In Texas, lawmakers are revisiting the role that credit plays in the cost of insurance, with some voicing concerns that credit-related errors are so difficult to correct that they could be unfairly hurting consumers.
While a few states in the U.S. heavily restrict the use of credit in insurance pricing, the vast majority of states allow insurers to use a consumer’s credit history—from bankruptcies to bill payments—to partly determine how much that consumer pays for coverage.
But it’s the processes that insurers use to determine that “credit-based insurance score,” the differences in each insurer’s scoring methods, and the difficulties that consumers have in correcting credit errors that are spurring lawmakers to revisit the topic.
Credit in Texas: ‘Profiling’ or ‘Predictive’?
Senate committee members last week discussed SB 72, a proposal to bar the use of credit in determining insurance scores, which was left pending in committee.
Sponsor Sen. Rodney Ellis (D-Houston) said the scoring practice is too wide-ranging across the industry.
“Different companies interpret the data in various ways, making the practice arbitrary and inappropriate,” he said in his testimony.
State consumer advocacy group Texas Watch supports the bill, spokesman Ware Wendell told senators, because it would prohibit a practice that amounts to “financial profiling.”
“Insurance credit scoring frustrates the fundamental purpose of insurance, which is pooling risk [and] transferring risk,” Wendell said.
Credit-based insurance scoring can produce rates varying as much as 400 percent, according to Wendell, and much of the “harmful impact” falls on middle-class and working families that are the least financially literate.
“Consumers don’t know what to do to qualify in the eyes of their insurance company,” he said. “For example, if you have two credit cards, that could be treated as a plus factor under some insurance credit-scoring models. Under others, it’s counted against you; you’re in a catch-22.”
Insurers don’t directly translate a credit score into coverage prices but instead take portions of a credit report and factor those portions into a scoring model that ultimately ends up as an “insurance score” that partly determines pricing, according to Jay Thompson, with the Association of Fire and Casualty Companies of Texas.
Thompson said that those scores have been proven in a string of studies to be “highly predictive” of one’s likelihood of filing a claim.
Which portions of credit background and how they are used depend on the insurer, but those dissatisfied with how their insurer considers credit still have plenty of options, according to Thompson.
“Credit is just one of many factors that determine a rate,” he said.
Nixing an entire rating model would actually hurt most consumers who benefit from their credit-based scores, according to the Property Casualty Insurers Association of America (PCI), which also testified at the committee hearing.
Joe Woods, a vice president at PCI, told senators that only 13 percent of consumers see a negative impact on their premiums from credit-based rating tools. Therefore, eliminating the credit-based scoring model would mean those hurt by it would still be “subsidized” by those who benefit from it because of the shared-risk nature of insurance.
“Even if you factor out the consumers with neutral [credit] results, more consumers would be hurt by a ban on the use of credit-based insurance scores,” he said.
Politicians Get Personal about Credit Errors
In Texas, lawmakers said that knowing how an insurer uses credit background in pricing is useless if a background marred by identity theft is difficult to rectify.
Sen. John Carona (R-Dallas), chairman for the Committee on Business & Commerce, said that he was victimized by identity theft months ago but still cannot get the errors left by that crime corrected.
“I’ve done all the things you have to do according to the law and sent certified letters and given notice and whatnot,” he said. “And I am now reaching my seventh month and I still can’t get that stuff off my credit report … When you’ve got a problem with that, with your credit score, it can really be nightmare for people.”
Carona asked insurers “to remain mindful” of such anecdotes, which can be common throughout the U.S.
Sen. Leticia Van de Putte (D-San Antonio) said her husband has also tried to fix credit-related errors marked on his background after having his identity stolen. After five months, those errors remain.
Van de Putte said she was also concerned about the legitimacy of using credit to rate a customer if credit history can be so unreliable.
“If we have for-profit companies out there whose sole business is to manipulate a credit score so that someone who really does have a poor credit score can get it easily fixed, then is it really as valid a tool as we once saw it?” she said.
SB 72 is still pending in committee.
Other States Also Reviewing Credit’s Role in Pricing
In Rhode Island, a similar bill, H 5028, to bar auto insurers from using credit in determining coverage was introduced last month but held for further study that same month.
On Monday, Nebraska legislators held a committee hearing on LB 92, another bill seeking to restrict insurers from considering credit that sponsor Sen. Russ Karpisek said was needed in the current financial climate where many consumers are hurting. At the Banking, Commerce and Insurance Committee hearing, several trade organizations, including PCI, spoke against the Nebraska bill while no one supported it. No action was taken and it is still in the committee.
In Alaska, legislators held a Tuesday committee hearing on SB 55, which would lift a restriction on insurers’ credit-based discounts at renewal periods. Current law requires that such discounts be offered only to consumers shopping for new policies.
PCI again offered its support for the use of credit in rating customers, while several insurance agents also threw their support behind the bill, including some from GEICO and Progressive.
With studies proving that “the use of credit is very predictive in providing an accurate rate for motor vehicle insurance,” discounts relating to credit background should also be available to renewing policyholders, Sydney Parker, an insurance agent working at an Anchorage GEICO office, said in a statement.
That legislation was “heard and held” for further consideration, according to the state’s legislative website.