March 10, 2003
Texas Legislature Report Supports Credit-Based Insurance Scores
By John Hillman, Best's Insurance News
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AUSTIN, Texas (BestWire) - A new study commissioned by the Texas Legislature suggests credit-based insurance scoring does act as a predictor of claims experience, a boost for insurance companies' arguments in favor of the practice.
The study--prepared by the Bureau of Business Research at the University of Texas at Austin--looked at information on more than 150,000 policies from five insurers, matching the information to credit information and claims history for both standard and nonstandard policies. The results showed that credit-based insurance scores add information to the underwriting of a policy not found in other underwriting criteria, the bureau said.
The study showed a "significant relationship" between the credit-based insurance score for the policyholder and the claims history, according to the bureau. The policies used in the study were from January through March of 1998, before the companies involved in the study were using credit-based insurance scores as part of their rate-making process, to avoid skewing the results, the bureau said.
In addition, the claims histories reviewed were obtained for a one-year period, which meant even slow-paying claims were included in the study, providing complete data, the bureau said. The data used in the review didn't include information on race, ethnicity or income, the bureau said, areas often focused on by consumer complaints.
The study requested information from the insurers on:
-- Age of the insured;
-- Gender;
-- Marital status;
-- Location where the vehicle was driven;
-- Use of the vehicle (i.e. business, pleasure, to and from work, etc.);
-- Prior driving history of the policyholder;
-- Annual mileage driven;
-- Make and model of the vehicle;
-- Age of the vehicle;
-- The policy premium; and
-- Incurred losses
The bureau got a credit report for each policyholder and developed a score, dividing the group into 10 segments according to scores. According to the results of the study, the lower scores showed significantly higher claims experience by loss ratio, the bureau said.
"This is a significant study which should clear up the misperceptions about the use of credit as a valid tool in the insurance business," Joe Woods, assistant vice president of the Alliance of American Insurers, said in a statement. "As we've said all along, research shows that people who manage their personal finances responsibly tend to manage other important aspects of their life--and financial assets such as their home and vehicle--responsibly as well."
"We urge the legislature to embrace this information and seriously consider the impact of limiting the use of credit-based insurance scoring," Woods said. "Such limits would have a negative impact on the majority of Texans who have a good score."
Donald Hanson, Southwestern regional manager for the National Association of Independent Insurers, said in a statement that his group was hopeful legislators would see the positive impact that insurance scoring can have. "Insurers have found that when used with other familiar factors such as driving record and the age of a home or type of vehicle, insurance scores help provide a clearer picture of an individual's risk of loss," he said. "This helps insurers more accurately price policies based on a policyholder's potential for filing a claim."
The top five writers of all private passenger auto coverage in Texas in 2001, according to A.M. Best Co. state/line reports, were: State Farm Group, with a 23.6% market share; Allstate Group, with a 16.8% share; Zurich/Farmers Group, with 12.7%; USAA Group, with 6.5%; and Progressive Insurance Group, with 5.6%.
In late November, legislation was introduced in Texas that would require insurers to file their credit-based insurance scoring methodologies with the insurance department and would prohibit insurers from taking adverse action solely on the basis of a credit-based score; using the fact that a person has little or no credit history as an adverse factor; using credit information that includes race, religion, national origin or gender as part of the score; or using insurance inquiries or nonconsumer initiated credit inquiries as part of the scoring process (BestWire, Nov. 25, 2002).
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