"Few like credit scoring proposal for insurance"

The following is an excerpt from a January 8, 2004 Houston Chronicle by Janet Elliott

AUSTIN -- A proposal to keep insurance rates from increasing or decreasing more than 10 percent because of a customer's credit history drew sharp criticism from the industry during a public hearing Wednesday.

But it also was blasted by consumer advocates and a Houston lawmaker because it contains a loophole that would allow companies to try to justify greater variations.

The Texas Department of Insurance staff is recommending the 10 percent cap as an amendment to a credit scoring rule adopted by Commissioner José Montemayor in November. That rule allows consumers' bad credit histories to be used against them in the form of significantly higher rates as long as they are given notice of the increase.

Previously, most companies had free reign in using credit scoring. Information submitted by insurance companies to Montemayor last year showed that some Texans have been charged up to 113 percent higher premiums because of credit scoring.

Montemayor is expected to decide whether to adopt the amended rule sometime after the public comment period closes Monday.

Industry officials said they would be forced to raise rates on home and auto policyholders with good credit ratings if the 10 percent cap takes effect.

Charles Duckworth, an independent insurance agent from Houston, said credit scoring allows him to offer lower rates to about a third of his 5,000 customers. He said using credit as a predictor of claims gives some customers a lower rate years sooner than under the previous system of experience rating.

Beamon Floyd, an insurance industry spokesman, said credit history has proven to be an "excellent tool for accurately pricing insurance products."

" If you impose a tight collar on the use of credit, you will not be protecting consumers. Instead, you will be forcing Texans who currently pay lower rates to pay higher rates to subsidize higher-risk consumers," Floyd said.

Opponents of credit scoring attacked it as arbitrary and inconsistent. Rep. Scott Hochberg, D-Houston, told Montemayor that he checked his credit on three credit rating services and found a wide variation.

His top rating was 90 percent and his lowest was 38 percent, which he said was because of a $200 penalty for canceling a mobile phone contract because the phone didn't perform as promised.

Hochberg said it has become clear that insurance companies don't want customers who are going to file claims. He said policyholders with lots of available credit might decide to pay for their own home or auto damage rather than file claims.

" But if you don't have a lot of money or are tapped out on your credit, it's absolutely sure if the insurance you're paying for owes you a claim, you're going to collect on it," Hochberg said.

Hochberg urged the commissioner to eliminate a loophole that would allow companies to charge higher rates for those with problem credit as long as they could justify the rates with "sound actuarial data."

" The presence of a loophole in the fence flies in the face of legislative skepticism about the use of credit scoring," Hochberg said.

A University of Texas study released last year found that for auto insurance customers, lower credit scores were associated with larger incurred losses. The study did not attempt to explain the correlation.

Similar studies on homeowners claims have not been done.

There was discussion during the hearing about Maryland, which has banned the use of credit scoring for homeowners insurance and capped it at 40 percent for auto rates.

Debbie Rosen McKerrow, a spokeswoman for the Maryland Insurance Administration, said rates did go up for some consumers after the general assembly enacted the law.

" We certainly heard from people who are pleased credit is no longer being used in homeowners insurance. A lot of other people were concerned their rates had gone up," McKerrow said.