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February 19, 2013

PCI Testifies In Support of Credit-Based Insurance Scores

AUSTIN, Texas—Joe Woods, vice president, state government relations for the Property Casualty Insurers Association of America (PCI), testified Tuesday, Feb. 19th, in opposition to SB 72, which would prohibit insurers from using credit-based insurance scores.

In his testimony before the Texas Senate Committee on Business and Commerce, Woods explained why the usage of credit information helped consumers, and also noted that far more drivers would be likely to see rate increases than decreases if the use of such information was banned.

“Let’s begin with a clear understanding of what this rating and underwriting tool really is,” Woods said. “Credit-based insurance scores measure the insurance risk, not the credit risk, of consumers; they are generated from credit histories and insurance claims data, and are distinct from scores based solely on credit histories intended for other business purposes such as making decisions on loans. Several studies have found that credit based insurance scores are among the three most predictive tools available for automobile insurance. The predictive value of credit based insurance scores has been hotly debated and vigorously studied over the last decade, and every credible study that has been done has found that they are highly predictive of insurance losses.”

Woods testified that hundreds of pages of studies have been done on this issue. The most exhaustive studies have been done by the Michigan Office of Financial and Insurance Services (2002), the University of Texas (2003), the Texas Department of Insurance (2005), and the Federal Trade Commission (2007). All of those studies confirmed that credit based insurance scores are highly predictive of insurance losses.

Woods also referenced a 2012 study by the Arkansas Department of Insurance that usage of this tool results in positive or neutral premium effects for 87 percent of insurance consumers, while only 13 percent see a negative effect.

“If credit based insurance scores were banned, the 13% who are currently paying more for their insurance based on their predicted losses would see their premium decreased,” Woods said. “The losses would still occur, and the other 87% of consumers would have to pay more premium than their predicted losses call for in order to subsidize the higher risk insureds.  Even if you factor out the consumers with neutral results, more consumers would be hurt by a ban on the use of credit based insurance scores by a 3.35 to 1 ratio; 43% would lose credits while 13% would be subsidized.”

PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association. PCI members write over $190 billion in annual premium, 40 percent of the nation’s property casualty insurance. Member companies write 46 percent of the U.S. automobile insurance market, 32 percent of the homeowners market, 38 percent of the commercial property and liability market, and 41 percent of the private workers compensation market.