[Grovenet] Answer on 42.

[David Morelli]

On Oct 24, 2006, at 7:35 PM, Ron D'Eau Claire wrote:

> I've heard the objection that credit rating gets counted more than  
> once too, but I don't think it is valid.
>
> Many factors in any evaluation like what the insurance companies  
> want to do here are interrelated. The normal approach is to weight  
> the various factors differently to produce an accurate overall  
> result. I've seen nothing to suggest that the insurance industry  
> wouldn't do the same.
>
> Remember the goal of the insurance companies: it is to insure the  
> greatest number of people at the lowest cost that still meets their  
> profit goals.  Everything they do is aimed at that: lower premiums  
> mean more customers.  That's how they grow. That's how they make  
> the greatest profits. That's how they stay in business.
>
> We need to step in with rules any time the drive for more customers  
> and better profits causes any business to make choices that are  
> self-defeating over time or which do something else we consider  
> unacceptable in our society, including excluding or penalizing  
> certain ethnic or economic groups. I don't see any evidence of that  
> happening here.
>
> Ron D'Eau Claire

Ron,

I am quite willing to believe that insurance companies want to grow,  
and that they wish to maximize their profits.  I am willing to  
believe that insurance companies want sufficient customers in each of  
their risk pools to allow statistical analysis to be reasonably  
accurate.  I do not believe that individual insurance companies want  
to insure "the greatest number" of people if those people fall  
outside of the company's target demographics.  I am willing to accept  
that the company wishes to use credit history to locate their target  
customers.  Just as credit card companies use demographics to target  
their potential customers.  And I am willing to believe that  
insurance companies want a valid reason to access an individual's  
credit history so that they can decide whether to target them in  
their marketing, and so they can share that marketing information  
with the home & life insurance, investment, real estate, and other  
companies that are members of the parent organization.  Remember the  
flyers they send around every year telling you that they do share  
their information within the company's branches?

I am unconvinced that the target marketing, and target selection  
really has anything to do with driving risk.  And I thought that  
insurance companies set rates in collusion with the state insurance  
commission to ensure that the company receives a sufficient return on  
their premium.  The best way to maximize profit margin would be to  
convince the insurance commission that the pool represents a bigger  
risk than it actually is, so that higher rates are allowed to cover  
the non-existent risk.  And, those people with good credit might be  
convinced to purchase additional insurance items, and investments.

Am I being too cynical?  Possibly.  But, then I once worked in a  
credit card operation of a major banking organization.  A company  
vice-president came through to give a pep talk.  He said that in the  
previous year the company had set aside some percentage of their  
budget to cover defaults on bankrupt credit card holders.  He said  
that the amount the company had actually paid out was significantly  
less than what they had set aside.  He was not happy with this  
situation!  If they had not reached their target percentage of  
bankruptcies, that mean that they had left too much of those people  
who were poor credit risks without credit cards.  He wanted the  
operation to push the credit cards harder to the poor credit risks.   
There was money to be made between the time the cards were issued and  
the people went broke, and he wanted the bank to get as much as  
possible.

Possibly auto insurance is the same way.

David