Credit (Insurance) Score, Race and Risk

The Texas Department of Insurance has just released the first part of a two part study examining credit scores, race and risk.  The insurance score is technically not a credit score as people in the know will tell you, but these same people will not tell you what the important differences between the two scores actually are. 

The big problem is that insurers use credit scores as underwriting risk factors.  Everyone knows low income people tend to have low scores, but not everyone (including me) can figure out why low income means higher insurance risk.  Insurers and credit score purveyors tell us the data do not lie:  a low credit score is associated with higher risk of loss.  The logic for most people is missing, thus the current dispute.  A UT study even begs the question as to what is going on. 

Interest groups like the CEJ (Texas Center for Economic Justice) claim the credit score discriminates against minorities.  To the extent that minorities have lower incomes, this is to be expected.  The question is whether the use of the score unfairly discriminates against minorities.  By unfair discrimination, I mean that after controlling for all risk factors (everything else equal) minorities have higher premiums exactly comparable risks. This is not a Civil Rights Act definition of discrimination, but one based on insurance ratemaking principles.

The first part of the study is a univariate (single comparisons) analysis that us that the average credit score for whites and Asians is better than that of Hispanics and African-Americans.  Further, credit scores are related to risk.

This report suffers from the fact that it does not test the conjecture in a multivariate setting because nothing is held constant.  This report adds exactly nothing to the debate. The authors admit this and plan to release part II at the end of the month. Even if properly accounting for income and other risk factors, race or ethnicity adds nothing to the risk score, the pressure to ban credit scores remains strong.  This is because of the federal civil rights lexicon is quite strong.  Disparate impact is used to describe those cases where an EMPLOYER has a facially neutral policy that has an adverse effect on protected groups.  Insurance underwriting has normally focused on measurable risk factors as permissible discriminators.  I believe all states prohibit the explicit rating of risk based on race, but none have gone so far as employ disparate impact as the some like the CEJ appear to desire.  The IJ today has this statement from the CEJ:

The Austin-based consumer advocacy organization, the Center for Economic Justice, maintained the study results "confirm what CEJ has been saying for years - that insurance credit scoring causes higher insurance rates for low-income and minority consumers.

This looks like a different battle line than the one the insurance industry is fighting.  The industry focuses on risk and others focus on race.  A study that does not control for both simultaneously will never be an acceptable answer.*

*The reason I sound like a po’d prof is because I have been saying this since around 1995 when the issue first arose.  I even volunteered to do the study for "free" if I could be free to publish it in a peer reviewed journal.  Grumble, grumble….

Comments

[Brandon Hart]

I am black and I do have a low credit score. I have never filed a claim in my life. I have been evicted from an apt before, i have filed bankruptcy for having wages garnished and student loans hounding me for the rest of my modest salary. I pay about 80% more for basic coverage on my car insurance than the average Georgian. repeat I have never filed a claim, no violations, i am over 30, I am married, I drive an economy car...I can't help to think why do I have to trust these car insurance companies using informtion gathering companies such as Choice Point. Choice point knows my race. They probably have a picture of me on file, I wouldn't be suprised. How do I know information is being passed from the choicepoints of the USA to the insurance companies. I definately believe they share qoutes . Everyone qoutes me the same. How can this be when they are supposed the figure rates in different ways. I am very frustrated and ready to sue. It is bull dung. They use credit reports but never report to credit. My credit score would be 100 points better if they reported all the 2 years of installments I paid on time. Its total BULLL!

[David Byrne]

I've been working for a major insurance company for the past 5 years as a credit analyst. It's my job to be familiar with all things related to insurance and credit. My company uses Choicepoint for everything from insurance scores to claim history reports, to motor vehicle reports. It is true that Choicepoint has one of the largest databases in the country in regards to people's personal data. However, speaking from the perspective of a person that looks at all of the data that comes in from them, they collect no information about race, income, or sexual orientation.

Insurance companies are going to continue to use insurance scores. At last count, more than 90% of them are using such a score. Lawsuits have been filed and have been tossed out of court. The only thing that you can do to minimize the negative impact these scores may have on you or maybe even turn it around into a positive affect is to increase your insurance score. This takes time, but it can be done. There are companies out there that educate and assist people to improve their insurance scores. The things that need to be done to improve a score are very precise and not as simple as paying your bills on time. Do a lot of research before attempting to change anything on your credit report in order to improve your insurance score.

An additional note... I am also an African-American person.

[noemi]

please review this link:
http://money.cnn.com/2005/02/17/technology/personaltech/choicepoint/

[noemi]

please review this link:
http://money.cnn.com/2005/02/17/technology/personaltech/choicepoint/

[Alison]

Hello. I am trying to develop a program that teaches students between the ages of 12 and 18 about financial respnsibility and how credit affects more than just the ability to get a credit card. Could you recommended some resources? Thank you.