Proposed Texas Credit Rule Reportedly to Increase Rates for Low-Risk Policyholders

A proposed rule by the Texas Department of Insurance (TDI) that would place a 10 percent cap on how much insurers can vary rates based on credit information will reportedly force low-risk policyholders to pay more for insurance.

“This proposal punishes people who have good credit while rewarding policyholders who file the most claims,” said Donald Hanson, southwestern regional manager for the National Association of Independent Insurers (NAII). “Placing an arbitrary cap on how much rates can vary based on credit-based insurance scores will have a negative impact on most consumers. The department’s proposal falls short of ensuring that premiums are reasonable, fair and related to the consumer’s risk of loss.”

Numerous studies have reportedly demonstrated that insurance scores are linked to the propensity for loss. In other words, policyholders with higher insurance scores tend to file fewer claims.

The largest and most comprehensive study on the connection between credit history and insurance risk conducted by EPIC Actuaries, LLC, reportedly demonstrated that policyholders with the lowest insurance scores cost insurers on average 33 percent more to insure while those with the highest scores cost insurers 19 percent less to insure.

“This study highlights the disparity that would occur by imposing a 10 percent cap. Policyholders with the lowest scores and who file the most claims would get a significant break in their premiums at the expense of policyholders who file the fewest claims. This one-size-fits-all approach does not take into account the unique ways that each insurance company uses credit information for underwriting and rating. Imposing a cap is counter to the principles of risk-based pricing. The cap is unfair to most consumers because it will force lower-risk policyholders to subsidize the premiums of higher risk policyholders,” said Hanson.