Conclusion Reached in Texas Insurance-Score Case

Coverage providers who write home and auto insurance in Texas and most other states routinely look at the credit information of prospective policyholders in order to help evaluate the amount of risk they pose and, consequently, how much to charge for coverage. Most states allow the practice, but there are many who oppose it, saying that it effectively leads to higher premiums for drivers in certain racial and socio-economic demographics.

While this may be the case, a decision handed down earlier this week from the Texas Supreme Court says that it could not bar insurers from using credit history in rate calculations in response to their effects on certain groups.

There has been much controversy over the practice, which is known as credit-based insurance scoring.

Not long after the Texas Legislature authorized the use of credit information in underwriting and rating, the state’s department of insurance released a report quantifying its effects. The data analyzed by the department indicated that “as insurers started using or expanding their use of credit, the vast majority of policyholders (approximately 90 percent) experienced rate swings ranging from a 40 percent decrease to a 40 percent increase in the rates paid for personal auto insurance.”

Further, the report showed that certain racial groups may experience a “disproportionate impact” as a result of credit-based scores. An analysis of the data showed that “The average credit scores for Whites and Asians are better than those for Blacks and Hispanics. In addition, Blacks and Hispanics tend to be over-represented in the worse credit score categories and under-represented in the better credit score categories.”

The commissioner in office at the time of the report, in a follow-up letter to the legislature, noted that, even though credit-scoring may leave a “disproportionate impact,” it is the result of the use of race-neutral factors and is not in itself discriminatory.

The Texas Supreme Court expressed a similar feeling toward the matter in its decision. The Court said that it was not its place to rule against a practice that has a disproportionate impact, and that it should be up to the legislature.

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