28 TAC §§5.9940 & 5.9941
The Commissioner of Insurance adopts new Subchapter U, §§5.9940 and 5.9941, concerning the use of credit information or credit scoring in certain personal lines of insurance, as provided in Insurance Code Article 21.49-2U, (as enacted by the Regular Session of the 78 th Legislature in Senate Bill 14, effective June 11, 2003). The subchapter is adopted with changes to the proposed text as published in the September 19, 2003 issue of the Texas Register (28 TexReg 8116).
The subchapter is necessary to implement Article 3, Use of Credit Scoring, of Senate Bill 14 (SB 14) enacted by the Regular Session of the 78 th Legislature. Article 3 amends Chapter 21 of the Insurance Code by adding Article 21.49-2U. The adopted sections require disclosure by an insurer or its agents to its customers concerning whether credit information will be obtained and used as part of an insurance credit scoring process and specify how an insurer may vary its rates due solely to credit scoring. In general, Article 21.49-2U provides certain requirements pertaining to the use of credit information and credit scoring by insurers in Texas for underwriting or rating certain personal insurance policies. Article 21.49-2U applies to all insurers authorized to write property and casualty insurance in this state that write certain types of personal insurance coverage and use credit information or credit reports for the underwriting or rating of that coverage. However, Article 21.49-2U does not apply to farm mutual insurance companies or eligible surplus lines insurers. Section 7(d) of Article 21.49-2U requires an insurer or its agents to disclose to its customers on a form promulgated by the commissioner whether or not credit information will be obtained on an applicant or insured or any other member of the applicant's or insured's household and used as part of the insurance credit scoring process. If credit information is obtained or used, subsection (d) also requires an insurer to further disclose the name of each person on whom credit information was obtained or used and how each person's credit information was used to underwrite or rate a policy. The requirements for the promulgated disclosure form are set forth in §5.9940.
Article 21.49-2U, Section 13(b) requires the commissioner to adopt rules regarding the allowable differences in rates charged by insurers due solely to the differences in credit scores. Adopted §5.9941 will ensure that consumers are charged premiums that are reasonable, fair and related to their risk profile and will promote a competitive environment and minimize market disruption. The section will promote stability in the market and promote an increase in consumer choices.
Changes have been made to §§5.9940 and 5.9941 as published; however, none of the changes introduce a new subject matter or affect additional persons other than those subject to the proposal as originally published. Changes have been made to clarify the requirements of the rules and in response to comments. Some of the changes include the moving of subsections for readability purposes. Section 5.9940 requires insurers to use Form CD-1, which is adopted by reference by the Commissioner. Adopted §5.9940 will enable consumers to be more informed regarding the use of credit information in the underwriting and rating in some lines of personal insurance. The department has made changes to the allowance of the use of a different disclosure form to provide that an insurer may use a different disclosure form only if it is allowed or approved for use in another state and complies with all the requirements of §5.9940 and Form CD-1. The alternative form must be filed with the Texas Department of Insurance prior to use. Section 5.9940 was changed to identify the name of the adopted disclosure form and clarify the conditions that must be met to use a form different from the form adopted by the Commissioner. Based on comments, the section was changed to delete language that is not necessary to be included in the form adopted by the Commissioner, such as identifying the name of the applicant, insured or the name(s) of other household member(s). The section was also changed, based on comments, to reflect that the disclosure form must be provided in Spanish when requested. The disclosure form was also changed to include a summary of the consumer protections set forth in SB 14. Subsection (h) was also added to clarify that insurers are still subject to all disclosure requirements in Article 21.49-2U.
Adopted §5.9941 provides for differences in rates an insurer may charge due solely to credit scoring if the differences in rates are based on sound actuarial principles and supported by data filed with the department. The department deleted the language related to percentage amounts in subsection (a). This change will allow the rule to accommodate a broader spectrum of possible ways an insurer may incorporate credit information or credit scoring into its rating structure. The adopted section will ensure that consumers are charged premiums that are reasonable, fair and related to their risk profile and will promote a competitive environment and minimize market disruption. Based on written comments and other comments received at the October 22, 2003 hearing, TDI will be proposing amendments to §5.9941. In the rule proposal, which will be filed in the near future, TDI will set amounts for the allowable differences in credit scores and provide means to address rate increases due to the imposition of amounts for the allowable differences.
General comments
Comment: Some commenters expressed support for the proposed rules and believe the rules provide for market stability and consumer safeguards. One commenter believes that staff took a pragmatic approach to the proposed rules and that the approach may be fairer for consumers in a particular insurance company. A few commenters appreciate the hard work and good job that TDI staff did on the proposal.
Response:TDI appreciates the comments.
Comment: One commenter believes that no relationship exists between homeowner's insurance and credit scores.
Response: Studies to date show a relationship between homeowner insurance losses and credit scores; however, the department will be conducting its own study to verify this relationship.
Comment: Several commenters stated the proposed rules should require insurers to notify applicants or policyholders each time the use of their credit score keeps them from being charged the best rate.
Response: TDI believes that a rule that requires notice to applicants or policyholders each time the use of a credit score does not result in the best rate is not necessary. Article 21.49-2U §8 requires insurers to give notice of an action resulting in an adverse effect. TDI believes that the notice requirement in subsection (g)(8) is satisfactory to accomplish the commenters´ objectives. The federal Fair Credit Reporting Act (FCRA), which can be found at 15 U.S.C. §§1681-1681u and Chapter 20 of the Texas Business & Commerce Code require insurers to give notice of an "adverse action" to applicants or insureds. Insurers have been required to follow the notice of adverse action requirements in FCRA and the Texas Business & Commerce Code long before Article 21.49-2U was enacted.
Comment: Several commenters stated the proposed rule should allow the department to capture additional, relevant data from companies so the department can better analyze the use of credit scoring.
Response: TDI believes that a rule regarding collection of data from insurers regarding the use of credit scoring is unnecessary at this time. The department will conduct a study to better analyze the use of credit scoring. Additionally, Article 21.49-2U §15 requires the commissioner to file a report, by January 1, 2005, regarding insurers' use of credit scoring, and the results will be provided in reports which will be public information.
Comment: One commenter stated the proposed rule should require insurance companies to disclose credit scores and score components so that consumers can identify the exact source of incorrect information in their credit file. One commenter is concerned about flaws in credit reports and that it is a "Herculean" task to get credit reports corrected.
Response: Article 21.49-2U, §10 makes insurance credit scoring models filed with TDI open for public disclosure upon written request. Credit reports, which are available to consumers, allow a consumer to discover the identity of the source of incorrect information in their credit file. If incorrect information is included in a credit report, Article 21.49-2U, Section 6 provides for dispute resolution and error correction. TDI understands that the error correction process can be frustrating, but encourages consumers to correct any errors in their credit reports.
Comment: One commenter stated that the proposed rule should require insurance companies to disclose rate variations caused by credit score categories and surcharges. The commenter states that for years, the credit reporting industry refused to disclose the factors used to compute credit scores, making it difficult for consumers to sue and recover damages against insurers. The commenter further states that if credit scoring is allowed, insurance companies should be required to disclose the increments of surcharges for each item that decreases a consumer´s credit score, thus allowing consumers to determine damages for incorrect entries to their credit files.
Response: TDI has been reviewing credit scoring models filed by insurers in accordance with SB 14 to determine if they are in compliance with SB 14 and based on sound actuarial principles. Article 21.49-2U §10 makes credit models filed with TDI open for public disclosure upon written request.
Comment: Some commenters opposed both §5.9940 and §5.9941 and explained about personal experiences with credit scoring being used in the insurance industry. One commenter believes that many more protections need to be placed on the use of credit scoring in insurance to protect consumers. The commenter stated that the credit score restrictions in SB 14 were based on the NCOIL Model Act. The commenter also stated that the portion of the NCOIL Model Act about not being able to use credit scoring as a sole factor is missing.
Response: TDI recognizes that numerous consumers have experienced frustrations and problems with the use of credit scoring in the insurance industry. TDI believes that SB 14 and rules adopted by TDI will help limit some of the problems. Many consumer protections are in SB 14 and not in the proposed rules. TDI has changed §5.9940 and the disclosure form to reflect the consumer protections that are included in Article 3 of SB 14. TDI agrees that Article 3 of 21.49-2U was based to a certain extent on the NCOIL Model Act. Although the portion about not being able to use credit scoring as a sole factor is not necessary in the disclosure form since the language regarding this issue appears in Article 3 of 21.49-2U, §3(2), TDI is including this information in the disclosure form to alleviate confusion expressed by some commenters.
Comment: Several commenters are concerned with the effective date of the proposal.
Response: The effective date of the statute is January 1, 2004. Insurers must comply with the statute as of that date. Insurers can use the promulgated disclosure form and be in compliance with the disclosure requirements of the rule. To allow insurers some time to make the necessary filings to comply with §5.9941, the department is permitting filings to be made no later than March 1, 2004. The adopted sections provide ample time for insurers to comply with the rule.
Comment: Some commenters are not happy with SB 14 and believe that the use of credit scoring in insurance is discriminatory against some minorities.
Response: While there have been some claims that credit scoring may disproportionately affect those with low or fixed incomes or those in some minority groups, this has not been conclusively established in scientific studies. TDI will be looking at these questions as part of its studies in the coming year.
Comment: One commenter believes that both of the proposed sections fail to fulfill the benefits and promises that many legislators and the Governor went around the state publicizing after the adoption of SB 14. The commenter believes that the proposed rules give insurers what they were unable to obtain during the 78 th Regular Session of the legislature.
Response: TDI disagrees. TDI believes that it fulfilled the intent of the legislation requirements set forth in Article 21.49-2U of SB 14 in its proposal. However, based on written comments and other comments received at the October 22, 2003 hearing, TDI is changing §5.9940 and will be proposing amendments to §5.9941. In the rule proposal, which will be filed in the near future, TDI will set amounts for the allowable differences in credit scores and provide a means to address rate increases due to the imposition of amounts for the allowable differences.
§5.9940
Comment: Some commenters stated that Texas Insurance Code Article 21.49-2U §7 provides for three different types of disclosure, and set out an explanation of each one, but the commenter feel that the proposal does not adequately distinguish between the different types. A commenter feels that the proposal makes no provision for oral disclosures and suggested adding language amending the proposal to reflect that only an oral disclosure is required.
Response: TDI agrees with the commenters that Texas Insurance Code Article 21.49-2U §7 provides for three different types of disclosure. Subsection 7(b) provides that an insurer shall disclose to each applicant that the applicant's credit report may be used in underwriting or rating the applicant's policy and that a disclosure must be provided at the same time of application orally, in writing or electronically. Subsection 7(d) provides for disclosure on a form promulgated by the Commissioner whether or not credit information will be used as part of the insurance credit scoring process. TDI does not believe an oral disclosure meets the statutory requirements contained in Subsection 7(d). For purposes of clarification of the application of the rule, TDI has changed the rule to distinguish between the disclosures by making changes to subsection (d) and adding subsection (g).
Comment: One commenter stated that no form is required by subsection 7(d) of Article 21.49-2U for disclosing to the applicant the name of each person on whom credit information was obtained and how such information was used to underwrite or rate the policy.
Response: TDI agrees that this disclosure is not subject to a promulgated form. Section 5.9940 regarding the disclosure form now reflects the statutory language contained in subsection 7(d) of Article 21.49-2U, which will eliminate listing the name of each person in the promulgated form.
Comment: One commenter suggests amending subsection (e)(7) of the proposed rule to allow insurers to generate the required disclosure as long as the disclosure is provided in accordance with the time lines set forth in subsection (g)(5) of the adopted rule insurers. The commenter provided suggested language, which would allow an insurer 15 days after receipt of a complete application to issue disclosure.
Response: TDI does not object to the disclosure being provided with the declarations page, which is done automatically by many insurers, because the department believes that this would comply with the requirement in subsection (g)(5) of the adopted rule. The section now specifies that the disclosure form must be provided no later than 10 days after receipt of a complete application. TDI does not believe that 10 days is unreasonable as long as an insurer has a complete application.
Comment: One commenter recommends amending subsection (e)(4) to clarify that the language in (e)(4) is not required to be contained in the disclosure if both disclosures mandated in Article 21.49-2U §7(d) are provided in one form.
Response: TDI deleted subsection (e)(4) and added subsection (g)(2) to clarify that the disclosure must contain a statement that if credit information is obtained or used, the insurer shall provide more detailed information concerning how the credit information was used to underwrite or rate the policy. Subsection (g) also provides that the detailed information may be provided in the disclosure form itself.
Comment: One commenter stated that some insurers are concerned with the specificity of the disclosure form. The commenter believes that a generic notice should be allowed and that using a generic notice would be more cost effective for insurers.
Response: The department has promulgated a generic form which has sufficient specificity so that the consumer may be adequately informed. Changes made to the rule only require insurers to check a box indicating whether the insurer will or will not obtain and use credit information on the applicant or insured or any other member(s) of the household, as part of the insurance credit scoring process.
Comment: One commenter believes that only the insurance group name should be required on the disclosure form.
Response: TDI does not object to the group name being provided on the disclosure form but believes it is important for an insured to have the address and telephone number of a particular company or county mutual in which the insured will be placed.
Comment: One commenter disagrees with the part of subsection (e)(7) that gives insurers 10 days to send an applicant the disclosure form. The commenter wants the name of the credit reporting agency in the disclosure form. The commenter believes that the disclosure form should be supplied to an insured 90 days prior to approval.
Response: TDI believes 10 days is reasonable. An insurer now has to provide the disclosure form with the application or immediately upon receipt of a complete application, but no later than 10 days after receipt of the application. TDI does not believe it is necessary to include the name of the credit reporting agency in the disclosure form because the insurer is required by SB 14, Article 21.49-2U, to notify an applicant or insured of the name of the credit reporting agency. TDI assumes the commenter is referring to renewals since TDI believes that the 90 days prior to approval is not practical for new applications. For renewals, companies typically provide adequate notice to allow insureds ample time to research other options.
§5.9941
Comment: One commenter agrees with staff that it may be premature to set a limitation on the allowable differences in rates charged due solely to credit scoring. The commenter cannot support a 15% limitation of the allowable differences and explains why a 15% limitation is not appropriate at this time.
Response: TDI appreciates the comments. Based on written comments and other comments received at the October 22, 2003 hearing, TDI will be proposing amendments to §5.9941. In the rule proposal, which will be filed in the near future, TDI will set amounts for the allowable differences in credit scores and provide a means to address rate increases due to the imposition of amounts for the allowable differences.
Comment: Several commenters expressed disappointment that the proposed rule fails to comply with a clear legislative mandate to set a cap on the unfair use of insurance credit scoring. These commenters urge the department to limit the variation in rates charged to policyholders based on their credit score to between 0% and 40%. One commenter stated that the legislators wanted a limitation placed on the differences that can be charged based on public policy and believes that there should be a limitation of 0% with no exceptions. Several commenters suggested that TDI limit the variation in rates charged to policyholders based on their credit score. The commenters stated that TDI could always change the variation amount later. One commenter urged TDI to promulgate a limit whether it is a percentage amount or a dollar amount. Several commenters stated that the language in Article 3 of SB 14 did not give the commissioner the option to delay setting a limitation.
Response: In order to promote fairness while avoiding destabilization in the personal lines insurance market, staff proposed §5.9941 that requires any differences in rates charged due solely to credit scoring to be based on sound actuarial principles supported by data filed with the department. Pursuant to SB 14, insurers may not use rates that are excessive, inadequate, unreasonable, or unfairly discriminatory for the risks to which they apply. Although the department believes the approach it has taken is reasonable and appropriate, TDI will be proposing amendments to §5.9941. In the rule proposal, which will be filed in the near future, TDI will set amounts for the allowable differences in credit scores and provide a means to address rate increases due to the imposition of amounts for the allowable differences.
For: Farmers Insurance Group, Republic Group of Insurance Companies, and Trinity Universal Insurance Companies.
For, with changes: Independent Insurance Agents of Texas (IIAT), Office of Public Insurance Counsel (OPIC), Progressive County Mutual Insurance Company and Texas County Mutual Association.
Against: Center for Economic Justice (CEJ), American Association of Retired Persons (AARP), League of the United Latin American Citizens (LULAC), Texas Public Interest Research Group (Tex PIRG), Texas Watch, Texas Association of Realtors, Consumers Union and individual consumers.
The new sections are adopted under Insurance Code Article 21.49-2U and §36.001. The 78th Legislature enacted Senate Bill 14, which added Article 21.49-2U. Article 21.49-2U, Section 13(a) authorizes the commissioner to adopt rules as necessary to implement the article. Article 21.49-2U, Section 7(d) requires the commissioner to promulgate a disclosure form. Article 21.49-2U, Section 13(b) requires the commissioner to adopt rules regarding the allowable differences in rates charged by insurers due solely to the difference in credit scores. Section 36.001 provides that the Commissioner of Insurance may adopt any rules necessary and appropriate to implement the powers and duties of the Texas Department of Insurance under the Insurance Code and other laws of this state.
§5.9940. Disclosure Form Required Concerning Use of Credit Information.
(a) This subchapter applies to an insurer that writes personal insurance coverage and uses credit information or credit reports for the underwriting or rating of that coverage.
(b) The definitions adopted under Insurance Code Article 21.49-2U apply to this subchapter.
(c) The commissioner adopts by reference disclosure form, Form CD-1, which may be obtained from the department's website at www.tdi.state.tx.us or from the Automobile/Homeowners Section, Mail Code 104-1A, Texas Department of Insurance 333 Guadalupe, P.O. Box 149104, Austin, Texas 78714-9104.
(d) In accordance with Section 7(d) of Article 21.49-2U, Insurance Code, an insurer subject to this subchapter or its agents shall issue Form CD-1 indicating whether or not credit information pertaining to the applicant or the insured or other household member(s) will be obtained and used as part of the insurance credit scoring process.
(e) An insurer may use a disclosure form that:
(1) is allowed or approved for use in another state, and
(2) complies with all requirements of this section and Form CD-1.
(f) The disclosure form, unless identical to Form CD-1, must be filed prior to use with the Texas Department of Insurance, Property & Casualty Intake Unit, Mail Code 104-3B, P.O. Box 149104, Austin, Texas 78714-9104 or with the Texas Department of Insurance, Property & Casualty Intake Unit, 333 Guadalupe, Austin, Texas 78701. (g) The written disclosure shall:
(1) contain the name, address and telephone number (toll-free if available) of the insurer;
(2) contain a statement indicating that if credit information is obtained or used, the insurer shall provide more detailed information concerning how the credit information was used to underwrite or rate the policy. This detailed information may be provided in the disclosure form itself;
(3) be printed in reasonably conspicuous type;
(4) be provided by the insurer or the agent electronically, by U.S. mail or by hand delivery;
(5) be provided to the applicant with the application or immediately upon receipt of a complete application, but no later than ten days after receipt of the complete application;
(6) be provided to insureds at renewal if credit information will be obtained and used as part of the insurance credit scoring process;
(7) be written in English and be provided to the applicant or insured in Spanish, if requested; and
(8) contain the summary of consumer protections set forth in Insurance Code Article 21.42-2U as provided in Form CD-1, including information on prohibited use of credit information, negative factors, effect of extraordinary events, dispute resolution, error correction and notice of action resulting in adverse effect.
(h) Insurers are subject to all other disclosure requirements in Insurance Code Article 21.49-2U.
§5.9941. Differences in Rates Charged Due Solely to Difference in Credit Scores.
(a) An insurer may vary its rates charged to applicants or insureds for personal insurance policies due solely to credit scoring. The differences in rates charged due solely to credit scoring shall be based on sound actuarial principles and supported by data filed with the department.
(b) Filings under this section must be submitted to the Texas Department of Insurance no later than March 1, 2004 to the Property & Casualty Intake Unit, Mail Code 104-3B, P.O. Box 149104, Austin, Texas 78714-9104 or to the Texas Department of Insurance, Property & Casualty Intake Unit, 333 Guadalupe, Austin, Texas 78701.