Depending on Viewpoint, Reaction to TDI Credit Scoring Study Results Varies

January 3, 2005

The Texas Department of Insurance has released its Report to the 79th Legislature on the use of credit scoring by the insurance industry. In announcing the report TDI said preliminary findings from the study “indicate a strong relationship between credit scores and claims experience. Poor credit scores are associated with increased claims activity. Furthermore, the study found that Black, Hispanic, young, and low-to-moderate income policyholders tend to have worse credit scores than White, Asian, older and high-income policyholders.”

Interested organizations quickly issued statements reacting to TDI’s overview of the study results; the responses varied according to the perspective of the issuing organization.

Insurance Council of Texas

According to an announcement issued by the Insurance Council of Texas, the report “clearly states that the use of credit scores is an accurate predictor of insurance losses. Credit scores are totally objective and ‘colorblind’ because race and income are not used. Credit scores focus solely on a person’s verifiable credit history.”

“The use of credit scores is an every day fact of life. They are used in obtaining jobs, finding an apartment, purchasing a home and buying nearly every type of major appliance.

“Credit scores are an underwriting factor that an individual can control and improve. By paying bills on time and managing their finances, policyholders can see a marked improvement in their credit score, which can lead to better insurance rates.

“Credit scoring is an important tool that insurance companies can use to better assess risk so they can fairly and accurately establish the price each consumer pays for their home and auto insurance coverage.

“It remains a fact that the use of credit scores has been proven actuarially sound and that they accurately predict insurance losses.”

Center for Economic Justice

The Austin-based consumer advocacy organization, the Center for Economic Justice, maintained the study results “confirm what CEJ has been saying for years – that insurance credit scoring causes higher insurance rates for low-income and minority consumers.

“‘The Department’s study is the latest confirmation that insurance credit scoring is simply 21st century redlining,’ said Birny Birnbaum, executive director of CEJ. “

“Birnbaum explained ‘Anyone looking at the actual scoring models quickly sees that the contents of these models focus on a consumer’s economic status rather than the record of paying bills on time. The new study by the Texas Department confirms the results of last year’s study by the Missouri Department of Insurance and CEJ’s own studies – the best predictors of your insurance credit score – and resulting premium – is your race or your income.'”

According to CEJ, which makes available on its Web site examples of credit scoring models used in Texas, the “TDI study shows that African American and Hispanic consumers are over 60% of the consumers having the worst credit scores, but less than 10% of the consumers having the best credit scores. (Chart 4, Page 15). …

“‘CEJ calls on Commissioner Montemayor to stop dragging his feet and implement the Legislature’s mandate to cap the impact of insurance credit scoring on insurance premiums,’ Birnbaum added.

“In 2003, the Texas Legislature directed the Commissioner to cap the impact of credit scoring on insurance rates. TEX. INS. CODE ANN. ART. 21.49-2U § 13 (b) states, ‘The commissioner shall promulgate by rule the allowable differences in rates charged by insurers due solely to the difference in credit scores.’ Despite promising in 2003 to protect consumers from abusive credit scoring practices, Montemayor has failed to adopt such a rule and has not taken a single action against any individual credit scoring model or insurer using credit scoring.

“‘While the State of Texas is cracking down on drivers who don’t have insurance, the insurance industry is making it harder for low-income consumers to comply with the law by using credit scoring to jack up poor peoples’ rates. It’s long past time for Commissioner Montemayor to stop watching the abuse of consumers from the sidelines and carry out his responsibility as Insurance Commissioner and protect consumers from this unfair discrimination,’ Birnbaum stated.

He added, “‘We know the industry will try to dismiss this study, as it has tried to do with all other studies that show the dark side of insurance credit scoring. But, as insurers reap record profits in Texas on both auto and homeowners insurance, we hope that legislators will recognize they have been fed a pack of lies by insurers and take quick action to ban insurance credit scoring in Texas.'”


In its announcement, the Property Casualty Insurers Association of America stated a “preliminary review of the report indicates that the findings are far from conclusive and lawmakers should reserve judgment regarding this issue until a more detailed analysis of individual policyholder data used in the study and a critical review of the report’s methodology can be conducted.

“It is too early to draw conclusions until TDI completes its entire analysis of the data. As TDI notes in the report it is in the process of conducting a multivariate analysis using the individual policyholder data in the study and will report the results to the Legislature by January 31, 2005. Moreover, before any conclusions can be drawn from this study, the validity of the methodology and results should be reviewed by actuaries and statisticians inside as well as outside of the insurance industry.

“Studies of that attempt to link credit information with race or income are extremely complex. While several states such as Alaska, Missouri and Washington have attempted to conduct this type of study, each one has suffered from critical flaws in the methodology and failed to adequately consider loss histories, which rendered the results invalid.

“All previous credible studies on insurance scoring have reinforced its validity as an accurate predictor of the risk of loss. The University of Texas, which conducted one of the most credible studies, demonstrated that there is an undeniable connection between insurance scores and risk of loss. Insurance scores make insurance underwriting and pricing more accurate. People who manage their finances responsibly – no matter their ethnicity or the value of their assets – suffer fewer losses and should pay less for their insurance. For insurers the issue is one of risk, not race. Insurers do not collect information on an individual’s ethnicity or income level. The use of credit history is an important factor in the color blind process of underwriting.”

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