Texas Study Finds Credit Score, Claims Link

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 scores found a strong relationship between credit scores and claims experience and showed that blacks and Hispanics tend to have worse credit scores than other ethnic groups.[@@]

The study, published by the Texas Insurance Department this week, was legislatively mandated?the Texas lawmakers had requested the study during their 2003 legislative session, when insurers' use of credit scoring was a top issue.

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

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

In summary, the study found there are indications of a strong relationship between credit scores and claims experience, with poor credit scores associated with increased claims activity. This finding, on an individual consumer level, may boost insurers' argument that credit scoring is a valuable and legitimate tool in assessing risks they are taking.

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

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

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