Homeowners and drivers in Northern Texas with poor credit are paying on the average at least 35% more for insurance coverage than residents with good credit. This is even when all other underwriting factors such as recent damage claims on homes and driving records are identical.
An analysis by an independent news organization in Dallas revealed that coverages offered by top insurers in Texas could increase dramatically based on credit rating alone.
As retrieved from data stored by Texas Department of Insurance, only two out of the state’s 35 largest Texas auto insurance providers use credit history in determining premium and availability of insurance. There are companies which double the premium rates of policyholders who fall into bad credit. Among home insurers, 19 out of the 26 largest firms charge significantly higher for low-credit clients than those with good ratings. It was further found out that one firm charge 250% higher premium on some clients with poor credit ratings.
State Farm, Allstate, and Farmers—Texas’ three largest carriers—all base premiums heavily on consumer ratings.
Insurance companies repeatedly refer to a study conducted by the University of Texas in 2003 which reveals that motorists with poor ratings are more likely to file claim.
Under present Texan legislature credit-based insurance writing is legal. Insurers maintain that it is necessary in determining the right premiums for their clients. They say it assures them that those who have bigger risks for home and auto insurance claims pay higher premiums.
However, civil rights groups and consumer advocates contend that credit-based underwriting is not fair, especially to lower-income families, majority of whom come from minority groups. They add that the practice overburdens policyholders even if it has little to do with their risks for claims.
Advocates say credit score should not be a major underwriting factor considering current US economy, adding that many consumers through no fault of their own suffer major drop in ratings. One example they cited is the sudden cutting of credit limits by card companies which is a very big factor in scoring. Civil rights group add that not only insurers but banks, credit card firms, lenders, and employers as well rely heavily on that factor in making decisions. They say this unfairly places huge burdens on consumers, referring to uncontrollable factors which affect one’s rating.
In 2003, the practice would have stopped if the bill approved by Texas House was approved by Senate. In lieu of the ban, use of ratings is restricted. For instance, medical bills and limited payment history are not allowed to be significant factors.
