Insurance underwriting involves two separate decisions: (1) whether the insurer wants to insure the applicant at all (selection); and if so, (2) at what price and terms (classification). The need to make these two judgments dictates the kind and quality of information an insurance institution collects and maintains about an individual applicant or policyholder.
In making these two types of decisions insurers look to physical hazards-medical hazards in life and health underwriting and in property and liability underwriting, the condition of the property, its use, and its surroundings. Underwriters also look to what is termed moral hazard. Evaluation of moral hazard is made by examining attributes of the applicant which suggest a greater than average likelihood of a loss occurring or the potential for unusual severity of loss-either an absence of a desire on the part of the individual to safeguard himself or his property from loss or a positive willingness to create a loss or to deliberately inflate a claim.
Thus, it is not surprising that the evaluation of moral hazards, particularly in property and liability underwriting, is the area where the greatest number of objections to insurers' information collection practices have been raised. An inquiry may cover drinking habits, drug use, personal and business associates, reputation in the community, credit worthiness, occupational stability, deportment, housekeeping practices, criminal history, and activities that deviate from conventional standards of morality, such as living arrangements and sexual habits and preferences. Because the relevance of many of these particulars can be hard to demonstrate, and because the judgment as to their relevance is often left to the underwriter handling a particular case, their propriety has become subject to question.
From the standpoint of many applicants and insureds, the dichotomy between the individual's privacy interest and the insurer's interest in evaluating risk is probably not as great as it seems at first glance. The low-risk applicant benefits from an underwriting evaluation that results in unusual risks being eliminated or written at a higher premium because that keeps the cost of his insurance down. The Commission was continually reminded that it is in the interest of the applicant to have complete and accurate information on which this judgment can be based so that he can be insured at the proper rate; that the insurer must be able to evaluate the risk it is being asked to assume if premium charges are to bear a reasonable relationship to expected losses and expenses for all insureds within a similar classification.
Economic forces may, however, work against a given individual. Because insurers compete against each other for the better risks, they do not have much incentive to look behind some of the criteria they use to sort the good risks from the bad. If their experience suggests, for example, that slovenly housekeepers make poor automobile insurance risks, they tend to be wary of all slovenly housekeepers. The problem, in other words, is not that the category of information lacks predictive value in all instances, but rather that it is applied too broadly.
Another source of concern in the area of intrusive collection practices stems from the use of so-called pretext interviews and other false or misleading information-gathering techniques. This concern was brought into sharp focus by recent publicity concerning Factual Service Bureau, Inn. (now Inner-Facts, Inn.), an investigative-support organization whose services were used by insurers in a number of cities throughout the country. Factual Service Bureau employees regularly misrepresented their identity and purpose in order to obtain medical-record information from hospitals and other medical-care providers without authorization. The insurers that used Factual Service Bureau should have known that it employed such intrusive techniques and generally engaged in questionable methods of information collection. Factual Service Bureau openly advertised its ability to procure confidential information about an individual without his authorization.73 Thus, even the insurers who had no actual knowledge of the techniques being used by Factual Service Bureau on their behalf may be said to have condoned its activities by their silence or failure to investigate more fully the practices and techniques used.
The Factual Service Bureau case also illustrates a broader problem which results from the apparent lank of restraint exercised by insurers over the support organizations they use to collect information about individual applicants, insureds, and claimants. In the claims area particularly, where a great deal of money may be at stake or where the suspicion of fraud may be high, many insurance companies have tended to look the other way while hiring support organizations that use questionable information collection practices and techniques.