When I was at the Bureau of Economics at the FTC, we were asked by Congress whether using credit histories to price car insurance was discriminatory. The resulting FACTA report found that:
- as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
- …scores effectively predict risk of claims within racial and ethnic groups.
- The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.
As a result, banning the use of credit scores would result in insurers finding other, less good and possibly discriminatory methods of distinguishing high from low risks, like selling insurance only in low risk areas. Good drivers living in higher risk areas would be “pooled” with other drivers living in the high risk area, and would have to pay higher rates.
Adam Smith’s words are evergreen:
The man of system, on the contrary, is apt to be very wise in his own conceit…He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.