Credit Accurate in Predicting Insurance Risk, TDI Study Confirms

The following statement can be attributed to Beaman Floyd, executive director of the Texas Coalition for Affordable Insurance Solutions. The statement comes in response to the Texas Department of Insurance (TDI) study of credit-based insurance scoring.

A recent study by the Texas Department of Insurance (TDI) reconfirmed that credit-based insurance scoring is an accurate and proven tool to help lower insurance rates for lower risk consumers. According to the TDI study: "Preliminary findings indicate a strong relationship between credit scores and claims experience. Poor credit scores are associated with increased claims activity."

TCAIS and many others have long known that Texas consumers benefit from credit-based insurance scoring because most policyholders pay less when insurance scoring is used. In fact, without the use of credit-based insurance scoring, 60-70% of Texans would see their rates go up. If credit-based insurance scores were prohibited, many lower risk Texans would be forced to subsidize customers with higher risk.

TDI's report shows that consumer complaints about credit-based insurance scoring dropped significantly after the Texas Legislature passed SB 14 in 2003. This law comprehensively regulates the use of credit-based insurance credit scores and affords significant protections to Texans.

Credit information is only one of many factors used by insurers to determine premiums.

Texans who do not want their credit histories to impact their insurance can buy coverage from insurers who do not use credit information. The TDI study indicates that insurers writing approximately 42% of homeowners insurance and 55% of personal auto premiums use credit history to impact on the rates paid. The rest do not.

The use of credit information by insurers has been the subject of a number of state and national studies, including one at the University of Texas, as commissioned by the Texas Senate in 2003. This study also confirmed that credit-based insurance scoring is a proven, statistically valid indicator of insurance risk. That is, statistically, people with positive credit-based insurance scores are less likely to incur losses.

However, TCAIS has concerns with the methodology of the TDI study where it studies the insurance score's impact on different classes of consumers. In its December 30th preliminary report, TDI outlines limitations of the data, which in our view may cause these conclusions to be flawed.

TCAIS urges public policymakers to use caution when considering legislative or regulatory changes to the use of insurance scores by insurers to avoid increasing the premiums paid by Texas consumers. In particular, according to the study, banning or limiting the use of credit-based insurance scores could raise premiums for Texas senior citizens: The study found that the best average credit-based insurance scores are for individuals older than 70.

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The Texas Coalition for Affordable Insurance Solutions (TCAIS) is an alliance of insurance providers and trade organizations committed to working with elected officials, the media and the public to find public policy solutions that promote a competitive insurance marketplace that maximizes benefits for buyers and sellers of insurance. TCAIS members include American Insurance Association, Allstate, Nationwide, State Farm and USAA.