A Supreme Court Decision handed down today, Safeco v. Burr, mostly sided with two insurance companies in a dispute over notifications related to the Fair Credit Reporting Act. The real question at hand was to what extent insurance companies had to notify policy holders when they offer them rates other than the lowest as a result of credit histories. The Court found that GEICO did not violate the law and that if Safeco did, it did not do so recklessly. This should let insurance companies breathe a little easier when they use credit scores to determine rates and, insofar as allowing the use of more information leads to rates that better reflect risk, it’s likely a good thing.
But the use of credit scores for insurance in the first place strikes me as a little screwy. Insofar as someone who skips out on a VISA bill might also skip out on a policy premium, I can see how credit scores might impact insurers’ bottom lines. But in setting premiums, this seems like a second-rate risk factor. Yes, common sense indicates that people who are careful in paying their bills may be careful when they hit the road or make a fire at home. But I don’t know of any research that proves this. Even a strong correlation wouldn’t really be very good proof: Everyone knows that younger people have worse driving records AND a harder time paying their bills on time. Thus, I’d tend to think that the use of credit scores may be more of a mechanism for coping with a system that, in many states, limits the use of a risk factors that may have more predictive validity than credit scores. Because they’re so easy to get, I’d suspect that insurance companies will always take them into account. But I’d also be willing to be that an insurance system subject to less political regulation would do a better job