Credit Score Use Limit Draws Ire

By Gary Mogel

NU Online News Service, Dec. 8, 11:30 a.m.EST?A proposed rule by the Texas Department of Insurancethat would place a 10 percent cap on how much insurers can varyrates based on credit information is drawing the ire of bothinsurance and consumer groups.[@@]

"This proposal punishes people who have good credit whilerewarding policyholders who file the most claims," said DonaldHanson, southwestern regional manager of the Des Plaines,Ill.-based National Association of Independent Insurers.

He added that "placing an arbitrary cap on how much rates canvary based on credit-based insurance scores will have a negativeimpact on most consumers."

Meanwhile, consumer groups continue to express their oppositionto the use of credit scores in insurance pricing, whether with a 10percent increase ceiling or otherwise. Doug Heller, a consumeradvocate with the Santa Monica, Calif.-based Foundation forTaxpayer and Consumer Rights, said that "limiting a bad practice,rather than getting rid of it entirely, is not sufficient."

On Nov. 10, the department adopted initial rules regarding theuse of credit scoring by insurers in Texas. Under those rules,insurers using credit information must provide a disclosurestatement to the consumer once an insurance application isreceived.

The disclosure notifies potential policyholders if creditscoring will be used in rate-setting and describes the consumer'srights and protections.

The department has now proposed amended rules that include the10 percent limitation. The proposal fulfills a promise made lastmonth by Texas insurance commissioner Jose Montemayor to "proposean amendment to these rules to set further limitations and toestablish variances to prevent unnecessary rate increases."

Opposing any limitation on the use of credit scores, NAII citesa study on the connection between credit history and insurance riskconducted by Bloomington, Ill.-based EPIC Actuaries LLC, whichconcluded that policyholders with the lowest insurance scores costinsurers on average 33 percent more to insure, while those with thehighest scores cost insurers 19 percent less.

Consumer advocate Mr. Heller countered that credit scores areused by the insurance industry as a "surrogate for poverty" andshould be totally banned in the premium calculation process.

"There is no place for the use of credit history in insurance?itis not like a loan," Mr. Heller stressed. "What does credit historyhave to due with the chance that wind will damage the shingles onyour roof?"