Studies Backing Credit-based Auto Insurance Have Loopholes


Critics say studies backing insurers’ assumption that credit and insurance risk have detractors which makes it unfair for some policyholders since they have to pay for risks they do not have. A new study sponsored by state regulators support the claim, making changes imminent in the auto insurance underwriting process.

Studies Backing Credit-based Auto Insurance Have LoopholesTexas auto insurance providers repeatedly cite a study conducted by University of Texas School of Business that found out an inverse proportion between credit and risk. According to the study, policyholders who have poor credit scores are more likely to file for claims.

Researchers reported that lower credit scores are strongly connected with higher incurred losses for motorists. The study, which was used in the 2003 Legislature, allowed insurers to charge higher premiums to policy holders with low scores. This goes for all kinds of policies: home, automobile, health, life, and no-fault.

However, the study has limitations, primarily because it only studied auto insurance. It did not include homeowner and other policies. As noted by former commissioner for Texas Department of Insurance Birny Birbaum, the findings were neither credible nor reliable. He added that the researchers’ inaccurate statements misinformed carriers all over United States, giving them justification to charge higher premiums for wrong reasons.

State regulators published a follow-up study in 2005, confirming Birbaum’s views. As revealed by the review, auto insurance policyholders who have low credit scores are likely to file more claims. However, the study retorts that total costs of claims can be determined through consumer scoring. Meanwhile, department researchers cannot yet conclude regarding the relationship between scores and costs of claims.

Four years ago, then state insurance commissioner Jose Montemayor wrote to legislative leaders and Governor Rick Perry regarding the issue. He said credit-based cost computation will only feed suspicion and divide Texans. He concluded that the practice should be stopped by all means.

Consumer advocates could not agree more about Montemayor’s view on credit-based underwriting. They call to Texas insurers to stop the practice for the general welfare of residents. Even some state legislators are currently proposing changes regarding the extent of using credit to determine premium rates.

However, the Federal Trade Commission (FTC) maintains that such practice by underwriters is still reliable. In its official website, FTC says consumer scores effectively predict claims that policyholders will file. For those reasons, the agency allows insurers to determine the price and availability of auto insurance.

Majority of motorists for their part say they do not fully understand credit-based underwriting but added that they perceive such measure as unfair and is charging Texans more for what risks they do not have.