Michigan:

Proposal rules out credit scores in setting insurance rates

By Peter Luke, MLive.com, Tuesday, April 27, 2004

LANSING -- Consumer credit scores should be abolished as a tool in setting auto and home insurance rates because they are unreliable and discriminatory, Michigan insurance regulators say.
    
Linda Watters, commissioner of the Office of Financial and Insurance Services, said Monday she'll propose a rule barring property and casualty insurers from considering credit scores in providing insurance premium discounts.

Gov. Jennifer Granholm said insurance companies "should be offering discounts based on the actions a consumer can take to reduce his or her insurance risk -- like installing a smoke detector or buying a car alarm -- not on an unrelated, unreliable credit score."

Credit scores are a numerical representation derived from a person's credit history. The higher the score, the more credit worthy the individual.

Using credit scores as a rate-setting tool surged in Michigan after a 1996 legislative rewrite of state insurance law allowed the practice. State law bars companies from denying coverage to customers based on credit rating alone. But insurers can factor in credit ratings if they can prove their rating standards are applied evenly to all customers.

Watters said the use of credit reports can't be evenly applied because companies use a variety of credit data from a variety of sources in calculating discounts.

"Credit reports are fraught with errors, and consumer scores can vary from 'high risk' to 'low risk' depending on which credit reporting agency an insurer uses," Watters said.

She said an agency rule banning the use of credit ratings could be in place in six months. The Legislature could pass a bill rejecting the rule, but that rejection would have to be signed by Granholm, which would be unlikely.

Senate Majority Leader Ken Sikkema, R-Wyoming, says he opposes the use of credit ratings in establishing insurance prices, also called credit scoring. "It's enough of a suspect art, which is why I don't like the use of it," he said.

According to a 2002 report by then-State Insurance Commissioner Frank Fitzgerald, most large auto and home insurance companies offer discounts -- some approaching 70 percent -- based on high credit ratings.

Credit scoring is controversial because it seeks to predict the likelihood of claims based on bill payment history, personal debt, even multiple home refinancings. That's different from other predictive factors long used in insurance rate setting, including age of a motorist and driving record.

"You can damage your credit rating by living long enough to pay off your house. All of a sudden you should pay higher insurance rates?" asked Rick Gamber, head of the Michigan Consumer Federation, a consumer advocacy group.

Urban lawmakers say credit scoring unfairly singles out the poor, who often have little credit history or bad credit records.

Insurance company officials insist there is a high correlation between a customer's credit rating and the likelihood of future claims. And they say that eliminating the use of credit reports will result in higher rates for those currently receiving discounts for good credit histories.

"This is just another tool to identify people who are less risky than others," said Eric Henning, an attorney who represents the Michigan Insurance Coalition, whose members include Auto Owners Insurance Co. and Citizens Insurance Co. "You have a large number of people who get discounts under this system. If you eliminate credit scoring, people are going to have their rates go up."

Watters disputed that, arguing the insurers can continue to use existing rating tools including driving records and claims activity.

Bearing the brunt of consumer complaints over credit scoring have been Michigan's independent insurance agents. They've been pressing for changes in the use of credit ratings, but object to banning their use.

The Michigan Association of Insurance Agents supports a bill introduced in the House last week that would give consumers more clout in challenging their credit score as it applies to insurance rates and in demanding refunds in cases of error.

Supporting that compromise is Rep. Clark Bisbee, R-Jackson, a member of the House Insurance Committee. He said "in theory, credit scoring is a great idea. But in practice, it's not working."

But he said banning it completely "will scare more insurance companies away so we'll have less competition and the rates will go up for everybody."