Credit-scoring significantly improves insurance pricing accuracy when combined with other rating variables in predicting risk. That's the conclusion of a study commissioned by the Texas Department of Insurance (TDI).In December, the department released its preliminary findings, which showed poor credit scores were associated with more claims activity, and blacks and Hispanics on average have lower credit scores than whites (see Feb. issue, page 8.)

The practice of using credit-based insurance scores has been under scrutiny for possible disparate impact on minorities and low-income people.

TDI delivered its final analysis to the 79th Texas Legislature at the end of January. At that time, Texas Insurance Commissioner Jose Montemayor admitted that according to the department's research-which included peer review by academics-credit scoring is an actuarially sound predictor of risk. He also defined his limited decision-making authority on the issue.

"As commissioner, I have the authority to end a practice that is either unfairly or intentionally discriminatory. However, I do not have a legal basis to ban a practice that has a disproportionate impact if it produces an actuarially supported result and is not unfairly or intentionally discriminatory."

The Texas legislature last year passed a bill allowing insurers to use credit scores, while putting in place consumer protections and commissioning the TDI study. This year, the Texas legislature is revisiting the topic, as are several other states.

The Federal Trade Commission, in conjunction with the Federal Reserve Board, also is conducting research on credit scores. The FTC/Fed study was mandated by the Fair and Accurate Credit Transactions Act (FACT) of 2004. Those results are due at the end of this year.

--Therese Rutkowski

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