit score.) Why are you suddenly a greater insurance risk because you are shopping for a lower interest rate.

Is there a real correlation between credit score and frequency of claims? Perhaps a slight one. But get this: the correlation is so slight that 96 percent of those with less than perfect credit have perfectly normal claim frequencies. In other words, 96 percent of those with weak credit are being punished for the behavior of a handful of bad apples, most of which could have been charged higher rates based on their driving records and past history of filing claims without ever looking at their credit score.

It might comes as a surprise to many, but insurance credit scoring is so indefensible that even the agents who sell insurance for the big companies overwhelmingly condemn the practice. Measure 42, which bans insurance credit scoring outright, is supported by the national agent associations of such large companies as Farmers, State Farm, Allstate, and American Family. Many agents of these companies have told me personally that they would speak out on this issue, but fear that they would be fired. Their national agent associations, however, filed endorsements for Measure 42, which I listed in the official voters pamphlet.

One point the agent associations stress is that credit scoring is a backdoor way for insurance companies to practice racial and neighborhood “redlining”. You see, it is illegal under federal law to redline. However, by using secret, proprietary credit scoring models, insurance companies can discriminate without ever appearing to have done so. Credit scoring allows companies to charge higher rates to minorities and ethnic groups, which typically have lower credit scores, while all the while appearing to have ignored the customer’s ethnicity. Never mind the fact that the Hispanic customer has a perfect driving record. He pays more for insurance, because he has been late paying some bills.

It is interesting to note the origination of credit scoring and how it works. The idea originated, not with the insurance industry, but with one of the large credit scoring companies. The creator of insurance credit scoring built a list of approximately 120 factors related to credit, from which the insurance companies could pick a mere 15 to 20 criteria and form their own unique, secret, credit scoring model. The idea was a win/win for both industries.

The credit companies make a fortune due to all of the credit checks the insurance companies make. The insurance companies win because they have a simple source for rating customers and do not have to mess so much with tracking a person’s driving record, the number of tickets, accidents, or arrests for driving under the influence.

It’s all the same to the insurance industry. Their goal is simply to maximize the amount of premiums they collect. What do they care whether the system is fair or equitable, or for that matter, logical. The end loser is of course the American consumer, especially those with excellent driving records and less than perfect credit histories.

One message the insurance industry will employ to defeat Measure 42 is to claim that the measure will result in an increase in insurance rates for those with good credit. Undoubtedly, their ads will threaten a wholesale increase in rates for those with good credit, if credit scoring is outlawed. Call their bluff. Ask them to prove it. Ask them how much they will increase everyone’s rates. They won’t answer you, because they can’t. They’re bluffing.

According to Consumer Reports Magazine, in most states insurance companies were allowed by the state insurance commissioner to increase their base rates when they first adopted credit scoring. In return, the companies were allowed to give preferred or discounted rates to those with better credit. In all likelihood, if credit scoring is banned, the state insurance commissioners will force companies to lower their base rates and then charge higher rates for those with real risk factors, such as having too many tickets, wrecks, or DUI convictions.

Let’s wind this up by applying a little common sense to the issue. How does having a low credit score make you more likely to get into an accident? Of course, it doesn’t. Why should a person with a low credit score and a perfect driving record pay more for insurance than the rich guy down the street, who totaled his Mercedes last year and filed an enormous claim? Of course, he shouldn’t. Insurance credit scoring is all nonsense. There is nothing fair or logical about it.

I realize that some of my fellow conservatives might object to more government regulation of business, which this measure is. To them, I would simply respond: When government requires citizens to buy a product, as is the case with insurance, the product is no longer truly a “free enterprise” product. We have to buy their product. We have no choice. When we are required by law to buy a product, the playing field is automatically tilted in the seller’s favor, in which case it is important that reasonable controls be installed to insure that consumers are not gouged.

Passing Measure 42 is the right thing to do. Credit scoring is an unconscionably unfair and discriminatory practice. Please join me in ending insurance credit scoring in the state of Oregon. Let’s force insurance companies to play the game fairly and honestly. In the end, we will all be better off.

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Posted by at 06:24 | Posted in Measure 37 | 23 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jerry

    Right on Bill! Could not agree more with you.
    We need to pass 48, too, by the way…

  • mrf

    This sounds like the insurance companies have a lot of explaining to do and I reckon they haven’t offered any public debates. That would be fascinating. Are there any on the docket?

  • Ben Mathews

    I do not see the problem here. This is supposed to be a conservative site which implies that we believe in the marketplace. If an insurance company believes that poor credit risks cost more to insure that is their right. If the insurance company is wrong, it will see a declining market share and either change its ways or go out of business. If it is right, it will prosper because it can offer lower rates to all of us that are good credit risks. I certainly do not want to subsidize someone else if I can avoid it. The current marketplace is a good thing. The proposed change is socialist.

  • Clay Fouts

    “When government requires citizens to buy a product, as is the case with insurance, the product is no longer truly a “free enterprise” product. We have to buy their product.”

    This is patently false. The Government requires insurance coverage for those who wish to engage in certain activities. No one is forcing you to drive a car and suffer having to pay the requisite liability insurance. If you don’t want to play the game, don’t drive. Costs too much? Sorry, you lose. Why don’t you start your own insurance company and do it better? That’s the American way!

    Land, on the other hand, *is* required for a person to exist. Our basic, physical survival demands space on the Earth, food to eat, and potable water. How does your head not explode into fragments while trying to simultaneously contain both the notion that government needs to regulate something as petty as insurance rates yet it must let the Invisible Hand of the free market determine the most fundamental parameters of life itself?

  • Kristian

    I really have no idea how to vote on this. That suggests that the messages, both of which are merely contradictory (“you’ll pay more” vs. “you won’t pay more”) are pretty much useless as getting out the information we need to know.

    Why?

    Why do we need to do this? The libertairian side of me likes limiting the amount of information anyone (including the so called “free market”—it ain’t been free for a century or more) can dig up on me. My credit’s very good, though, so if this does pass will I indeed see a rise in rates? Even then, is it worth it?

    I don’t trust corporate bureacracies any more than government bureaucracies. It would be a violation of those companies’ internal ethics (maximize stock price) to do something voluntarily that was in the consumers’ best interest if it had the potential of harming the bottom line. So far as I’m concerned, insurance companies don’t deserve any presumption in favor of the free market, as immense barriers to entry give them what amounts to oligopoly. They don’t build those giant insurance towers in every downtown by running narrow profit margins.

    PS – Bill, I don’t really have anything against you personally (we haven’t even met), but I’m also skeptical of why you’re running this measure. Usually, motive is a far second concern in my initiative voting decisions, but I do have to wonder. Any comment on that?

  • Captain An-on

    While i don’t agree with a lot of Bill Sizemore’s views and politics, i whole heartidly agree with him here.

    Because, as Kristian points out, of the high barriers to entry into the market and collusion among the insurance companies, they have been allowed an essential monopoly. As long as they can squeeze a penny out of you, or deny a claim on ANY grounds, they will. The bottom line is, there needs to be legitimate nexus between the driving record and the credit report. And there is none. paying bills and debts does not increase your ability to drive safely. It really is a backdoor to bilk more money out of the consumer.

    Because of the monopoly, you can’t shop for another insurance company that doesn’t use this practice. they all do. *IF* a company started up and didn’t use the practice, it would have to charge higher rates until they got a costumer base that would adequately fund thier company, which would drive away costumers because of the rates. It’s a chicken and egg situation. Can’t lower rates unless you have enough customers; won’t get enough customers until you lower the rates. So the government has to step in to protect the consumer.

  • I keep trying to figure out what Bill’s angle could possibly be on this one, but when he starts doing crazy things like quoting the preeminent consumer interest group in the country, I begin to wonder if he isn’t just plain right with this.

    Insurers don’t offer you credit. They offer you insurance. There’s no reason to use private credit information to determine whether they’re an insurance risk.

  • oregonelam

    I can understand equating insurance risk with a credit record. If you are too irresponsible to pay your bills, you’re likely to be just as irresponsible with the safety of your vehicle…not in how you drive, but in how you keep proper maintenance, the failure of which is also a risk.

    However, I have a problem with the use of a credit report by the insurance industry without disclosure to the policy holder as to the type of information uncovered without any ability to challenge it. Instead of forbidding the use of credit reports, require insurance companies to allow policy holders to review the information and correct it.

  • Steven Plunk

    Why are we asking government to intrude into how a private business conducts business? Is there a problem with how it is being conducted presently? Will government intervention make things better or worse? This measure has too many questions surrounding it to garner my vote.

    I would think it obvious that credit scores have a relationship with insurable risk so why would we object to a risk management company using useful data in assessing risk?

    • Anonymous

      Because often times, private business robs the consumer, participates in unethical practices and cheats the public out of millions. The government must step in when private businesses act irresponsibly, and to protect the interets of the citizenship.

      Bad credit does NOT = bad driver. i’ve seen plenty of people who would purportedly have good credit (ie. drive expensive cars such as BMV’s, LEXUSes etc) drive like crap – mis corners, cross lines, run red lights etc. Please, it’s just one more way the big corps can rob americans

  • Anonymous

    Having worked in the insurance industry a number of
    years ago; I can say without any hesitation that if the
    insurance industry opposes something – it’s likely going
    to gore their ox – not the policyholders.
    And there is nothing “free” about the insurance
    industry. If you own a small business, for example, your
    choices are very limited as to which companies can
    write a policy for you in that state. I won’t even discuss
    insurance industry policies of sending out payment
    notices a week or 10 days before payment is due. Just
    another scam to assess the policyholder “late charge”
    fees.

  • Scat Cat Pdx

    Is this the same Bill Sizemore?

    I am voting no to me this is a free market issue.

    • MikeTubbs

      ….i disagree…Scatcat!
      [clean your own doo-doo box…it’s stinky]

      Nobody subsidizes anyone in the Auto Insurance Market!

      When i lived in California my auto insurance premium was $241.00 a year…when i moved to Oregon it jumped to just under $700.00 per year!

      [i didn’t take up gieco’s offer of a 15% savings…i’d be paying $884.00 with their discount…go figure?…i was free not to choose..so i didn’t choose them]

      Why did my status of “Ultra-Prefered Driver” change? with just a move across the state line.

      It ain’t because the insurance guys in California don’t know math and insurance guys in Oregon do. They charge more here solely because can!

      [that’s doo-doo…too]

      It’s people like you that continue to allow them to….so stop believing those insurance commercials…they’re geared for people that have better things to do…

      …than think for themselves.

      Tell me just how 42 could cause your rate to go up…in a truly unsubsidized “Free Market” economy?

      Vote Yes on 42

  • Clay Fouts

    “They charge more here solely because can!”

    Isn’t this the very essence of the free market?

    • Anonymous

      So should be be paying 11 dollars per watt of electricity?? PGE has a virtual monopoly on the energy business. A free market would let them rape and pillage the public. but the government prevents it.

      same situation here. the insurance industry is raping and pillaging the citizens, and the government needs the ability to stop them.

      wake up, there is no free market economy. it’s pseudo-free only. There is a lot of needed government interference.

      • Clay Fouts

        Actually, it’s not virtual at all. PGE has a real and *guaranteed* monopoly over its state-assigned jurisdiction. Just as with roads and water pipes, no one wants a dozen sets of electrical lines running up and down the street to their house. The judicious use of right-of-way inhibits its practicality, and the essential nature of those services warrant extra precautions to maintain service stability. Thus the government trades monopoly status for price controls (theoretically, of course).

        These essential services differ substantially from auto insurance. Insurance companies do compete on price (as is evidenced in the price differential cited in this very article!) and don’t have to utilize a limited common resource (like r.o.w.).

        Being happily car-free, this affects me naught and I don’t much care one way or the other. I may very well vote for it on the principle that insurance is a racket. Or I may vote against it on the hope that it motivates more people to out of their cars. Mostly I think it’s humorous — if eggregiously hypocritical — that the folks at “Oregon’s Idea Brainstrust” are promoting this implicitly anti-free-market legislation.

  • Tim Lyman

    The insurance industry has nothing to do with free markets.

    • Phyllis Klein

      I am glad to see this bill come to Oregon. I moved to Oregon from Idaho 3+ years ago and was surprised to find my car insurance rate with Farmers Insurance uses my credit information in calculating my rate. It is a truly a crime. The correlation is ridiculous.

      I have great credit (score > 750) with absolutely no late payments ever (age 50), yet my credit rate with Farmers was a D (A being best) because I had too much credit. It jacked my rate up significantly. My new agent told me to get rid of cards I don’t use, reduce my overall credit line. I was outraged.

      I checked it out online and found that each state determines whether this is allowed or not. Many states have voted it out. I am a CPA and I believe the insurance companies are really stretching it to believe that I am a greater risk in general due to my large credit line, therefore I am a greater risk behind the wheel. I don’t see the relevance. Perhaps if someone has a very poor score, it may indicate they do not have good sense, but I would still argue that they could be a safe driver and simply horrible with money!

      I have been shocked by the ads against this measure, hence my visit to the website. I guessed that only insurance companies would be against this measure passing. I’m surprised to find so little argument for it. I’m shocked that the general public is not cognizant of how their insurance companies are ripping them off. But so many today just keep paying that insurance bill and rarely notice the details of their ‘rate calculation’!

      I do not know who Bill Sizemore is, but am getting a good idea from the comments here. Perhaps people should not always assume (Pete #3) and make sure to not only keep an open mind but continually make sure that we make up our own individually and vote based on facts/research.

      Thanks for your ear and spread the word “Yes on 42”!
      (I did hear that American Family Insurance did not use credit scoring as a part of their client’s risk )assessment.

  • Stan

    When I went shopping for insurance many years ago, I went through almost all of the major insurers before I could find someone to insure me for the state required minimum liability coverage. All others would not do it ’cause, according to them, it wasn’t enough in this day and age of accident repair. I finally found a company that would and have been satisfied with my rates and coverage ever since. I drove 2-500 miles a day in the Portland metro area for 4 yrs. and was involved in 2 fender-benders caused by inexperienced teen drivers without any credit rating at all, one with Mom and Dad’s insurance, and one with no insurance. Thank goodness for uninsured motorist coverage. Insurance companies have an open ticket to do whatever they can get away with, much like the oil companies. We, in the western U.S. are transportation dependant or strangled by lack of mobility. Insurance companies and oil companies should not be allowed to dictate our finances when the government mandates this intrusion of minimum liability coverage and taxing fuel due to our need for transportation in the west. We don’t have the chokehold of 8 million people on an island in New York. Who would even want to drive there? We, on the other hand, have no choice unless we’re happy with foodstamps and welfare because to get to a JOB usually involves travel up to 30 miles for a living wage.

  • gary sternberg

    While at times I appreciate Mr. Sizemore’s loyalty to the people of Oregon, and I have supported several of his anti-tax measures in the past…this time Mr. Bill the Ballot Measure Man is totally and completely off-base.

    Many of the points that were contained within the article above are factually incorrect, and furthermore, will lead ignorant people (yes…many voters do not have a clue, and all of you know that) to arrive at an incorrect conclusion due to the spin you have placed on this. One of your better abilities is to distort the truth in an attempt to bolster your latest ballot measure. Specifically…

    Your comment that “They (theinsurers) create their own “unique scoring model”, which conveniently is a proprietary trade secret” is not factual. All insurers that wish to use a credit scoring model must file their intended use of credit with the state insurance division, and can only use credit scoring as an underwriting tool if the insurer can prove a substantial correlation between losses and credit scoring. All insurers credit scoring benchmarks are on file with the state, and are NOT “proprietary trade secrets.” Strike One!

    Next: you quoted Consumer Reports, stating that “Consumer Reports Magazine performed an investigation to test the accuracy of insurance credit scoring” and noted that the magazine created a fictional person in order to test this idea. I do not know of a single insurance carrier that actually has credit questions on an insurance application. There is a release for the insurance applicant to sign in order to allow the insurer to run their credit, but no actual credit questions or information, other than a S.S. number (perhaps). In order to obtain a “fictional person’s” credit history, that “fictional person” would actually have to HAVE a credit history…how would this be possible? The insurers run the credit, not the producers. STRIKE 2!

    Last pitch: your words–> “What if you are buying a house and have applied for several mortgage loans in an attempt to find the lowest interest rate. Every time a lender checks your credit, he lowers your credit score and potentially increases your insurance rates. (Multiple credit checks lower your credit score.)” True, but only to a point, and you should really check the current credit reporting laws to make sure that you actually KNOW what you are talking about. By the way…if you have good credit, inquiries on your credit report are pretty much a non-issue, unless a person’s gone insane recently by applying for credit everywhere. STRIKE 3!

    Folks…do yourself a favor and read more on this subject before you make up your mind. Mr. Sizemore is obviously putting a spin on this to make the measure look attractive to the Oregon voters…think before you vote!

  • Daniel Carnahan

    This was so phenomenally well written I am taken back and humbled. I have recently sent out my own measure 42 email (quoting and referencing this exact web page) trying not to ‘sway’ people, but rather state the truth. And, for me, that’s what this article does. Anyone who disgraces themself by putting down this article falls into the realm of the wealthy elite who are struggling to step on the shoulders of the rest of society. Could they look a widow in the face and laugh as they profit from her loss? Could they look in the eyes of a child of a victim from Katrina and spit upon them, eating in front of them while the child starves, benefitting from their precious gift of prosperity. For far too long, people have ignored that their prosperity is a fragile gift. Mr. Sizemore, I commend you for your words. Not because you ‘sold’ me on anything (I already had my own opinions on this matter), but because you so eloquently stated the facts for all to read.
    I can only pray, that in the eyes of God, under the Flag representing the spilled blood of brave American Soldiers and 200 years of fighting for freedom and equality, that the voters come forward, wealthy or unwealthy, read the issues in their entirety and understand what this measure means to them. Hard working Americans are hard working because they are not blessed with good finances and must struggle based on the biased and innacurately measured Credit Scores from Credit Bureaus. Do we spit on them? For, if it wasn’t for them, this country would not be. And, to those whose money has defined their lives and their rights to benefit from our loss: It is the poor who currently subsidize the wealthy. Where do you think insurance companies get the money to offset the discount they give you? How is it fair that we are punished for your gain when we’ve done nothing wrong: innocent until proven guilty? Remember that? This measure would even out the playing field for us all. Besides – it’s the lack of care and concern that the ‘well off’, supporting this bill that scares me the most. Why do we want to allow people with such a disregard for others to be behind the wheel of 2 1/2 tons of steel? Seems like an incredible risk to me…
    And folks, one final point of defined significance, those with good credit scores are the only ones who can afford expensive vehicles, homes, etc. – and yet, it is these very same people who are causing the border between good and bad scores to increase because the so-called low risk people aren’t able to keep up their payments.
    Mr. Sizemore, I will vote for your measure, and for the honesty and integrity you have shown here, which is becoming more and more rare in the current political arena, you also personally have my vote. Thank you.

  • Daniel Carnahan

    I feel compelled to add one other, most necessary comment here. Sadly, I cannot post the entirety of my long email making the case more solid, but all of you need to know something:
    You have been told that with this measure, your good credit report will cause you to subsidize the poor. Sadly, this is what we call a twist on words to sell you on an idea. I wish I had the room to explain it, but you need to know you’re being lied to.
    You have been told that poor credit scores are directly related to higher accident risk. You need to know, you’ve been lied to. Poor credit scores are directly related to higher insurance loss. The number of accidents is not affected by credit scores, but the inability to afford a lawyer, with a low credit score means that the person with the bad credit will most likely lose in an insurance settlement. That’s the difference. It’s not about safety or driving, it’s about money.
    You have been told that the laws are already in place protecting consumers from ‘increases’ in their insurance due to credit scores. You have been lied to. Although the laws are there, the frequency of checks by insurance companies in direct correlation to increases in insurance rates verifies that little factor.
    You have been led to believe that this measure will adversly affect your home/car insurance because everyone and everything will now be considered an equal risk. This is in fact, not true. Sadly, what you have not been told is that now your driving record will have a direct impact on your insurance, your accident history will have a direct impact on your home. You will be, for the first time in this state, held accountable for yourself, and your actions. You will not be exempt because you have money. Sorry if that bothers you, but you should know the truth.
    Folks – whether you like Mr. Sizemore or not, believe in him, support or oppose this measure, the fact is, you are being lied to repeatedly by those opposing it. Whether or not you know the facts… even assuming you’ve done all your homework, as I said in the email I’ve sent out across oregon, would you follow lemmings over the cliff to the rocks below? No – then why would you follow liars into the voting booths (where our very lives are affected?)?
    Thanks.

  • Curt Sowulo

    Give Satan an ice-pick for surely, hell has frozen over. I actually agree with Mr. Sizemore on something but I only need one simple reason: because it is the right thing to do.

    Insurance rate should be determined soley on ones measurable casualty risk. I don’t deserve lower premiums because my credit score is over 800. I deserver lower premiums because I haven’t had an accident or ticket. Period. Sometimes things must be done simply because they are the right thing to do. For me, this has nothing to do with money. It has everything to do with reasonable ethical standards.

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