NO BASIS FOR CREDIT SCORE BAN

Texas Insurance Commissioner José Montemayor in late January delivered to Gov. Rick Perry and the Texas Legislature the final report on a credit scoring study conducted by the Texas Department of Insurance. In a letter introducing the study, Montemayor told lawmakers that after reviewing the results he concluded the use of credit scores in insurance rating “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 added that “credit scoring significantly improves pricing accuracy when combined with other rating variables in predicting risk” and he had no “legal basis” upon which to support a ban of the practice.

“The first phase of the analysis, published December 31, 2004, indicated that credit scoring is correlated to risk,” Montemayor stated in the letter. It “also indicated that certain age, income and race groups tended to have worse credit scores, though not all minorities have bad credit scores,” the commissioner said.

The second phase “evaluates if, and to what extent, credit scoring enables an insurer to more accurately predict losses when used in conjunction with other variables,” he continued. “Overall, the second phase indicates that credit scoring significantly improves pricing accuracy when combined with other rating variables in predicting risk.”

Montemayor noted that, “Prior to the study, my initial suspicions were that while there may be a correlation to risk, credit scoring’s value in pricing and underwriting risk was superficial, supported by the strength of other risk variables.” But, he said, the study “did not support those initial suspicions.”

A link to the credit scoring study is available on TDI’s Web site at www.tdi.state.tx.us.

Topics Texas