Sides Argue over Use of Credit Score by Texas Insurers

Fort Worth Star-Telegram, Texas

R.A. Dyer

January 8, 2004

Jan. 8--AUSTIN, Texas -- The controversial use of credit history by Texas insurers took center stage during a public hearing Wednesday, with consumer groups calling the practice unfair and industry officials saying it leads to more accurate rates.

Both sides lobbed criticism at a proposal that would limit the practice -- but allow exceptions for insurers who can justify its more aggressive use.

"Insurance companies use credit to give the best possible prices to the lowest risks, while charging a fair premium to those likely to incur the most losses," said Beaman Floyd, who spoke on behalf of a number of Texas insurance companies.

"The Texas Department of Insurance proposal not only allows insurance companies to continue the discriminatory use of credit scoring, [but] it fails to meet the legislative intent of even the modest insurance reforms of the 2003 Legislature," said Dan Lambe, executive director of the Texas Watch consumers group.

At issue is an increasingly common practice by insurers of using a customer's credit history when setting premiums -- even though premiums are paid in advance of coverage. Typically, those with good credit get better rates, while those with poor credit are charged more.

Consumer groups question whether the practice accurately reflects risk. And even if it does, they say credit scoring is fundamentally unfair and should be limited as a matter of public policy.

Industry groups say credit scoring accurately predicts risk and that limiting its use will increase rates for customers with good credit.

That argument appeared to hold some weight with Insurance Commissioner Jose Montemayor, who said any hard cap on credit scoring could result in rate hikes for many Texans.

"I don't want an arbitrary setting of a number resulting in millions of Texans paying more for their insurance policies," he said.

Montemayor is considering a rule change that would limit to about 20 percent the difference in insurance premiums that would be based on differences in credit history.

Under that rule, an insurance company could charge no more than about 20 percent more to a person with bad credit than to one in identical circumstances with good credit.

However, the rule also allows companies to go outside that 20 percent limit if they can justify the rates with actuarial evidence.

Consumer groups say the proposed cap is meaningless because law already requires actuarial justification for all insurance rates.

"This cap is nothing more than window dressing -- it's a fancy way of restating current law," Lambe said. He said lawmakers specifically directed the department to limit the use of credit scoring -- and that the proposed rule ignores current law.

But Floyd said limiting the use of credit scoring would cause low-risk customers to subsidize high-risk customers. "If you impose a tight collar on the use of credit, you will not be protecting customers," he said.

Montemayor is expected to rule on the proposal by this summer.

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(c) 2004, Fort Worth Star-Telegram, Texas. Distributed by Knight Ridder/Tribune Business News