According to today’s Dallas Morning News editorial, credit scores shouldn’t determine insurance premiums. However, rather than examine the evidence to determine whether or not credit scoring is valid, the Morning News merely conjectures that it is “likely … that otherwise good drivers and homeowners are bearing the brunt of credit scores damaged during the recent recession.”
The evidence, however, shows a “a strong relationship between credit scores and claims experience.” The Texas Department of Insurance found in 2005 that, “Poor credit scores are associated with increased claims activity.” Former Texas Insurance Commissioner Jose Montemayor noted at the time that though he had “the authority to end a practice that is either unfairly or intentionally discriminatory,” the use of credit scoring is “is justified actuarially and it adds value to the insurance transaction.”
No one understands exactly why credit scoring works to help set actuarially sound credit rates. But it does. Which means it is beneficial to the significant portion of the population who have good claims history and good credit scores and thus receive lower premiums. The Dallas Morning News ignores this substantial benefit.
It also ignores that actions have consequences. People have low credit scores and high claims activity for a reason. While at certain points both of those could be due to misfortune, overtime they are more likely to be because of poor decision making. And it is wrong for the government to take money from people who make good decisions to subsidize people who make poor decisions, whether the issue is home mortgages or insurance. Yet in most cases banning credit scoring would do just that.
We have noted many times that government regulation has all kinds of unintended consequences. We should get the Texas Department of Insurance-and the Dallas Morning News-out of the business of regulating insurance rates so consumers can get on with the business of managing their own lives.
-Bill Peacock