CREDIT-BASED INSURANCE SCORES: IMPACTS ON CONSUMERS OF AUTOMOBILE INSURANCE

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 ... - tailieumienphi.vn