Tuesday, September 01, 2015

Consumer Reports on auto insurance, part IV

(Previous posts: part I; part II; part III)

Consumer Reports' biggest complaint is that insurance companies set premiums by including criteria that, according to CR, don't have anything to do with driving. The one that troubles them the most is credit rating:

"We want you to join forces with us to demand that insurers -- and the regulators charged with watching them on ouir behalf -- adopt price-setting practices that are more meaningfully tethered to how you drive, not to who they think you are. ..."

"In the states where insurance companies don't use credit information, the price of car insurance is based mainly on how people actually drive and other factors, not some future risk that a credit score 'predicts'. ..."

"... an unfair side effect of allowing credit scores to be used to set premium prices is that it effectively forces customers to dig deeper into their pockets to pay for accidents that haven't happened and may never happen."


Well, you may or may not agree on whether insurers should be allowed to consider credit scores, but, even if CR's conclusion is correct, their argument still doesn't make sense.

First: the whole idea of insurance is EXACTLY what CR complains about:  to "pay for accidents that haven't happened and may never happen." I mean, that's the ENTIRE POINT of how insurance works -- those of us who don't have accidents wind up paying for those of us who do. 

In fact, we all *hope* that we're paying for accidents that don't happen and may never happen! It's better if we don't suffer injuries, and our car stays in good shape, and our premium stays low. 

Well, maybe CR didn't actually mean that literally. What they were *probably* thinking, but were unable or unwilling to articulate explicitly, is that they think credit scores are not actually indicative of car accident risk -- or, at least, not correlated sufficiently to make the pricing differences fair.

But, I'm sure the insurance industry could demonstrate, immediately, that credit history IS a reliable factor in predicting accident risk. If that weren't true, the first insurance company to realize that could steal all the bad-credit customers away by offering them big discounts!

It's possible, I guess, that CR is right and all the insurance companies are wrong. Since it's an empirical question ... well, CR, show us your evidence! Prove to us, using actual data, that bad-credit customers cause no more accidents than their neighbors with excellent credit. If you can't do that, maybe show us that the bad-credit customers aren't as bad as the insurers think they are. Or, at the very, very least, explain how you figured out, from an armchair thought experiment and without any numbers backing you up, that insurance company actuaries are completely wrong, and have been for a long time, despite having the historical records of thousands, or even millions, of their own customers.


Just using common sense, and even without data, it IS reasonable that a better credit rating should predict a lower accident rate, holding everything else equal. You get better credit by paying your bills on time, and not overextending your finances -- both habits that demonstrate a certain level of reliability and conscientiousness. And driving safely requires ... conscientiousness. It's no surprise at all, to me, that credit scores are predictive, to some extent, of future accident claims.

And CR's own evidence supports that! As I mentioned, the article lauds USAA as being the cheapest, by far, of the large insurers they surveyed. 

But USAA markets to only a subset of the population. As Brian B. wrote in the comments to a previous post:

"[USAA insurance is available only to] military and families. So their demographics are biased by a subset of hyper responsible and conscientious professionals and their offspring."

Consumer Reports did, in fact, note that USAA limits its customers selectively. But they didn't bother demanding that USAA raise its rates, or stop unfairly judging military families by "what they think they are" -- more conscientious than average.


Not only does CR not bother mentioning the possibility that drivers with bad credit scores might actually be riskier drivers, they don't even hint that it ever crossed their minds. They seem to stick to the argument that nothing can possibly "predict" future risk except previous driving record. They even put "predict" in scare quotes, as if the idea is so obviously ludicrous that this kind of "prediction" must be a form of quackery.

Except when it's not. In the passage I quoted at the beginning of this post, they squeeze in a nod to "other factors" that might legitimately affect accident risk. What might those factors be? From the article, it seems they have no objection to charging more to teenagers. Or, to men. They never once mention the fact that female drivers pay less than males -- which, you'd think, would be the biggest, most obvious non-driving factor there is.

CR demands that I be judged "not by who the insurance companies think I am!" Unless, of course, I'm young and male, in which case, suddenly it's OK.

Why is it not a scandal that I pay more just for being a man? I may not be the aggressive testosterone-fueled danger CR might "think I am."  If I'm actually as meek as the average female, the insurer is going to "profit from accidents I may never have!"


I suspect they're approaching the question from a certain moral standard, rather than empirical considerations of the actual risk. It just bugs them that the big, bad insurance companies make you pay more just for having worse credit. On the other hand, men are aggressive, angry, muscle-car loving speeders, and it's morally OK for them to get punished. As well as young people, who are careless risk-takers who text when they drive.

A less charitable interpretation is that CR is just jumping to the conclusion that higher prices are unjustified, even when based on statistical risk, when they affect "oppressed" groups, like the poor -- but OK when they favor "oppressor" groups, like men. (Recall that CR also complained about "good student" discounts because they believe those discounts benefit wealthier families.)

A more charitable interpretation might see CR's thinking as working something like this:

-- It's OK to charge more to a certain group where it's obvious that they generally have a higher risk. Like, teenage drivers, who don't have much experience. Common sense suggests, of course they get into more accidents.

-- Higher rates are like a "punishment," and it's OK, and even good, to punish people who do bad things. People who have at-fault accidents did something bad, so their rates SHOULD go up, to teach them a lesson! As CR says,

"In California, the $1,188 higher average premium our single drivers had to pay because of an accident they caused is a memorable warning to drive more carefully. ... In New York, our singles received less of a slap, only $429, on average."

-- It's OK for men to pay more than women because psychologists have long known that men are more aggressive and prone to take more risks.

-- But it's *not* OK to charge more for someone in a high-risk group when (a) there's no proof that they're actually, individually, a high risk, and (b) the group is a group that CR feels has been unfairly disadvantaged already. Just because someone has bad credit doesn't mean they're a worse driver, even if, statistically, that group has more accidents than others. Because, maybe a certain driver has bad credit because he was conned into buying a house he couldn't afford. First, he was victimized by greedy bankers and unscrupulous developers ... now he's getting conned a second time, by being gouged for his auto policy, even though he's as safe as anyone else!

If CR had actually come out and said this explicitly, and argued for it in a fair and unbiased fashion, maybe I would change my mind and come to see that CR is right. But ... well, that doesn't actually seem to be what CR is arguing. They seem to believe that their plausible examples of bad credit customers with low risk are enough to prove that the overall correlation must be zero!

When a certain model of car requires twice as many repairs as normal, CR recommends not buying it. But when a certain subset of drivers causes twice as many accidents as average, CR not only suggests we ignore the fact -- they even refuse to admit that it's true!


Here's a thought experiment to see how serious CR is about considering only driving history.

Suppose an insurer decided to charge more for drivers who don't wear a helmet when riding a bicycle, based on evidence that legitimately shows that people who refuse to wear bicycle helmets are more likely to refuse to wear seatbelts.

But, they note, it's not a perfect correlation. I, for instance, am an exception. I don't wear a bicycle helmet, but I wouldn't dream of driving without a seatbelt (and I might even be scared to drive a car without airbags). 

Would CR come to my defense, demanding that my insurer stop charging me extra?  Would they insist they judge me by how I drive, not by "who they think I am" based on my history of helmetlessness?

I doubt it. I think they'd be happy that I'm being charged more. I think it's about CR judging which groups "deserve" higher or lower premiums, and then rationalizing from there.

(If you want to argue that bicycling is close enough to driving that this analogy doesn't work, just substitute hockey helmets, or life jackets.)


I'm not completely unsympathetic to CR's position. They could easily make a decent case.  They could say, "look, we know that drivers with bad credit cause more accidents, as a group, than drivers with good credit. But it seems fundamentally unfair, in too many individual cases, to judge people by the characteristics of their group, and make them pay twice as much without really knowing whether they fit the group average."

I mean, if they said that about race, or religion, we'd all agree, right? We'd say, yeah, it DOES seem unfair that a Jewish driver like Chaim pays less (or more) than a Muslim driver like Mohammed, just because his group is statistically less (or more) risky. 

But, what if it's actually the case that, statistically, one group causes more accidents than the other? We tell the insurance companies, look, it's not actually because of religion that the groups are different. It must be just something that correlates to religion, perhaps by circumstance or even coincidence.  So, stop being so lazy.  Instead of deciding premiums based on religion, get off your butts and figure out what's actually causing the differences! 

Maybe the higher risk is because of what neighborhoods the groups tend to live in, that some neighborhoods have narrower streets and restricted sightlines that lead to more accidents. Shouldn't the insurance company figure that out, so that if they find that Chaim (or Mohammed) actually lives in a safer neighborhood, they can set his premium by his actual circumstances, instead of his group characteristics, which they will now realize don't apply here?  That way, fewer drivers will be stuck paying unfairly high or low premiums because of ignorance of their actual risk factors.

If that works for religion, or race, it should also work for credit score. Can't the insurance companies do a bit more work, and drill down a bit more, to figure out who has bad credit out of irresponsibility, and who has bad credit because of circumstances out of their control?

Yes! And, I'd bet, the insurance companies are already doing that! Their profits depend on getting risk right, and they can't afford to ignore anything that's relevant, lest other insurers figure it out first, and undercut their rates.

And CR actually almost admits that this is happening. Remember, the article tells us that the insurers aren't actually using the customer's standard credit score -- they're tweaking parts of it to create their own internal metric. CR tells us that to complain about it -- it's arbitrary, and secret! -- but it might actually be the way the insurers make premiums more accurate, and therefore fair.  It might be the way insurers make it less likely that a customer will be forced to pay higher premiums for "accidents that may never happen."


But I don't think CR really cares that premiums are mathematically fair. Their notion of fairness seems to be tied to their arbitrary, armchair judgments about who should be paying what. 

I suspect that even if the insurance companies proved that their premiums were absolutely, perfectly correlated with individual driving talent, CR would still object. They don't have a good enough understanding of risk -- or a willingness to figure it out.

A driver's expected accident rate isn't something that's visible and obvious. It's hard for anyone but an actuary to really see that Bob is likely to have an accident every 10 years, while Joe is likely to have an accident every 20. To an outsider, it looks arbitrary, like Bob is getting ripped off, having to pay twice as much as Joe for no reason. 

The thing is: some drivers really ARE double the risk. But, because accidents are so rare, their driving histories look identical, and there doesn't seem to be any reason to choose between them. But, often, there is.

If you do the math, you'll see that a pitcher who retires batters at a 71% rate is at more than double the "risk" of pitching a perfect game than a pitcher with only a 69% rate. But, in their normal, everyday baseball card statistics, they don't look that much different at all -- just a two percentage point difference in opposition OBP.

I think a big part of the problem is just that luck, risk, and human behavior follow rules that CR isn't willing to accept -- or even try to understand.

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