Janet, age 35, is divorced and has two preschool children. Janet earns only the federal minimum wage, and money is tight. Her former husband failed to make child-support payments for the past three months because he lost his job in a company merger. As a result, Janet fell behind in the payment of her bills and received several threatening letters from collection agencies. Janet believes that she can save money if she switches auto insurers. One auto insurer quoted her a rate that is substantially higher than the rate she is now paying. A company representative explained that Janet is being ratedup because of her poor credit record. Janet is surprised because she has a good driving record and has not been involved in an accident within the last five years.
a. Explain the rationale for charging Janet a higher premium for auto insurance because of a poor credit record.
b. Explain the arguments against using credit-based insurance scores as a rating or underwriting factor in auto insurance.