"Use of credit scoring gets boost
Insurance chief cites study, tells Legislature he can't ban practice"

The following is an excerpt from a February 1, 2005 Dallas Morning News article

AUSTIN - State Insurance Commissioner Jose Montemayor, citing a study that firmly backs use of credit histories in pricing insurance policies, said Monday that he has no authority to ban credit scoring by the insurance industry in Texas.

Mr. Montemayor, who sent the second of two state reports on credit scoring to the Legislature on Monday, said the only way the practice can stopped is by legislative action - and that could disrupt the auto and homeowners markets in Texas.

Bills have been filed by lawmakers this year to ban the use of credit histories by insurers. Sponsors contend the ban is needed because the practice unfairly targets blacks and Hispanics, who tend to have lower credit scores and thus pay more for insurance.

Leading consumer groups also have called for either a halt or sharp restrictions on credit scoring by insurance companies.

But Mr. Montemayor said the state study establishes that credit scoring "significantly improves pricing accuracy" when combined with other factors to determine a person's risk as a driver or a homeowner.

A key finding in the study indicated that policyholders with the worst credit scores - the bottom 10 percent - were up to two times more likely to file insurance claims than policyholders with the best credit scores - the top 10 percent.

Regarding the impact on minorities, Mr. Montemayor said in a letter to Gov. Rick Perry and legislative leaders: "I do not have a legal basis to ban a practice that has a disproportionate impact if it produces an actuarially supported result and is not unfairly or intentionally discriminatory.

"Credit scoring is not unfairly discriminatory as defined in current law because credit scoring is not based on race, nor is it a precise indicator of one's race," he said.

If the Legislature opts to outlaw or severely limit use of credit history by insurance companies, it should phase in the changes over time to avoid disruption in the auto and homeowners insurance markets, the commissioner said.

In passing a massive insurance reform law two years ago, the House initially approved a ban on credit scoring, but the prohibition was removed in negotiations between the House and Senate on the legislation. The final bill did call for restrictions on the practice.

Mr. Montemayor acknowledged in his letter that he was initially skeptical of the link between credit history and insurance risk. But he changed his opinion after the study was done by the Texas Department of Insurance last year.

Currently, 82 percent of auto insurers and 54 percent of home insurers use credit scores in determining premiums and issuing policies. Someone with a poor credit score can pay as little as 11 percent and as much as 400 percent more than someone with a good credit history, according to the state study, which examined the credit scoring policies of Texas insurers.

A statistical breakdown for auto policies found that minorities make up 65 percent of drivers with the worst credit scores, while white drivers make up 90 percent of those with the best credit scores.