Texas Plan on Credit Scores Draws Criticism

A.M. Best

Chris Grier

January 8, 2004

AUSTIN, Texas, Jan 08, 2004, (A. M. Best via COMTEX) -- A scant few weeks after Congress permanently reauthorized insurers' right to use credit information in underwriting, Texas officials are about to enact sharp curbs on those rights when it comes to setting rates for homeowners and automobile insurance.

The Texas Department of Insurance is about to institute a 10% limit on the amount by which insurers may adjust consumers' rates because of their credit histories. Insurance Commissioner Jose Montemayor is expected to adopt the rule shortly after the public-comment period for the proposed change closes on Jan. 12.

Currently, insurers can use policyholders' bad credit histories to impose much higher premium rates, as long as they give notice of the increases. Montemayor began his push to change the state's rules on credit-based insurance scoring after a report last year showed that some consumers in the state were being charged as much as 113% more for their premiums, based on their credit.

Insurers oppose such caps, saying that they do nothing to lower rates and that they will instead be forced to raise auto and homeowners rates for those with good credit. Insurance trade groups railed against those caps when they were passed in Maryland in 2002, and they blamed them for higher homeowners rates there (BestWire, Aug. 21, 2002).

At a public hearing on the matter the week of Jan. 5 in Austin, state Rep. Scott Hochberg urged Montemayor to get rid of a loophole that would allow companies to charge higher rates anyway. Under Texas' rules, insurers can still raise rates more than 10% for those with bad credit as long as those rates also are justified with what the regulation calls "sound actuarial data." That phrase isn't defined any further in the regulations.

A University of Texas study, the only widely known look at credit scores and losses, found that those with bad credit tended to have larger losses. That study didn't, however, explain the linkage, and it only looked at auto insurance. Studies on homeowners insurance and credit haven't been done.

Maryland established similar rules in April 2002, banning the use of credit scoring in setting homeowners insurance rates altogether and setting a 40% cap on changes in auto rates. Rates soon went up, prompting complaints to the Maryland Insurance Administration. Travelers Property Casualty Corp. (NYSE:TAPa) in particular faced angry phone calls from policyholders, because it had to drop a 20% discount for its customers with the highest credit ratings.

Utah, Hawaii and Washington also have banned some credit-based scoring practices for auto and homeowners insurance, and a number of other states also are considering bans.

Consumer advocates who lobby against insurance scoring say the practice discriminates against the poor and against those who opt not to use credit when making purchases, because credit-based scores lead to higher premiums for those customers with no other justification. Insurers, on the other hand, argue that creditworthiness is an accurate predictor of risk and, therefore, a valid way of setting premiums.

Congress last year approved legislation permanently reauthorizing the 1970 Fair Credit Reporting Act, which governs how businesses may access and use private consumer information such as credit data. The legislation made permanent provisions that allow insurers to use credit information, but individual states may still regulate how that information is used.

Texas, meanwhile, has seen radical upheaval in the homeowners market over the past several years, including billions of dollars in mold claims and rate hikes as high as 400%. Montemayor's office ordered the top 32 writers of homeowners policies to roll back their rates by as much as 32% last year, forcing those companies to forgo $510 million in annual premiums in Texas's $4.1 billion homeowners market (BestWire, Aug. 8, 2003).

According to 2002 state/line data from A.M. Best Co., the top five writers of homeowners multiperil in Texas, based on direct premiums written, were: State Farm Group, with a 30.5% market share; Zurich/Farmers, with 19.2%; Allstate Insurance, with 16.7%; USAA Group, with 6.6%; and Travelers/Citigroup Cos., with 4.2%.

The top five writers of private-passenger auto coverage were: State Farm, with 23.2%; Allstate, with 16.6%; Zurich/Farmers, with 13.2%; USAA, with 6.1%; and Progressive Insurance Group, with 4.9%.

Copyright (C) 2004 A.M. Best