"Credit scoring crucial, insurers say"

The following is an excerpt from a January 8, 2004 Associated Press article by Matt Joyce

Insurance companies on Wednesday argued at a public hearing that credit scoring -- or factoring policyholders' credit histories into the calculation of insurance rates -- is critical to accurate and fair rates.

Opponents questioned the accuracy of credit scoring and argued that it should be tightly restricted as a tool for setting insurance rates.

Texas Insurance Commissioner José Montemayor held the hearing to gather feedback on an insurance department proposal that would keep insurance rates from increasing or decreasing more than 10 percent because of a credit score.

The proposal is in response to 2003 state legislation on the use of credit scoring.

ypically, people with poor credit scores pay a higher rate than they otherwise would, while people with good credit scores pay a lower rate.

Critics say the current proposal creates a loophole for insurance companies to charge rates beyond the proposed 10 percent cap.

Ware Wendall, policy director for the consumer group Texas Watch, said the Insurance Department needs to impose a specific limit on the effect of credit scoring, rather than a limit with the option for a variance.

" The Legislature ordered TDI to establish a floor and a ceiling -- a maximum and a minimum -- on the effect credit scoring may have on rates," he said. "The current proposal fails to meet that demand."

Marylin Hamilton, associate commissioner for the Insurance Department, said the potential variance on the 10 percent cap is necessary to provide market stability and to minimize rate increases from the new rule.

Insurance industry representatives said Wednesday that any effort to limit the use of credit scoring will drive up premiums and shrink the market for high-risk drivers and homeowners.

Jonathan Klein, Texas product manager for Progressive auto insurance, said the company's auto insurance rates are based largely on credit scoring, along with other factors such as a driver's age and type of vehicle.

" The only reason an insurer like us that wants to grow would not make our rates available is if we couldn't accurately price risk, and we'd be forced to lose money on a policyholder," he said.