PDF CREDIT-BASED INSURANCE SCORES
[Pages:242]CREDIT-BASED INSURANCE SCORES:
IMPACTS ON CONSUMERS OF AUTOMOBILE INSURANCE
A Report to Congress by the Federal Trade Commission
July 2007
FEDERAL TRADE COMMISSION
Deborah Platt Majoras Pamela Jones Harbour Jon Leibowitz William E. Kovacic J. Thomas Rosch
Chairman Commissioner Commissioner Commissioner Commissioner
Bureau of Economics
Michael R. Baye Paul A. Pautler Jesse B. Leary
Director Deputy Director for Consumer Protection Assistant Director, Division of Consumer Protection
Bureau of Consumer Protection
Lydia B. Parnes Mary Beth Richards Peggy Twohig Thomas B. Pahl
Director Deputy Director Associate Director, Division of Financial Practices Assistant Director, Division of Financial Practices
Analysis Team
Matias Barenstein, Economist, Bureau of Economics, Div. of Consumer Protection Archan Ruparel, Research Analyst, Bureau of Economics, Div. of Consumer Protection Raymond K. Thompson, Research Analyst, Bureau of Economics, Div. of Consumer Protection
Other Contributors
Erik W. Durbin, Dept. Assistant Director, Bureau of Economics, Div. of Consumer Protection Christopher R. Kelley, Research Analyst, Bureau of Economics, Div. of Consumer Protection Kenneth H. Kelly, Economist, Bureau of Economics, Div. of Consumer Protection Michael J. Pickford, Research Analyst, Bureau of Economics, Div. of Consumer Protection W. Russell Porter, Economist, Bureau of Economics, Div. of Consumer Protection
TABLE OF CONTENTS
i
LIST OF TABLES
iii
LIST OF FIGURES
iv
I. EXECUTIVE SUMMARY
1
II. INTRODUCTION
5
III. DEVELOPMENT AND USE OF CREDIT-BASED INSURANCE SCORES 7
A. Background and Historical Experience
7
B. Development of Credit-Based Insurance Scores
12
C. Use of Credit-Based Insurance Scores
15
D. State Restrictions on Scores
17
IV. THE RELATIONSHIP BETWEEN CREDIT HISTORY AND RISK
20
A. Correlation Between Credit History and Risk
20
1. Prior Research
20
2. Commission Research
23
a. FTC Database
23
b. Other Data Sources
28
B. Potential Causal Link between Scores and Risk
30
V. EFFECT OF CREDIT-BASED INSURANCE SCORES ON PRICE
AND AVAILABILITY
34
A. Credit-Based Insurance Scores and Cross-Subsidization
35
1. Possible Impact on Car Ownership
39
2. Possible Impact on Uninsured Driving
40
3. Adverse Selection
42
B. Other Possible Effects of Credit-Based Insurance Scores
46
C. Effects on Residual Markets for Automobile Insurance
49
VI. EFFECTS OF SCORES ON PROTECTED CLASSES OF CONSUMERS
50
A. Credit- Based Insurance Scores and Racial, Ethnic, and Income Groups 51
1. Difference in Scores Across Groups
51
2. Possible Reasons for Differences in Scores Across Groups
56
3. Impact of Differences in Scores on Premiums Paid
58
a. Effect on Those for Whom Scores Were Available
58
b. Effect on Those for Whom Scores Were Not Available
59
B. Scores as a Proxy for Race and Ethnicity
61
1. Do Scores Act Solely as a Proxy for Race, Ethnicity, or Income? 62
2. Differences in Average Risk by Race, Ethnicity, and Income
64
3. Controlling for Race, Ethnicity, and Income to Test for a Proxy Effect 67
a. Existence of a Proxy Effect
67
b. Magnitude of a Proxy Effect
69
i
VII. ALTERNATE SCORING MODELS
73
A. The FTC Baseline Model
74
B. Alternative Scoring Models
78
1. "Race Neutral" Scoring Models
78
2. Model Discounting Variables with Large Differences by Race and
Ethnicity
80
VIII. CONCLUSION
82
TABLES FIGURES APPENDIX A. APPENDIX B. APPENDIX C. APPENDIX D. APPENDIX E. APPENDIX F.
Text of Section 215 of the FACT ACT Requests for Public Comment The Automobile Policy Database Modeling and Analysis Details The Score Building Procedure Robustness Checks and Limitations of the Analysis
ii
TABLES
TABLE 1. Typical Information Used in Credit-Based Insurance Scoring Models
TABLE 2. Claim Frequency, Claim Severity, and Average Total Amount Paid on Claims
TABLE 3. Median Income and Age, and Gender Make-Up, by Race and Ethnicity
TABLE 4. Change in Predicted Amount Paid on Claims from Using Credit-Based Insurance Scores, by Race and Ethnicity
TABLE 5. Estimated Relative Amount Paid on Claims, by Race, Ethnicity, and Neighborhood Income
TABLE 6. Estimated Relative Amount Paid on Claims, by Score Decile, Race, Ethnicity, and Neighborhood Income
TABLE 7.
Change in Predicted Amount Paid on Claims from Using Credit-Based Insurance Scores Without and With Controls for Race, Ethnicity, and Income, by Race and Ethnicity
TABLE 8.
Change in Predicted Amount Paid on Claims from Using Other Risk Variables, Without and With Controls for Race, Ethnicity, and Income, by Race and Ethnicity
TABLE 9. Baseline Credit-Based Insurance Scoring Model Developed by the FTC
TABLE 10. Credit-Based Insurance Scoring Model Developed by the FTC by Including Controls for Race, Ethnicity, and Neighborhood Income in the Score-Building Process
TABLE 11. Credit-Based Insurance Scoring Model Developed by the FTC Using a Sample of Only Non-Hispanic White Insurance Customers
TABLE 12. Credit-Based Insurance Scoring Model Developed by the FTC by Discounting Variables with Large Differences Across Racial and Ethnic Groups
iii
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