Industry Groups Say Texas Report Supports Credit Score Claims

March 10, 2003

A report prepared for the Texas Legislature on credit-based insurance scores supports the insurance industry’s assertions that credit history is a valid tool in predicting future claims, according to trade groups such as the Alliance of American Insurers and the National Association of Independent Insurers (NAII).

The report, paid for by the legislature and prepared by the University of Texas at Austin’s Bureau of Business Research, will be presented to the Senate Business and Commerce Committee.

The Alliance said published reports indicate the $60,000 study looked at more than 153,000 policies from five companies doing business in the state. The 1998 credit scores for those policyholders were compared with the number of claims subsequently filed by the policyholders. The groups with the worst credit scores all had higher than expected losses—up to 53 percent higher for the worst scores—while those with the best scores had losses 25 percent less than targeted. The dollar amount of the claims was also significantly higher for those with the worst credit scores.

“This is a significant study that should clear up the misperceptions about the use of credit as a valid tool in the insurance business,” said Joe Woods, the Alliance’s assistant vice president and Southwest regional manager. “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.

“The University of Texas study reaffirms the previous independent studies on insurance scoring,” said Donald Hanson, southwestern regional manager for the NAII. “Based on the strong relationship between insurance scores and risk of loss that the University of Texas researchers found, we are hopeful that legislators will see the positive impact that insurance scoring can have in helping to make insurance coverage more available and affordable for millions of drivers and homeowners. 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. This helps insurers more accurately price policies based on a policyholder’s potential for filing a claim. Legislation that would ban the use of this tool would be a disservice to consumers.”

The NAII said numerous other studies that have been commissioned by state legislators across the country also verify the correlation between credit and risk. Since December 2002, the Alaska, Kansas, Michigan, Washington and now Texas legislatures have received independent studies that provide further proof that insurance scores are very accurate predictors of loss.

Texas is one of at least 35 other states examining insurance scoring this legislative session, the NAII said.

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