March 7, 2003
Study: Insurers lose more to
bad-credit customers
By R.A. Dyer, Star-Telegram Staff Writer
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AUSTIN - Have bad credit? Chances are, you're also more likely to file an insurance claim.
That's the conclusion of a University of Texas at Austin study released Thursday that examines the correlation between credit history and automobile insurance losses.
The 13-page report, conducted by UT's Bureau of Business Research, found a correlation between credit history and both the size and frequency of insurance claims.
Texas lawmakers commissioned the study last summer in anticipation of making possible changes to both the automobile and home insurance markets. Consumer groups want lawmakers to ban the use of credit history by insurance companies; insurance companies say their use can save money for many customers.
The research team reviewed a year's worth of premium and loss data for automobile insurance policies. Then, they contracted with a commercial company to match 153,326 of those policies with the policyholders' credit histories.
The research team found that insurance companies were likely to suffer greater losses on policies sold to those with poor credit, as opposed to losses from customers with better credit. "There is less than a 1 in 10,000 chance that the relationship observed between credit score and relative loss ratio could be due to chance alone," the study concludes.
It further finds that customers with relatively poor credit are more likely to file claims, and that the size of those claims are generally larger.
Industry spokesman Jerry Johns said the report confirms what insurance companies have said all along.
"This sends a message to the Texas Legislature ... that the idea of banning credit history is not a good idea," said Johns, of the Southwestern Insurance Information Service. "Banning of use of credit histories would have a net effect of raising rates for 40-50 percent of the citizens of Texas."
But Rob Schneider, a senior staff attorney for the Austin office of Consumers Union, said it's important to note what was not included in the report. Namely, the report did not examine whether credit scoring by insurance companies harms disproportionate numbers of poor and minority Texans.
"If we use credit scores for homeowners and automobile [insurance companies], we can make it more difficult for low-income people who may be struggling with their bills," said Schneider, whose organization publishes Consumer Reports magazine.
Lawmakers are considering competing bills regarding credit scoring: One would ban its use outright, the other would require insurers to provide public information on credit scoring guidelines.
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