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February 3, 2005
A Ban on Credit Scoring Would Raise
Rates
for Many Texans
The Texas Department of Insurance (TDI) released a study
yesterday that again confirms that credit-based insurance
scoring is a proven tool to accurately predict risk.
Lawmakers are looking for ways to reduce insurance premiums
yet as Commissioner Montemayor wrote in a letter to Governor
Rick Perry, a ban on credit scoring would 'raise premiums
for a very large number of policyholders' and force an
'immediate price shock that would be unrelated to a change
in risk.'
TCAIS and many others have long known that Texas consumers
benefit from credit-based insurance scoring because most
policyholders pay less when insurance scoring is used.
In fact, without the use of credit-based insurance scoring,
60-70% of Texans would see their rates go up. If credit-based
insurance scores were prohibited, many lower risk Texans
would be forced to subsidize customers with higher risk.
The study makes reference to existing laws passed in 2003
that put forth specific prohibitions against the unfair
use of credit-based insurance scoring. TDI's report shows
that consumer complaints about credit-based insurance scoring
dropped significantly after the Texas Legislature passed
Senate Bill 14 in 2003. This law comprehensively regulates
the use of credit-based insurance credit scores and affords
significant protections to Texans.
In addition to protecting consumers, rating
systems must be related to each individual’s level
of risk. In fact, Commissioner Montemayor succinctly
described the
value of risk-based rating practices in his letter to Governor
Perry:
'By the nature of risk-based pricing and underwriting,
all factors used in insurance have a disproportionate impact
to some extent. One could make a convincing argument to
ban the use of all risk-related factors based solely on
disproportionate impact. Effectively, we would ban risk-based
pricing and underwriting and revert back to the pricing
system where we homogenize the
risk and essentially charge everyone the same price --
regardless of risk. That would be a set-back to all Texans,
of all races, especially those of moderate to lower income
whose risk remains low.'
TCAIS urges public policymakers to use caution when considering
legislative or regulatory changes to the use of insurance
scores by insurers to avoid increasing the premiums paid
by Texas consumers. Risk-based rating, to include credit-based
insurance scoring, must be part of a fair and accurate
system so that low risk consumers are not forced to subsidize
higher risk
consumers and incentives exist to actually minimize risk.
Sincerely,
Beaman Floyd
Director
Texas Coalition for Affordable Insurance Solutions
500 West 13th Street
Austin, TX 78701
Phone: (512) 477-7382
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