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The Dallas Morning News recently ran a piece that contained comments you made about the present legislature. I would like to comment on those you made about insurance reform.

First, the legislature seems to misunderstand the principles of underwriting. Underwriting principles are based on averaging risks by building a client base that is a cross section of the general population. By doing that, the risk associated with high-risk clients is balanced by the risk associated with low-risk clients. This principle is amply demonstrated by group health insurance plans.

This principle implies that the risks associated with individuals or even sub-groups of individuals need not be taken into consideration. It is obvious that the use of credit scoring is a violation of this basic underwriting principle.

The alternative to this way of underwriting is to underwrite each and every prospective client. Certainly, that can be done, but its enormously expensive, and because of that probably unworkable.

Consider this example. Our home is insured by a mutual company which issues annual reports to its members. Recently we received the latest annual report, a flier consisting of four pages. The first page consists of a statement from the president, and the last page consists of an abbreviated balance sheet. The president in his statement wrote "the association dipped into its reserves for a second year in a row to pay the claims of its members." But the balance sheet containing figures for the years 2001 and 2002 showed that this claim is untrue. In both years, premiums more than covered both claims and expenses associated with paying claims. What was not covered completely were underwriting expenses which amounted to almost 30 percent of the companys income. Of course, there are two ways of covering the shortfall: the company can raise premiums or reduce expenses. Which do you suppose the company chose to do?

Now to credit scoring. Having spent twenty years in college classrooms teaching logic, I have for some time now sought a copy of even one study that claims to show a significant correlation between losses and credit scores. But you know what?, none can be found. They are all secret! which leads me to believe that the claims are false; otherwise, the companies would be anxious to publish them. (Dewhurst 7/10/2005)