"Allow insurance firms to use credit scoring"

The following is an excerpt from a January 25, 2005 Austin American-Statesman Op-Ed piece

Many Texas insurance companies, like a lot of other Texas businesses, rely on credit scoring, in part, to help them make pricing decisions. Why? Because these scores accurately predict risk and allow companies to price accordingly.

In fact, the correlation between a person's credit standing and the chance that he or she will file an insurance claim often exceeds 99 percent, meaning there is almost a "perfect correlation" between the two.

Insurers also know that consumers want the best possible coverage for their vehicle and home at the lowest possible cost, and that their ability to accurately match rate with predicted risk is critical to being profitable and sustaining growth in the very competitive Texas insurance market.

When insurers can accurately predict risk, they can set their rates with confidence and aggressively price their products to meet the needs of our rapidly growing state.

Insurers use credit scores not only because of their accuracy, but because they are totally objective and focus solely on a person's verifiable credit history. Furthermore, they are "colorblind" and income neutral because race and income are not used.

And yet no matter how accurately credit scores predict insurance losses, or how many studies prove their worth, some still oppose the use of credit scoring and want the practice banned — even if it would almost certainly lead to higher insurance rates.

Such has been the response to the new, legislatively mandated study by the Texas Department of Insurance. Its preliminary findings indicate the strong relationship between credit scores and claims losses, and that poor credit scores are associated with increased claims.

These findings are hardly breaking new ground and confirm many of the conclusions in another recent study by the University of Texas.

For example, the insurance department study found that the average loss per vehicle for people with the worst credit scores is double that of people with the best scores. The data also show that as credit scores improve, the frequency of auto accidents decreases. With homeowners insurance, the loss ratios for people with the worst credit scores are triple that of people with the best scores.

The study also found that the use of credit scores had the effect of lowering rates for nearly 50 percent of personal vehicle policy-holders and 60 percent of homeowners.
Of the estimated 10 million auto and homeowners policies in Texas, the report notes that complaints to regulators that reference credit scoring are only 300 per year.

So where is the rub? By using race and income data from the Texas Department of Public Safety and U. S. Census Bureau, the study found that black, Hispanic, young and low-to-moderate income policy-holders tend to have worse credit scores than white, Asian, older and high income policy-holders.

And because these groups were found to have disproportionately lower credit scores, some are once again suggesting that credit scoring is an unfairly discriminatory practice and want to prohibit its use.

Understandably, insurance companies are concerned that the benefits of credit scoring should be preserved, and that is why they worked with legislators last session to pass laws that prohibit using "a credit score that is computed using factors that constitute unfair discrimination."

The new laws include numerous other safeguards, such as disclosure, dispute resolution and error correction, plus the requirement that insurers must file their credit scoring models and related processes with the insurance department.

Practically every homeowners policy sold in Texas was credit scored, and homeownership among all groups — especially minorities — is at record highs across the state. If anything, credit scoring has helped more people own homes and boosted the state's economy.

No one should pay for someone else's insurance costs, and credit scoring makes sure that doesn't happen. Each risk has to pay its own costs and the better risks in the market always demand — and deserve — the most competitive rate. Denying the use of credit scoring puts the majority of Texas consumers at risk for inaccurate pricing and higher rates.

Gentry is executive director of the Insurance Council of Texas, a trade association of more than 500 insurance companies.