Texas Regulatory Study Affirms Credit Scoring
A Texas insurance department study concluded that insurers accurately rate applicants through the controversial use of credit records.
The department had found in an earlier report that younger, poorer and minority group members tended to have the worst credit scores, which prompted introduction of a bill to ban the practice.
However, the more recent report on both auto and home insurance found the difference in claims experience by credit score was substantial. For example, 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.
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."
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 the practice.
Neil Alldredge, state affairs director for the National Association of Mutual Insurance Companies in Indianapolis, called the latest report "the final nail in the coffin of opponents to credit-based insurance scoring."
Jeff Brewer, a representative for the Property Casualty Insurers Association of America in Des Plaines, Ill., said the report "demonstrates there is real validity to using insurance scores" and that "there is no racial discrimination"
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. 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," he wrote. Banning the practice, he predicted, would "create pricing and availability disruptions in a market that has just stabilized and begun to rebound."
PCI's Mr. Brewer urged Texas lawmakers to reject SB167, the bill introduced last month by State Sen. Rodney Ellis, D-Houston, that would ban credit scoring. Sen. Ellis lashed back. "It doesn't matter if credit scoring is actuarially justifiable. It is morally unacceptable," he said.
Sen. Ellis, an African-American, said earlier findings "clearly demonstrated that credit scoring discriminates against and has a disproportionately negative impact on African-Americans, Latinos and people with moderate incomes."
"Do tornadoes avoid people with good credit scores?" said Sen. Ellis. "Are African-Americans and Hispanics who are far more likely to have negative credit scores far more likely to be bad drivers? If the answer is no, then why is credit scoring legal?"
Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.