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.