Michigan

Mich. Insurers Prepared to Battle Insurance-Scoring Ban in Court

LANSING, Mich. June 30, 2004 (BestWire) - Michigan auto insurers have spent so much on credit-based insurance scoring that they're willing to go to court to protect their investment if a proposed ban on using that rating tool is passed in the state.

Insurers are not anxious to go to court, and the proposed rule to ban the use of credit information still has a way to go in the approval process, but insurers have seen enough so far to be concerned that the ban has a shot at becoming reality.

"There's a lot of money invested in these formulas," said Dyck VanKoevering, general counsel for the Insurance Institute of Michigan. He said the association, which represents more than 80 property/casualty insurance companies and related organizations operating in Michigan, has retained counsel.

"Enough companies have invested in credit scoring, that it's likely we would litigate, but we hope it would not get that far," VanKoevering said. The institute sees insurers having a strong case, with one reason being the use of credit information is legal under the federal Fair Credit Reporting Act, he added.

Eric Henning is president of the Michigan Insurance Coalition, whose property/casualty insurer members write about $2.5 billion to $3 billion in premiums annually in the state. He's also an attorney with the firm Dykema Gossett in Detroit, which has been retained should the ban eventually be approved, he said.

The coalition is discussing its options, but has not made any decisions related to litigation. One area it could challenge is the commissioner's authority to adopt this rule, he said. "Should you be able to do something by rule because you can't do it legislatively?"

Gov. Jennifer Granholm and Linda Watters, commissioner of Michigan's Office of Financial and Insurance Services, held a press conference April 26 to announce their intent to get a rule banning the industry's use of insurance scoring in underwriting auto and homeowners policies, blaming it for rising insurance prices. The rule would mandate insurers reduce their base rates.

State Farm just started using insurance scoring May 15, said Angie Rinock, a spokeswoman for the insurer, who noted that credit information can only be used to provide auto policy discounts in Michigan. A policyholder doesn't pay a higher rate because of poor credit information, she said. The company offers other discounts, like one for going three years without an accident.

"Customers receiving the discount will not receive a discount if the ban goes through, not unless they go three years without an accident," Rinock said. "A policyholder who didn't get the (credit-based) discount won't see a change."

While State Farm, like the industry, has determined that credit information is a good predictor of the likelihood of an individual filing a claim, it's only one of several factors used in the rate-making process, she said. "The model we use combines credit characteristics and claims history to determine an insurance score, and this helps us to determine the discount. Driving record, make and model of vehicle are some other factors."

Costs to pay claims also drive rates, Rinock said. Michigan's personal injury protection coverage "is one of the most generous in the nation," and costs to pay PIP claims in the state have nearly doubled to $18,578 in 2003 from $9,326 in 1997.

This is an example of why industry advocates say Granholm and Watters are misleading consumers, and even legislators, who don't know the difference between a base rate and a premium. The base rate is a starting point. A premium is arrived at only after discounts and other factors are applied.

Granholm has said the ban is a first step in her goal of reducing rising insurance costs. The Granholm-Watters press conference came after six months or more of meeting with state legislators and industry representatives to come up with a bill to address the commissioner's consumer-protection concerns. Watters said the bill that came out of those sessions didn't include all the consumer protections she wanted, so she is trying to accomplish it through rule making, rather than legislation (BestWire, June 17, 2004).

The proposed ban would require insurers to reduce their base rate 10% to 45%, with consumers expected to see premiums savings in that range, Watters said. The widespread use of credit-based insurance scoring began in 1999 in Michigan, which Watters cites as the cause for an exponential increase in base rates since then. This is why she is calling for the base-rate reduction. Watters said she is not pushing for the ban on a whim.

"I agree there's no whimsy. It's a very coldly calculated political move," said Michael Harrold, assistant vice president and regional manager with the Property Casualty Insurers Association of America.

When Granholm ran for governor, she finished third in Detroit, Harrold said. "The more she appears to do to help Detroit, the more Detroit will help her. But I don't think she's willing to look at loss ratios in Detroit. The losses are so much higher in Detroit that rates have to be higher. Detroit loss ratios are a real problem."

This ban, and a data call to see if insurance rates are excessive in Michigan, will be played up as issues now and into 2006, when the governor's post and all state Senate and House seats are up for election, he said. If premiums don't drop, the insurance industry is sure to get the blame.

And premiums won't drop because of a ban on using credit information, Harrold said. "We believe that's counter to what OFIS is saying, rates will go up for the majority of consumers."

"No one factor in insurance rating has that kind of weight where you would get a 30% reduction. It just won't happen," said Neil Alldredge, director of state affairs with the National Association of Mutual Insurance Companies. "It's a smoke screen for doing away with insurance scoring. "It's good politics in Detroit, but it's a detriment to the rest of the consumers," he said.

Insurers being deprived of a tool they find highly predictive will be less aggressive in the marketplace, Harrold said. "The more confident they are that they're charging an appropriate premium, the more likely they are to write the business. That is particularly true in some of the markets of most concern in Michigan--Detroit and Flint and other urban markets."

Pursuit of this ban is not new for Granholm. When she was attorney general campaigning for governor in 2002, she said she'd ban insurance scoring, said Sean McManamy, an assistant vice president with the American Insurance Association.

Granholm and Watters could be setting the stage for consumer backlash as well by repeatedly saying base rates will come down 10% to 45% with the ban in place, McManamy said. "I think they're leading the public to believe their premiums are going to come down 10% to 45%." Perhaps a "handful" of consumers with the worst credit will see some reduction, but this will not be the case for the "vast majority" of consumers, he said.

OFIS "should know better" than to use the terms "base rate" and "premiums" interchangeably as they have been when speaking before legislators and the public, said VanKoevering. "A lot of our companies ran before-and-after scenarios using a 45% base-rate cut. The majority of their policyholders are still going to see a premium increase, even a significant one."

A base rate is a starting point for what the premium will ultimately be, but is not the premium, Henning said. Some companies have as many as 32 different discounts they offer, and every potential policyholder would have some discount that would apply, so it's nearly impossible for someone to pay the base rate as their premium, he said.

Watters has said insurers do not use the tool uniformly, but Henning said even insurers who have the same discount category will charge a different rate. "That's the free market. Find a rate that is uniform in the market," Henning said. "It's uniform within the company, and that's what the law requires."

Legislators who spent long hours over the course of those six months poring word-for-word, line-by-line through a bill with Watters and representatives of her office, are also concerned about this push for a rule, said AIA's McManamy. "Rather than go through the legislative process, they chose to say 'we're going to take our ball and go home.' It was disappointing for those who spent all that time in those meetings."

After going through a series of four public hearings in July, the proposed rule has to go through the Legislature before getting to the governor.

"A lot of legislators are concerned about the commissioner going through the legislative process, then not getting all she wanted, and going back to change the rules," said VanKoevering.

The result of the work is HB 5803, a bill based on the model developed by the National Conference of Insurance Legislators to regulate insurance scoring and include consumer protections.

The Michigan Insurance Coalition has a few things it would like to see changed in the bill before supporting it, but Henning said there is also a very real concern about its prospects. "Why move a bill now, if the governor is saying she wants a ban and she won't support anything other than a ban?"
 

(By Dennis Kelly, senior associate editor, BestWeek: Dennis.Kelly@ambest.com) BN-NJ-06-30-2004 1600 ET #