Lawsuit Over Texas Credit Scoring Regulations?

According to Mr. Birnbaum, the commissioner, in drawing up the new rules, failed to follow enabling legislation language that would limit insurance policy rate differences between consumers with high and low credit scores.

In announcing the regulations on Monday, Mr. Montemayor said he would be amending the rules in the future "to set further limitations and to establish variances to prevent unnecessary rate increases."

Explaining his decision against any rate cap, Mr. Montemayor's statement said that "if one person's premium is capped, then another person's must be increased to obtain enough premium to cover expected losses" and "the person taking the rate increase may very well pay more regardless of their claim history or risk."

The new rules require that consumers be given a disclosure notice if credit scoring will be used and informed of their rights and protections. Those protections include no negative scoring for consumers that pay cash and have little credit history or for consumers with past due medical collection accounts and extraordinary life events.

Mr. Montemayor said he expects insurers to provide actuarial proof justifying their use of credit scoring and that each point of variation must be proven up.

Mr. Birnbaum said the law already requires a sound actuarial basis for rate setting. Reacting to the commissioner's concern that a limit would skew consumer rates, he said, "Where was the concern when they [insurers] introduced credit scoring and raised rates 100 percent?"

He said there was a possibility of a legal challenge from unnamed consumer organization, "but no final decision has been made from what I understand."

The National Association of Independent Insurers, Des Plaines, Ill. was among those in the insurance community voicing positive reaction to the new regulations predicting they will benefit consumers and the insurance industry "by ensuring that premiums are based on the risk that the policyholder represents."

Donald Hanson, NAII's southwest regional manager, said "insurance scoring and territorial rating rules are based on the principles of risk-based pricing and fairness. Consumers that pose greater risk of loss should pay a higher premium than other consumers."

"The rules adopted reinforce that principle. We commend the department for taking a cautious approach to implementing rules on these subjects. These rules strike the right balance by working to enhance market stability, while offering sound consumer safeguards."

Last month, prior to an insurance department hearing on the regulations, State Representatives Charlie Geren, R- Fort Worth, and Steve Wolens, D-Dallas, issued a statement telling Mr. Montemayor that in passing its credit scoring bill, the legislature had "consciously decided to place a ?cap' or ?limit' on the difference Texas policyholders can be charged for premium as a result of their credit scores."

The regulations, they said failed to meet that goal and would permit insurance companies "to continue gaming the system and unfairly increasing Texans' premiums."