On Jan. 10, 2004, Texas State Senators Rodney Ellis of Houston, Gonzalo Barrientos of Austin and Eliot Shapleigh of El Paso announced their intent to file a bill in the legislative session that began Jan. 11 that would ban the use of credit history by insurance companies in setting rates.
In announcing the bill, the senators expressed concern over the results of a study conducted by a consumer interest group, the Austin-based Center for Economic Justice. Sen. Ellis said the CEJ report showed the use of credit scores by insurers leads to disproportionately higher premiums for minority and middle class Texans.
The Texas Department of Insurance earlier this month released the first results of a credit score study it commissioned. That study indicates a relationship between claims history and credit scores, but TDI said it also shows that certain minority groups and lower income consumers tend to have worse credit scores.
Insurance industry representatives quickly responded to the senators’ announcement.
Property Casualty Insurers Association of America (PCI) called on legislators to proceed with caution in regards to the proposed credit-based insurance scoring bill.
Calling the rhetoric of the news conference to announce the bill “inflammatory and divisive,” Donald Hanson, southwest regional manager and counsel for PCI, said the senators’ actions were “counter productive especially when it is based upon nothing more than preliminary information.
“Studies that are related to the connection between race, income and credit are extremely complex,” Hanson continued. “We need to wait until this study is complete to ensure that is accurate. This is especially true because several states such as Alaska, Missouri and Washington that attempted to conduct studies on race and income have suffered from critical flaws in the methodology and failed to adequately consider loss histories, which rendered the results invalid. We would not want to base public policy on faulty or inconclusive data.”
Insurers use credit scores in order to charge more accurate rates, stated Mark Hanna, a spokesperson for the Insurance Council of Texas. Hanna added, “TDI’s study confirms that people with bad credit scores are twice as likely to have an accident than drivers with good credit scores. The study also confirms that there are excellent, average and poor credit scores in every ethnicity.” He noted that “minority/ethnic or socioeconomic” status does not come into play because “insurers do not consider this information in the underwriting process.”
In an announcement, Sandra Ray, public affairs director for the Southwester Insurance Information Service, stated her organization respects “the opinions of the coalition members, but would like to offer some facts based upon concrete and exhaustive research, which indicate that the use of credit is a valid predictor of loss for people from all economic and social levels of Texas society.”
Ray noted that TDI’s “study confirmed that there is a strong relationship between credit scores and claims experience. Insurers are trying to ensure that all policyholders who pose less risk be given the benefit of paying lower insurance premiums because of their good credit score.”
She offered the following statistics as evidence that “insurance is clearly available and affordable, including to millions of Americans of modest means and all ethnic groups:
· Homeownership rates in Texas reached a record high 64.5 percent in 2003 (latest data available).
· Homeownership in the Dallas metropolitan area also reached a record high 63.1 percent in 2003.
· Minorities are using their good credit to buy homes and get insurance.
· In fact, homeownership rates for minorities are at or near record highs and have increased much faster for minority groups than for whites
· Between 1995-2001 Hispanic American homeownership has increased 45.9 percent.
· African American homeownership has increased 23.2 percent.
· Homeownership by White Americans has increased only 10.7 percent.
Ray added that, “restricting the use of credit histories actually has the effect of requiring financially prudent policyholders, many of whom are in low-income households, to subsidize more affluent people who may pose greater risks.”