Texas Study Finds Credit Score, Claims Link

NU Online News Service, Jan. 4, 3:05 p.m. EST?A"groundbreaking" Texas study on insurers' use of credit scoresfound a strong relationship between credit scores and claimsexperience and showed that blacks and Hispanics tend to have worsecredit scores than other ethnic groups.[@@]

The study, published by the Texas Insurance Department thisweek, was legislatively mandated?the Texas lawmakers had requestedthe study during their 2003 legislative session, when insurers' useof credit scoring was a top issue.

The Texas Insurance Department called the study "significant"and "groundbreaking." The department noted that data in its studysurpasses information used in many other published studies, becauseit includes race and ethnicity information at the individuallevel?rather than information at the aggregate level, such as ZIPcodes and census tract data, used in previous reports.

The Texas study looked at these individual data to determinewhether credit scores are an effective predictor of risk, and toexamine the impact of its use on different classes of consumers. Inall, the report looked at data for 2,000,000 policyholders, andincluded six auto credit scoring models and three homeowners'credit scoring models.

In summary, the study found there are indications of a strongrelationship between credit scores and claims experience, with poorcredit scores associated with increased claims activity. Thisfinding, on an individual consumer level, may boost insurers'argument that credit scoring is a valuable and legitimate tool inassessing risks they are taking.

At the same time, the study found that black and Hispanic, aswell as young and low-to-moderate income policyholders, tend tohave worse credit scores than white, Asian, older and high incomepolicyholders. This finding suggests insurers' use of credit scorescould lead to disproportionately higher premiums for black,Hispanic, young and low-to-moderate income groups.

The Austin, Texas-based consumer advocacy group, Center forEconomic Justice, issued a statement saying the study proves whatit has been saying for years?that insurance credit scoring causeshigher insurance rates for low-income, minority consumers.

Birny Birnbaum, executive director of the group, said the studyis the latest confirmation that insurers' use of credit scoring is"simply 21st century redlining."