In the insurance industry, the credit score of an individual matters a lot. The credit score helps the insurance company to determine the level of risk that the individual poses and, consequently, the price that the individual pays for insurance. Insurance credit scoring is a controversial issue because it raises ethical concerns regarding how insurance companies use personal information to make decisions that affect people's lives.
Insurance credit scoring does not involve a person's credit history with a credit agency but rather their credit-based insurance score. The score is a statistical prediction of the likelihood that an individual will file an insurance claim in the future. The score is derived from a combination of factors such as credit history, outstanding debt, payment history, and length of credit history.
Many insurance companies use insurance credit scores to determine the amount a person pays for insurance premiums. They argue that people who have low credit scores are more likely to file claims, and therefore, they are more expensive to insure. Insurance companies justify using insurance credit scores in determining premiums by saying that it is a valid and objective way of predicting risk.
However, advocates for consumers' rights and opponents of insurance credit scoring argue that the practice is discriminatory. They argue that allowing insurance companies to use credit scores in determining insurance premiums puts low-income individuals who may have low credit scores at a disadvantage. These individuals, who cannot afford credit monitoring, are subjected to higher insurance premiums, regardless of whether or not they have a history of claiming insurance.
Further advocates argue that insurance credit scoring is discriminatory because people of color and minorities tend to have lower credit scores on average compared to white Americans. According to a study from the Center for Economic Justice, black and Latino drivers pay an average of 40% more for car insurance than white drivers. This difference in pricing is partially based on insurance credit scores, which penalize people who have poor credit scores.
Insurance Credit Scoring Raises Ethical Questions
The ethical questions surrounding insurance credit scoring are rooted in the use of personal information for making decisions that affect people's lives. Critics argue that using credit scores as a factor in determining insurance premiums is unfair because the credit score does not reflect a person's accident history or their actual level of risk. In this way, it can be seen as a violation of the rights of consumers.
Insurance Credit Scoring Cannot be Considered Risk-Based Pricing
Risk-based pricing should be grounded on actual risks or factors that can predict future risks. Factors such as driving records, driving experience, age, and car make and model are more relevant to determining the likelihood of accidents. Insurance credit scoring has no bearing on a person's driving habits or history.
Alternative Methods to Insurance Credit Scoring
An alternative to insurance credit scoring is focusing on actual risks associated with an individual's driving history or the likelihood of filing a claim. Insurance companies will have to take into consideration personal factors such as age, gender, driving experience, accident history, and other factors related to actual risk. Risk-based pricing will ensure that the price that people pay is accorindc to their risk profile.
Another approach that insurance companies can take is to eliminate insurance credit scores altogether. Many insurance companies already operate in states that prohibit the use of credit scores in determining premiums. However, this would require a concerted effort from insurance companies to change their method of pricing.
Conclusion
Insurance credit scoring raises ethical concerns because it is used as a means of determining insurance premiums for consumers which is unfair and discriminatory. It is important to review current practices as they relate to insurance credit scoring. Insurers should come up with alternative models that take into account the actual risk of consumers. Until such time, insurance credit scoring has to be seen as an ethical issue with severe implications for consumers in various economic strata.