480
620
430
580
760
FallaCy 1: The Converse Error
In formal logic, “affirming the consequent” is an error in which
the conclusion is assumed to be a consequence of the premises.
It may be written as (A implies B) means (B implies A) and is
sometimes termed a logical error or a converse error. Examples
include the following:
■ ■ If an insured drives her piano at high speeds into oncoming
traffic, there will surely be a serious accident.
There has just been a serious road accident.
An insured must have driven her piano at high speeds into
the oncoming traffic.
■ If the bus arrives on time for once, it will be a miracle.
We are in the delivery room witnessing a miracle.
The bus must have arrived on time for once.
■ People who are known to commit fraud commonly carry a
large amount of personal debt.
This person’s credit report shows high balances as a percentage of total credit limits.
This person probably pads claims and ought to be charged
more for insurance.
Indebtedness isn’t a reliable indicator of a person’s ethical standard. Drawing lines too broadly around those who are
“more likely” to commit fraud could attach a harsh penalty to
an honest group of people who might already be under financial
strain. If fraudsters are an expensive component of an indebted
group (and difficult to pinpoint), insurers may profit from encircling a wider grouping. But this is contrary to the American
value of innocent until proven guilty. It would be scandalous
for merchandisers to impose the full costs of shoplifting on a
small subgroup of shoppers. Such costs are more appropriately
spread thinly among the shopping population.
FallaCy 2: The Doctrine of False Cause
Correlation implies causation, or simply “false cause,” is a logical fallacy in which two events that occur together are claimed
to have a cause-and-effect relationship. As an example, a study
finds that people who have root canals are more likely to be diagnosed with cancer. Root canals could be a strong indicator of
cancer risk but haven’t been shown to be the cause. Heavy smoking can lead to serious dental problems and will place people at
greater risk for cancer.
When defending the practice, proponents of credit scor-
ing tend to emphasize the causality consideration of Actuarial
Standard of Practice (ASOP) No. 12, Risk Classification ( for All
Practice Areas), which reads as follows in Section 3. 2.2: “While
the actuary should select risk characteristics that are related
to expected outcomes, it is not necessary for the actuary to
establish a cause-and-effect relationship between the risk char-
acteristic and expected outcome….” Speaking from a regulator’s
perspective, it’s important to remember that statutes take pre-
cedence over actuarial standards, including those that dictate
that rates not be unfairly discriminatory.
■ expense—The principles state that “… the cost of utilizing a
given variable for classification purposes should be reasonable in
relation to the benefits achieved, for the insurance program and
those insured (emphasis added).” Consumers bear most of the costs
associated with inaccuracies in credit reports; errors are corrected
at their time, effort, and inconvenience. On the company side, credit
scoring is an inexpensive method for insurers to classify consumers
broadly and improve profits overall. Expanding the use of credit
reports into new markets could present enormous financial gains,
especially to companies already in the credit-reporting business.
While a business may be inclined to interpret the expense consideration in its own favor, it wasn’t written to be one-sided.
■ hazard Reduction—Insurance is meant to be a tool for enhancing financial stability and for encouraging reductions of
hazard. Any kind of stress can affect a person’s driving. Narrowly, it would make sense to charge a higher price to a group with
a greater propensity toward accidents. But if financial stress is
the risk culprit, the use of credit characteristics can load straws,
sticks, and bricks on top of the camel’s back. Exacerbating risk
is contrary to the purpose of insurance.
■ public acceptability—Many insurers have responded to potential criticism with a “hardship clause,” which softens the
impact of credit scoring when a consumer has experienced such
things as illness, death in the family, divorce, or catastrophe.
Such a clause is a positive measure in advancing fairness in the
application of credit scoring. But unacceptable misclassification
remains, as does the more elusive matter of freedom of choice.
Consumers could be expected to challenge any insurance
rating system that might violate basic rights. As long as debt
obligations are honored as agreed, consumers would likely expect to make financial choices at face value, without a penalty
