When it comes to insurance companies their main goal is correlate rates for policies as closely as possible with the actual cost of claims. The reason for this is because if the rate will be too high clients will move to other providers causing the company to lose market insurance or they will set the rates too low and cause them to lose money. So one tool that insurance companies use is credit scoring. The reason for this is because studies have shown that how a person manages their financial affairs will be a good prediction on their insurance claims. (Insurance Information Institute) However, there is now a debate on whether the use of credit scoring in underwriting insurance is ethical or not. So on the insurers side, they are saying the
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For example, in the testimony of Kevin McCarty Insurance Commissioner for Florida before the subcommittee on Oversight and Investigations of the House Committee on Financial Services said critics are saying that by using the credit score it is another method to use discrimination against lower-income people. (McCarty) The reason for this because even though the studies show that by using the credit score is a more accurate way to make the right risk classifications it also directly impacts certain classes. A survey has also found that 14% of insurance professional found that by using this method it is ethical, 10% found it unethical and 66% are undecided. (McCarty) Another reason why this tool can be unethical is because the systems itself is broken. For example, in a downturn economy were unemployment rates rise, homes foreclose and the rise in inflation all have an impact on the credit score even though it’s not a true representation of the person risk. (McCarty) Also, crimes such as identity theft can cause a person credit score to go lower which would cause the person to be placed in a risk allocation where they really shouldn’t be. (McCarty) Also, a person who does not use a credit score, have a lower amount of credit cards, have an installment loan all can reduce a person credit score even though they may manage their money properly. (McCarty) So the ethical dilemmas are why are these insurance companies using this tool when they know that there will be some discrepancies in the way that a person will be risk classified based on a non-accurate credit score. Another ethical dilemma is that consumers are kept in the dark. The reasoning being is that these companies do not have the obligation to tell why the score and its impact on your rates. So a consumer will have no idea if the insurance company will want to take you on and simply keep charging
For example, in the testimony of Kevin McCarty Insurance Commissioner for Florida before the subcommittee on Oversight and Investigations of the House Committee on Financial Services said critics are saying that by using the credit score it is another method to use discrimination against lower-income people. (McCarty) The reason for this because even though the studies show that by using the credit score is a more accurate way to make the right risk classifications it also directly impacts certain classes. A survey has also found that 14% of insurance professional found that by using this method it is ethical, 10% found it unethical and 66% are undecided. (McCarty) Another reason why this tool can be unethical is because the systems itself is broken. For example, in a downturn economy were unemployment rates rise, homes foreclose and the rise in inflation all have an impact on the credit score even though it’s not a true representation of the person risk. (McCarty) Also, crimes such as identity theft can cause a person credit score to go lower which would cause the person to be placed in a risk allocation where they really shouldn’t be. (McCarty) Also, a person who does not use a credit score, have a lower amount of credit cards, have an installment loan all can reduce a person credit score even though they may manage their money properly. (McCarty) So the ethical dilemmas are why are these insurance companies using this tool when they know that there will be some discrepancies in the way that a person will be risk classified based on a non-accurate credit score. Another ethical dilemma is that consumers are kept in the dark. The reasoning being is that these companies do not have the obligation to tell why the score and its impact on your rates. So a consumer will have no idea if the insurance company will want to take you on and simply keep charging