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Monday, January 31, 2005 2:56 PM
Credit scoring for insurance rates criticized
The common practice of using credit scores or credit histories to determine
insurance rates discriminates against minorities and poor people and should
be banned, lawmakers and advocacy groups said Monday.
Sen. Rodney Ellis, D-Houston, said legislation banning the practice would
be filed in both the House and Senate. Ellis also called on the Texas Department
of Insurance commissioner to stop the practice.
A state report released last week indicated black, Hispanic and low-to-moderate
income policyholders generally have lower credit scores than their white,
Asian, older or high-income counterparts. Typically, those with higher credit
scores pay lower insurance premiums.
“Most right-thinking people just have a basic visceral notion that credit
scores are something that ought to not be used in determining what somebody’s
rate ought to be or how much they ought to pay in insurance,” said Ellis,
who was joined by several other lawmakers.
Leaders of AARP, Texas Watch, Common Cause, League of United Latin American
Citizens and the NAACP, among others, joined the call for a ban.
According to the state study, 54 percent of homeowners insurance policies
and 82 percent of auto insurance policies are written by companies that use
credit scoring in decision making.
Insurance companies have said banning use of credit scores would reduce the
accuracy and fairness of rates statewide. The state report shows a correlation
between low credit scores and a high number of insurance claims.
“We don’t see this as a race issue,” said Mark Hanna, Insurance
Council of Texas spokesman. “It’s all about charging more accurate
rates.”
Advocates of the ban said the link between credit scores and risk level has
not been adequately proven, and that credit scores can vary.
Rep. Scott Hochberg, D-Houston, said he got three different reports when he
asked for credit scores from the three reporting agencies.
“That tells us it’s a crazy process,” he said.
For minorities, the practice breaks the fundamental American promise of fairness,
said LULAC spokeswoman Ana Correra.
“Our skin color should not make us a higher risk,” Correra said.
Banning the use of credit scores would result in lower-risk policyholders
paying higher rates to subsidize higher-risk policyholders, said Beaman Floyd,
director of the Texas Coalition for Affordable Insurance Solutions.
“If it was banned, next year more people would open up their renewal
notice and have higher rates,” Floyd said
.
Ellis called on insurance Commissioner Jose Montemayor to end the use of credit
scoring.
Insurance department spokesman Jim Hurley said Montemayor will respond after
the second part of the insurance department’s credit scoring study,
which aims to identify how much credit scoring actually improves insurers’
ability to predict losses.
The second part of the credit scoring study is expected to be released by
month’s end.
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