Letter from Ohio: Insurance-scoring ban wouldn’t serve consumers well
Except for public health and some reasonable safety measures, when the government tells an industry how to run its core operations, the impact is not generally favorable to consumers. It’s true in manufacturing, transportation, utilities and also in financial services. In the insurance business, beating up or overregulating insurance companies or agents as a group may satisfy political needs, but it almost never has a positive impact on insurance customers. As a general proposition, if you find a state with low premiums, it is also a state where the insurance companies are most anxious to compete for the business, and regulation of the industry is reasonable and predictable.
Insurance is unlike almost every other kind of business for one reason: the cost is never known when the price of the policy is calculated. Since the price is essentially a guess, companies over the years have worked on developing the most sophisticated guesses possible. If they guess low, they go out of business. If they guess high they may lose business to other companies over the long-run. The more basic the tools (i.e. the less information available) the bigger the guesses.
As modern insurance practice has developed, rating engines used to calculate prices for auto and homeowner insurance policies have been stuffed with different factors to test them all out for predictability over a large numbers of customers. Certain combinations using information from credit reports and personal driving records have proven to be the most accurate in separating customers into groups who share the highest likelihood of having the same loss impact on their companies. These multiple factor proprietary formulas can be somewhat different for each company and can be used for either underwriting or pricing to some effect. Since most insurance claims are created by accidents, there is no way to tell which specific customers will be afflicted with what kinds of accidents and losses, but there are very useful ways to guess that a group with a certain risk profile will tend to produce more losses for a company through the claims process than another group.
State after state have concluded that formulas using credit-based factors are not effective proxies for ancestry, geography, race, income, sex, age, marital status and other categories that people do not welcome as dividing lines. Some wealthy people have terrible insurance scores because of their aggressive use of credit. And unlike banks and other lending institutions, which use credit information to determine if people can successfully service a debt, with insurance, there is no “redlining” or favoritism between a city’s neighborhoods.
Many states, including Ohio and most of her neighbors, have already considered and/or passed laws dealing with the use of credit factors to determine insurance coverage, as the formulas are not made public and are often difficult to explain. There have been dozens of studies of insurance scoring by states, trade associations, consumer groups and the U.S. General Accounting Office, some involving millions of policyholders. There was a lawsuit brought in the state directly north of us. The sum of this confirms that a ban on this kind of tool for insurance companies, such as that currently proposed by an Ohio lawmaker, would not be good for Ohio policyholders.
They should do their homework, and think of something else if they really want to help Ohio drivers and homeowners.
