The insurance industry took a few hits at a recent Senate committee hearing on the use of consumer credit histories in rating and underwriting insurance policies. In addition to criticisms from consumer groups, the industry faced a number of hard questions from legislators themselves.
While stressing the purpose of the hearing was to gather information on which to base objective decision-making, various committee members expressed skepticism about the value and legitimacy of insurers’ use of consumer credit information in writing and issuing policies.
Senator Troy Fraser (R-Horseshoe Bay) set the tone in opening the hearing—one in a series of information-gathering sessions on various insurance topics—by commenting that the Texas “insurance crisis” that has fueled “intense public debate.” While Fraser allowed that such debate is a productive first step in addressing problems, he added: “What troubles me, though, in this process is that I continue to hear from representatives of the insurance industry that seem to think … that this issue will suddenly disappear or evaporate come November 5, on election day … I want to assure everyone here that nothing could be farther from the truth.
“As someone who has spent the last eight months examining this issue, I can tell you this problem is real, serious and it will simply not go away,” Fraser continued. “Just because we have an election doesn’t mean that my constituents or the constituents of every member sitting here today are going to be any happier about what’s happening with their insurance rates…
“On the issue of credit scoring, I will continue to challenge the viability of credit scoring and making sure that … it is being used fairly. Whether the current methods being used are fair to all consumers. Whether certain segments of the population are being singled out by either their economic status, their age or possibly their race. I also have concerns about privacy when it comes to credit scoring … about how the information gathered is being used and who it’s being shared with.
“Let me be very clear. If any evidence exists that credit scoring is being used to discriminate against policy holders based on factors I’ve mentioned, or in any way violate privacy rights, I’m prepared to file legislation to end these types of abuses.”
Sen. John Corona (R-Dallas) clarified that Sen. Fraser’s remarks represented Fraser’s personal opinions. Corona added that “the purpose of the committee is to study these issues and … not to summarily issue an indictment of the insurance industry.”
A panel of representatives from the Texas Department of Insurance told the committee that about 75 percent of the companies writing homeowners policies in Texas use credit histories in some fashion in issuing policies. Some companies use the information for rating, some for underwriting, some for both. The practice is more widely used in personal auto lines, where about nine out of ten carriers use credit information to write policies.
One of the major points of discussion throughout the hearing was the difference between a credit score and an insurance score. Industry representatives clarified that a consumer’s credit score, developed through an examination of that individual’s financial habits, and applied to a detailed model to determine a score relative to an established average, is but one element of the insurance score. The insurance score includes items such as a person’s claims history in addition to credit information. It is the insurance score, rather than the credit score, that is often used as a factor in rating and pricing a policy, and/or in deciding whether or not to extend a policy to an individual consumer. All insurers do not use credit information in the same way and models vary from company to company.
Insurance industry representatives included Eddy Lo, with Fair, Isaac & Co. and Jeffrey Skelton of Choice Point, two companies that develop credit reports; Denise Ruggiero with State Farm Insurance; Allstate’s Dean Lamb; Lee Ann Alexander, Liberty Mutual; and William H. Graves with Progressive County Mutual.
Fair Isaac’s Lo said there is a strong correlation between losses in personal lines and credit. He noted that although numerous studies show a correlation between financial management and risk behavior, they don’t necessarily indicate why there is a link—just that it exists.
Industry panelists spoke with a single voice on at least one point: the inclusion of credit information in developing insurance scores helps them underwrite risks more accurately and in many cases provide lower rates. As Lee Ann Alexander of Liberty Mutual put it, “A lot of people are benefiting and a lot of people do have better rates” because of the credit factor in their insurance score.
Some of the committee members remained skeptical. Sen. Eliot Shapleigh (D-El Paso) said he didn’t “see the connection” between consumer credit information and insurance loss. “Basic consumer credit report information—I fail to see how it’s linked to risk in home insurance and car insurance,” Shapleigh said. “I think that’s what we need to know on this committee. It tells me that you might not be able to pay the premium, that you might miss a payment, but it doesn’t tell me what the risk of loss (is).”
Accuracy of the data, the appeals process—consumer recourse if the data is wrong; the length of time it takes to correct inaccuracies; the danger of redlining certain populations or communities; and how the use of credit scores affects the agent who has to relate to the consumer that their rates are going up even though they have no claims were a few of the other concerns expressed by the committee.
Graves said Progressive’s “position on credit is that the legislature should support the responsible use of credit scoring” and refrain from banning the practice outright.
He emphasized that, “One of the things that hasn’t been said, or hasn’t been said clearly is: we don’t start with the model and start looking for correlations … We start with the raw data. And we look for the regressions in the data between various elements of credit on the one hand and losses on the other. The correlations fall out of the data—they are a statistical fact.”
Ruggiero explained that the Texas Coalition for Affordable Insurance Solutions (TCAIS), an industry group, has endorsed seven principles for credit-related regulation. They include:
1. Require insurers to notify consumers that credit information is used by the company to help assess risk.
2. Require insurers to provide applicants an explanation of why they were not offered coverage if due to credit; and provide existing customers a written statement of reason, upon request, explaining why they received a premium increase or cancellation notice if due to
credit.
3. Prohibit insurers from using credit information as the sole factor in denying, canceling or not renewing a home or auto insurance policy.
4. Protect those who have little or no credit history by limiting how insurers use a lack of credit history as a determining factor in denying coverage.
5. Prohibit insurers from using certain credit information—such as medical collection information and disputed information under investigation by a credit bureau—to help assess risk.
6. Require insurers to reevaluate policyholders, at their request ,if they discover errors on their credit report.
7. Require insurers that use credit on renewal to reassess consumers’ credit information periodically and, when necessary, adjust their premiums accordingly.
Sen. Leticia Van De Putte (D-San Antonio), however, questioned why the industry did not voluntarily implement its own suggestions. “If you’re so hot about doing this what are you waiting for?” asked Van De Putte. “Why are you waiting until the legislature forces you to do something that is sound and good—this looks like the industry taking care of its own perceived problems … There’s nothing in those points that you can’t do voluntarily right now. If this is what you want then do it.”
Sen. Fraser added that the industry can help itself by giving legislators some “comfort level” and satisfying the “concerns that have been brought up today.”
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