Tuesday, October 31, 2006

Oregon Measure 42

Most of us get pretty creeped out when we've heard that our credit rating is being used for this and that, and that just about anyone can get it and make judgments about our lives. This year some people thought that they would change the state statutes by putting before voters a measure that would make it illegal for Insurance companies to use your credit report when trying to calculate your premium, or the amount you pay per month or year for the coverage.

Before I get going, I must say that this was tougher than I thought it would be. I guess you might say that the underlying issue here is just how private we expect our credit history to be. I'll admit that it does bug me that it's so available, and I have to admit that it seems like credit history would be a poor indicator of how bad a driver someone is, or how likely they are to get hurt or have their house burn down.

But you would also like insurance companies to charge a little as possible, and to do that they do their best to figure out who is a more risky customer. Now the obvious way they do this is to look at your absolute history. How many times have you made claims against insurance companies. How is your driving record, and do you have pre-existing health conditions.
But another way that they do it is to look at your place amongst a list of statistical measures that determine how likely you are to file a claim. Your age is one thing, for health insurance. The older you get, the more likely you are to require medical attention and services. The younger you are, the more likely you are to drive like a crazy person (just in case you think I'm being an older crotchety driver, I'd like to remind you that I was a crazy person behind the wheel when I was 19).
Now insurance companies will tell us that people with bad credit tend to be the type that will make poor judgments in their lives and are more likely to come into situations where they need to file insurance claims. This is a pretty interesting correlation, but not one that any of us can either argue with or against based on facts. Why is it that poor credit equates to higher rates of insurance claims? Is it the poor decisions, or is there something else?
I would like to see more research in this area to figure out exactly what the correlation is, because it seems to me that credit would be a crude metric for this sort of thing.
In their letters opposing the use of credit scoring, insurance agent associations made it clear that negative credit scores often stay with people long after they have revitalized their credit, artificially increasing their insurance costs. Often people with excellent credit do not qualify for preferred insurance rates, for such reasons as having "too many credit cards", even though the client carries low balances on their accounts and have never been late.
Now it's important to recall that credit is just one of the many things that insurance companies use to develop your insurance score that guides them in setting your premiums.

However, I can't help but look at this measure's text and wonder how long they took to think about it. One of the arguments against that caught my eye (among those arguments that provided me no information and were just taking up space) was how this affects the use of business credit.
A business' credit worthiness is a proven, accurate predictor of risk. More than an insured's ability to pay insurance bills, it predicts the likelihood that the insured will file an insurance claim.
Now I would believe that credit scores of businesses are a more likely measure of how risky an insurance policy would be for that particular business. Moreso than credit scores of individuals. What bugs me about the measure, then, is it's refusal to take this into account. Why not treat businesses differently than individuals when determining whether or not credit information can be used to determine insurance premiums.

One area that did cause some thought on my part was that proponents of the measure decry the current statues in that they force people with bad credit into the insurance company that they are currently with. It works out that way because insurance companies cannot raise or lower rates based on the credit information of individuals, only when they are applying for a new policy. In that way, proponents claim, they "build a moat around the companies and keep existing customers from shopping for lower rates. This is clearly anti-competition."
Well, I can see how that would appear to be anti-competition. However, the regulations in place to create that "moat" were put into place, and without the government "meddling" in the industry there would be no "discouraging of price comparison or shopping for lower rates", as the proponent put it.
I would think that this grace of having the company you are currently getting insurance from not be able to raise rates on you would allow you the time to work on your credit scores. However, as noted above, it's an enigma how the credit information is used to determine that insurance score, as some people with cleaned up credit can still fail the test.

However, I'm not at all sure that this measure passes the test in too many ways. The lack of exceptions and detail, the apparent ill-thought out absoluteness of the text scares me a bit more than the insurance companies do.
Voting: NO

Jack Bogdanski: No "I think insurance companies should use credit ratings in deciding whom to insure and how much to charge."
Mike the Actuary points out that sometimes life's little tragedies creates bad credit situations.

In other words, assume that you’ve missed a few bills because you’ve lost a job, but you want to shop your insurance coverage. You’re quoted a higher premium because of those delinquencies. In a few states, you have the right to contact an official with the insurance company, and explain your case. If your credit report reflects your situation, the insurer is required to make an exception.
If memory serves, Oregon is not one of those states.

But that's a case for creating exceptions in the law, not outlawing the use of credit history.

The Eugene Register Guard notes the strange bedfellows involved with this one. It's interesting that organizations like OSPIRG and the Pacific Green Party have decided to look past the shortcomings of the measure's sponsor, Bill Sizemore, in order to support this one.
Couple of barks over at Blue Oregon, one is trashing Sizemore and the other is voting for it despite Sizemore.
Tryan Hartill wants desperately to vote for this, but in the end can't bring himself to do it.

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