In a packed hearing room at the Texas Capitol, members of the Texas House Insurance Committee on Jan. 21 heard the views of consumers and their advocates, as well as insurers and their representatives, regarding House Bill 23, which would ban the use of credit history in rating insurance premiums.
HB 23 is one of a number of bills filed during the current legislative session that would ban or further restrict the use of credit information in developing insurance premiums.
Consumers in support of the ban testified the practice is unfair for many reasons and discriminates against minorities and low-income individuals.
Insurers said HB 23 is unnecessary because the legislature enacted measures in 2003 that included safeguards against using to consumers’ detriment the credit information of individuals who have suffered “extraordinary life circumstances” that adversely affected their credit rating.
Many of the individuals testifying in favor of the bill related stories in which extraordinary circumstances, such as loss of a job and high medical bills, caused their credit rating to plummet and their homeowners insurance bills to skyrocket. A police officer from Mesquite, whose wife’s cancer-related medical bills destroyed their financial standing, said the cost of his homeowners coverage increased so much he had to sell his home.
Lawmakers on the panel repeatedly asked the consumers testifying about their circumstances when their crises occurred. For most, their credit troubles and subsequent insurance problems took place before the legislature enacted reforms in 2003.
Insurance organizations, including the Property Casualty Insurers Association of America, told the committee that a ban on insurers’ use of credit information would force most consumers to pay higher premiums on automobile and homeowners insurance.
“Based on the statements expressed by consumers at the hearing, the current law is satisfactory in meeting the needs of consumers who have experienced a financial hardship. We did not hear any problems that were not addressed by the protective provisions of current law,” said Joe Woods, vice president and regional manager for PCI.
Ware Wendell, with the consumer advocacy group Texas Watch, told lawmakers that using credit histories in insurance rating is a “flawed, inconsistent and discriminatory practice.” He said among other things, the high rate of errors inherent in credit scores and the fact that credit information is applied inconsistently by insurers add to the reasons why credit histories should not be used in the rating of insurance. He maintained that not only do more than 75 percent of consumers’ credit scores contain errors, an individual’s credit score can vary significantly among the three dominant credit score providers.
Wendell spoke on behalf of a coalition of consumer organizations that includes Texas Watch, League of United Latin American Citizens (LULAC), Mexican-American Legal Defense and Education Fund (MALDEF), NAACP, Texas Public Interest Research Group (TexPIRG), Center for Economic Justice, Public Citizen, Consumers Union and Common Cause.
Lawmakers grilled a representative from Choicepoint, a company that supplies insurance scores and scoring models to the insurance industry, on the error rate in credit reporting as well as what factors are used in determining an insurance score.
The Choicepoint representative explained that credit scores, which his company obtains from consumer credit reporting companies such as Equifax, Experian and Trans Union, are different from insurance scores. Credit scores, he said, take into consideration information such as an individual’s credit to debt ratio, consumer credit use and credit applications. He was unable to tell lawmakers the error rate in either credit scores or insurance scores, of which credit history is only a part. Pointing out that Choicepoint only deals with insurance scoring, he said, “Our error rate is what the credit reporting error rate is,” adding he did not know what Choicepoints rate of errors is.
The insurance committee made no decisions on the Jan. 21 testimony and did not schedule additional hearings.
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