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logo    The Insurance Industry's use of Credit Scoring


Your piece on the insurance industry's use of credit scoring is indeed a bad Blow. Your reliance on statements made by people with a stake in the matter can be likened to asking the fox if his invasion of the chicken yard is justifiable. Good journalism requires something more objective than that.

First you fail to point out that in spite of the industry's claims, not a single study of the validity of the use of credit scoring has ever been made public so the claim can be reviewed objectively. Search the internet, the professional journals in a good university library--you wont find a single one. If the claim has such validity, why all the secrecy? Even the august Texas legislature, which commissioned such a study from the University of Texas, hasn't released it for public scrutiny, and when I asked the office of the Lieutenant Governor for a copy, my request was ignored. I thought of making a Freedom of Information request, but decided against it merely because there wasnt much I could do with it except satisfy my own curiosity. Your paper could make a request and publish it though. Ever thought of doing that?

Such studies are of dubious validity even when they do seem to show valid relationships. Statistical literature is full of such examples. But you need to only remember the vast number of recent medical claims that have been made on the basis of such studies that later have been shown to be wrong. Think about the recent news about the use of estrogen as beneficial to the health of women. For decades we were told that studies showed such a benefit. But alas, they were wrong, according to the most recent studies. Do you really think we ought to base policy on that kind of nonsense?

Second you talk about the industry's ability to alter the formulas to get different results. That should have raised your hackles! That ability insures that the proponents of the practice can get any result they want. Decide what you want and write the formula accordingly! So much for objective validity.

Then finally, think about your understanding of how a relationship between credit scores and insurance claims can be possible. Sure, people who use credit carelessly may also do other things carelessly, but that doesnt prove anything unless you can also show that a vast majority of the people with poor credit scores are people who have used credit carelessly. As far as I know, no study has ever been done that gives that result.

A poor credit score can result from a vast number of things other than the careless use of credit. The credit granting institutions pushing easy credit on people, the high interest rates involved, and the penalties included make it almost certain that even the slightest bad luck will destroy a creditor's score. A debilitating accident, the sudden illness of a child, a sudden death of a family member, loss of a job, a loss of investments in the stock market, a divorce, increases in the cost of living unaccompanied by proportional increases in income, even something like an increase in insurance costs, can push even careful people over the edge, since credit today is granted not on the basis of a creditor's present assets, but on an estimate of his future income. Do you want to argue that all of these people are irresponsible users of credit? If so, I believe the only relevant conclusion to be drawn is that the only responsible use of  credit is to use the offers of it as kindling for a fire.

It is said that William Barrett Travis, that hero of the Texas Revolution who now resides in the Texan Pantheon of godlike figures, came to Texas to avoid the debts he had accumulated in, I think, Alabama. What would this heroic Texan say about this use of credit scoring? The insurance industry would, I guess, point to his clay feet. So much for heroes!

I really shouldn't but I want to include another point about the credit industry, even though it diverges from the main argument. Credit granting institutions use of penalties for late payment is something a good journalist could have a field day with. I suspect that if you checked the D&B ratings of those institutions, you will discover that many, perhaps all, don't pay their own bills on time.

So I'm sorry to have to tell you that you, like so many others, have been suckered. Thank you Mr. Phineas Taylor Barnum! (Steve Blow DMN 7/10/2005)