SB 14 Would Hinder Insurers’ Ability to Assess Risk of Loss

The language in SB 14 indicates that a company cannot make underwriting or rating decisions “predominately on the basis of a credit score,” but the bill does not define “predominately.” Additionally, SB 14 requires an insurer’s credit scoring model to be open to the public. In other words, an insurance company’s competitors would have access to how they go about selecting and pricing risks. The bill also requires the Commissioner to set by rule the maximum difference in premiums that can be charged due to credit scoring.

Solution:

Rather than implement unproven regulations, legislation should incorporate the National Conference of Insurance Legislators (NCOIL) regulations for insurers' use of credit information. Since adopted by NCOIL in November 2002, 15 states have taken action on proposals similar to the NCOIL credit model. The NCOIL credit regulations provide clear language that bans the sole use of credit and determines the manner in which an insurer must treat the lack of credit information. With the proper guidelines and clear standards, the use of credit benefits Texas consumers by helping companies match premiums with risk.

In addition, insurers should be required to file individual credit models for review by TDI. However, since these models are considered by most insurance companies to constitute a trade secret, they are proprietary and should not be made available to the public, which includes their competitors. Requiring disclosure of confidential information would create a disincentive for other companies who may want to enter the Texas market.

Finally, a rule regarding premiums relating to credit scoring may be impossible for TDI to administer since most companies use many factors in addition to credit scoring in determining rates. In addition, the models companies use put varying degrees of weight on different credit factors. As long as there is an actuarial basis for charging different premiums based on projected risk factors, companies should have the freedom to determine an appropriate range.