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|A New Theory of Racial Differences (Dec. 1994)|
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Credit scores are good for auto insurance companies, but problematic for African-American and Hispanic consumers.
The study found credit scores effectively predict the number of claims consumers file and the total cost of those claims. However, it also found that black and Hispanic consumers tend to have lower scores than non-Hispanic whites and Asians. As a result, consumers in those demographic groups, on average, end up paying more for car insurance.
Credit-based insurance scores are tallied on information in a consumer’s credit report. Insurance companies use them to predict the claims that consumers are likely to file, and set rates. Consumers with higher scores pay lower rates than consumers who have low credit scores.
Credit scores help insurance companies “better match the risk of loss that consumers pose” so higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums, the FTC explained. “Scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they otherwise would not be able to determine an appropriate premium.”
But credit scores are distributed differently among racial and ethnic groups. “These differences are likely to have an effect on the premiums that these groups pay, on average,” the report noted.
The FTC could not suggest any alternative that would help insurance firms predict risk effectively but decrease price differences among racial and ethnic groups.
(Posted on August 24, 2007)