Texas Regulators Find Credit Scoring Is Accurate

Texas Insurance Commissioner Jose Montemayor, in a letter with the latest study results, said the department found overall that "credit scoring significantly improves pricing accuracy when combined with other rating variables in predicting risk" of loss with home and auto insurance buyers.

Texas approved a measure allowing credit scoring with some restrictions in 2003, and at that time the legislature requested a report on the impact of credit scoring.

In reaction to the report, a spokesman for the Des Plaines, Ill.-based Property Casualty Insurers Association of America, which has lobbied heavily for credit scoring in statehouses across the nation, said the findings were welcomed.

Jeff Brewer, speaking for the PCI, said, "We think it demonstrates there is real validity to using insurance scores. We agree with the commissioner's findings that it adds value to that insurance transaction.

"Basically it reaffirms the things that we have been saying that there is a strong connection between the scores and risk of loss, and that it adds accuracy to the pricing of policies. He found there is no racial discrimination and those charges are false."

He said PCI is urging Texas lawmakers to reject SB167, the bill introduced last month by State Sen. Rodney Ellis, D-Houston, that would ban credit scoring. A spokesman for Mr. Ellis had no immediate comment.

Mr. Montemayor wrote that even though racial groups were unevenly distributed according to risk factors, "all factors used in insurance have a disproportionate impact to some extent."

To charge everyone the same price for insurance regardless of risk "would be a setback to all Texans, of all races, especially those of moderate- to lower-income whose risk remains low," the commissioner wrote.

The department found "credit scoring is not based on race, nor is it a precise indicator of one's race," Mr. Montemayor's letter noted.

Banning the practice, he predicted, would "create pricing and availability disruptions in a market that has just stabilized and begun to rebound."

According to the study, credit scores provide insurers with additional predictive information distinct from other rating variables.

With personal auto liability, credit score was related to claim frequency, but very little or no evidence linked it to claim severity, the department said.

With home insurance, credit score was found to relate to the probability of filing a claim and possibly to the amount of claim.

For both auto and home insurance, the report found the difference in claims experience by credit score was substantial. It said that typically claim experience for the 10 percent in the worst credit category was 1.5 to two times greater than that of the 10 percent in the best category.