The Texas Department of Insurance recently adopted initial rules regarding the use of credit scoring by insurers in Texas. And the department believes the rules, along with the statutory provisions in Senate Bill 14, are among the strongest in the country when it comes to regulating insurers’ use of credit scores.
“I am very proud of these rules and Senate Bill 14,” Texas Insurance Commissioner Jose Montemayor said in a published bulletin. “They represent some of the strongest, if not the strongest, consumer protections related to the use of credit scoring in the country. The Legislature took historic steps in addressing our need for a modern rating law and they deserve an enormous amount of credit for doing what is best for Texas.”
According to TDI, under the new rules, companies using credit information must provide consumers with a disclosure statement regarding its use once an insurance application is received. The disclosure notifies potential policyholders if credit scoring will be used in rate setting and describes the consumer’s rights and protections.
The rules require insurers to justify the rate charges as a result of credit scoring when used with other rating variables. However, in December 2003, TDI will propose amended rules addressing those limits as more information becomes available. Montemayor said he expects insurers to provide actuarial proof justifying their use of credit scoring and that each point of variation must be proven up. Failure to provide adequate proof will result in an insurer being prohibited from using credit scoring.
Insurance trade groups have issued comments in favor of the rules, stating that they are fair and will benefit consumers.
“The insurance scoring and territorial rating rules are based on the principles of risk-based pricing and fairness,” stated Donald Hanson, southwest regional manager for the National Association of In-dependent Insurers.
“Consumers that pose greater risk of loss should pay a higher premium than other consumers. The rules adopted reinforce that principle. We commend the department for taking a cautious approach to implementing rules on these subjects. These rules strike the right balance by working to enhance market stability while offering sound consumer safeguards.”
According to Mark Hanna, a spokesman for the Insurance Council of Texas, “Commis-sioner Montemayor made the right move in allowing insurers to use credit scoring on rates where it is actuarially justified. Insurers wouldn’t expect anything less. The Commissioner says he needs more data and plans to study it further.
“Insurers welcome any further studies as well as a fair actuarial analysis of the current use of credit scoring,” Hanna added.
TDI’s report explained that the absence of a credit history may not be a negative factor in terms of rate setting and that insurers are required include that information in the notice to consumers who have little or no credit history. The disclosure form must identify each of the statutory prohibitions contained in SB 14. Similar protections will exist for people with past-due medical collection accounts and extraordinary life events. Additional disclosure is required by SB 14 to state how credit scoring was used.
The disclosure must also explain the consumer’s right to appeal an adverse ruling that results in higher rates or other adverse actions. The company is required to provide a contact telephone number that the consumer can call to dispute inaccurate or prohibited information. TDI also has a toll-free number for consumers to use when they believe an unjustified adverse action has been taken.
As with most politically charged issues, not everyone is happy, however. On Nov. 14 the Austin American-Statesman published an opinion by its editorial board that called on Montemayor to consider placing caps on the amount an insurer can raise or lower rates as a result of an insured’s credit history. Montemayor “put off answering the most critical question: whether to limit the amount of surcharge or discount to a premium applied by insurers in connection with a person’s credit rating,” stated the editorial.
Consumer groups have advocated caps because drivers are required by law to purchase insurance for their automobiles and mortgage lenders require home buyers to purchase coverage for their homes. Limits would make the use of credit information fairer, they say.
The Statesman editors endorsed the idea stating, “A narrow limit should be seriously considered, because the purchase of auto and homeowners coverage is not optional.” They also urged the state to “do all it can to ensure affordable rates by doing what insurance is supposed to do: spread risk.”
Montemayor has said he is delaying a decision on the question of caps until the department gathers more information. In a commentary published in the Statesman on Nov. 19, Montemayor stated that “the department will conduct an exhaustive study to determine if credit scoring has a disparate impact on any class of policyholders. If it is proven that credit discriminates based on race or any other protected class, it will be banned.”
Defending the rules as “a strong first step in regulating credit scoring,” Montemayor urged all concerned “to step beyond the hysteria concerning credit scoring and work for real reform.
The Independent Insurance Agents of Texas has so far remained silent on the issue. A spokesman for the IIAT said the group was taking a wait and see attitude.