March 7, 2003
Study shows insurance industry right about credit history-claims tie
By Travis E. Poling, Express-News Business Writer
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The insurance industry's controversial stance that there's a link between a customer's credit history and the likelihood of his filing a claim appears to have validity, according to an independent study commissioned by the Legislature.
Sen. Bill Ratliff, R-Mount Pleasant, said the University of Texas at Austin's Bureau of Business Research conducted the $60,000 study and the Legislature paid for it. Ratliff requested the study last summer while he was acting lieutenant governor to counter or confirm studies paid for the by the insurance industry.
Researchers gathered data, including credit scores — a measure of credit worthiness — on 153,326 policies from five participating insurance companies doing business in Texas.
The credit scores sampled were from the first quarter of 1998. The study then tracked actual losses from claims associated with the policies.
When the policyholders were divided into 10 groups of equal size, the UT study found that the group with the worst credit scores led to a claims loss about 53 percent higher than expected. And three groups with the worst credit scores all had claim losses above the targeted loss ratio.
The group with the best credit score cost the insurance firms 25 percent less than loss ratio targets.
What's more, the credit score can predict the monetary size of the claims.
The average loss per policy was $695, but the group of policies with the worst credit scores weighed in at $918. The group with the best credit scores averaged $558.
But the study has its limits. The researchers wrote they didn't attempt to explain why credit scoring helps insurers predict insurance losses. And variables such as race, ethnicity and income weren't included.
Sen. Troy Fraser, chairman of the Senate Business and Commerce Committee, said the study would be formally presented to the committee in a hearing Tuesday.
That hearing also is expected to be a forum for consumers to speak out against the use of credit scoring and insurers to defend the practice.
Testimony will also be heard on Sen. Leticia Van de Putte's SB 400, which prohibits the use of credit scoring by insurance underwriters and orders a rollback on insurance rates to Jan. 1, 2001.
The insurance industry opposes rate rollbacks and has long contended, as their own studies show, that using credit scoring helps predict which applicants for insurance are likely to file home or auto claims.
Other insurance-related bills discussed in committee Thursday are undergoing tweaking to give the Department of Insurance more authority to determine if the criteria insurance companies use to raise rates or drop coverage is fair.
Fraser said his previous homeowner insurer dropped him after he made two claims for water damage, one large and one small, in the same year. He said he also wants to add language to his Senate Bill 127 that would keep the claims history of a house from stigmatizing the owners when they move to a new house.
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