Link: https://www.rstreet.org/2021/03/30/bricks-without-straw/
Excerpt:
Credit analytics firm FICO posits that the reason for the correlation of credit history and claim probability is that “individuals who closely and cautiously monitor and manage their finances tend to also take better care of their cars and homes and are, generally, more diligent in their risk management habits.” Because such individuals are found across demographic classifications, the discrimination argument becomes hard to uphold.
If insurers find that credit scores have bearing on accident propensity, insurers should be allowed to use them. Preventing insurers from deploying basic tools required to generate appropriate risk-adjusted prices leads to mispricing of risk, harming insurance buyers as well as insurers. What is more, such deprivation leads to unintended negative consequences—an unfair socialization of risk, leaving customers either overcharged or undercharged. Executive fiat prohibiting insurers from accessing the tools of their trade is tantamount to Pharaoh ordering the Israelites of old to make bricks without straw. Bad business, bad policy.
Author(s): Jerry Theodorou
Publication Date: 30 March 2021
Publication Site: R Street