No Whimsy

Revised: 09/22/2006

Michigan Commissioner: No Whimsy Behind Rule to Ban Credit Scoring
By Dennis Kelly, senior associate editor, BestWeek

LANSING, Mich. June 17, 2004 (BestWire) - Michigan's insurance regulator said her quest to ban insurers' use of credit information is not being done on a whim, but is based on a body of state-specific research, including information gathered by her predecessor.

"We found that credit scores are fraught with errors," said Linda Watters, commissioner of Michigan's Office of Financial and Insurance Services. Some studies show upwards of 70% of credit reports have errors, she said, with about 29% being "so egregiously" incorrect that it hurts insurance rates paid by consumers.

"There's no uniformity. We understand insurers apply it differently," Watters said, "and there's no transparency."

The proposed ban would apply to homeowners and automobile insurance and come in the form of a rule, as opposed to legislation. Watters estimates consumers will see rate decreases ranging from 10% to 45%, depending on where they live. Insurers would be required to reduce their base rate under the proposal.

During a recent conversation, she repeatedly referred to two elements regarding the proposed ban--the insurance company data that's been collected over the past couple of years and the benefit to consumers.

As the insurance industry has fought state-to-state battles over the past few years to retain use of credit-based insurance scoring as an underwriting tool, it points to its own data showing a correlation between low credit-based scores and a higher claims-filing frequency.

Walters said one can always find studies that will support a position. "What we found from pure information is base rates increased significantly since the advent of credit scoring," she said.

Michigan is a "file-and-use" state, meaning insurers don't need prior approval from the commissioner to use a rate. Since 1999, when credit-based insurance scoring began its widespread use in Michigan, "we have seen base rates increase exponentially," Watters said. "So we know the base rates have been impacted by credit scoring. That's why we're calling for a reduction of base rates."

A 384% jump in consumer complaints prompted Watters to launch an investigation into rising homeowners and auto rates in January. Insurers were called on to provide claims experience for 2001 and 2002; repair-cost information, as required by state law, and written exposure, written premium, incurred losses and incurred claims for 2001 and 2002.

After seven months of study in 2002, Michigan's former insurance commissioner Frank Fitzgerald decided not to ban insurers' use of credit-based insurance scoring, but did seek to require insurers to make public the formulas and factors used to determine those scores. Michigan law allows automobile and homeowners writers to use credit information only to provide discounts to policyholders (BestWire, Dec. 16, 2002).

Along with the data she requested, Watters said she is also working with information gathered from Fitzgerald's survey. She also has per-company information on the discount given policyholders through the use of credit scoring.

Her conclusion from the data is there isn't enough of an overall benefit from the credit scoring-based discounts to offset the ill effects caused to rate-paying consumers. "Absolutely," she said.

But Watters still has a use for those discounts. "Insurers will be required to reduce the base rate by the weighted average of the credit-scoring discount," she said.

While testifying at recent state Senate committee hearings, Watters was asked if some policyholders who get discounts because of good credit-based scores would see rates go up.

"If consumers experience a change in their rates after Jan. 1, 2005, like anyone else, we encourage them to shop around for the best rate," Watters said. During the hearing, one senator noted accurately, she said, that the free market system will kick in, giving consumers options because the rating factors will be tied to risk.

Insurers see an insurance-scoring bill in the Legislature, HB 5803, as the better alternative because it's based on a model developed by the National Association of Insurance Legislators that imposes some restrictions they say they can live with, while at the same time providing consumer protections.

Watters said she has worked for "many months" with legislators to try to incorporate a number of her pro-consumer concerns into a bill, but it was determined that they weren't going to make it in the bill--thus the rulemaking route. A series of four public hearings will be held between July 19-28 at various locations so all stakeholders can comment on the proposed rule, she said.

The objective is to have it the rule ready in the fall so it would take effect on policies beginning Jan. 1, 2005. "I've made several speeches to industry associations and all along I've been very clear in looking at all my options. A ban has always been an option. We didn't just do this on a whim."

The average premium for Detroit-area drivers with clean driving records for a midsize, midpriced sedan was $4,945 a year, including comprehensive, collision, bodily injury, property damage and uninsured motorist coverage, according to a study by consulting firm Runzheimer International. At the other end is Nashville, Tenn., with the lowest average annual premiums, at $978.

Runzheimer's results, released in March, didn't entirely mirror the geographical spread of a study done by the National Association of Insurance Commissioners the previous July. NAIC's study didn't include Michigan among the 10 states with the highest auto rates (BestWire, March 5, 2004).

Banning the use of credit information in insurance underwriting homeowners and automobile coverage is the first step in Michigan Gov. Jennifer Granholm's plan to address rising insurance costs in her state (BestWire, April 29, 2004). Granholm appointed Watters in April 2003 to replace Fitzgerald, who had resigned two months prior.

Since 1999, when insurance scoring began to be widely used in Michigan, average automobile insurance base rates increased between 45% and 90%, depending on location, Granholm said, citing information from the OFIS Buyers Guide to Auto Insurance.

The top five writers of all private passenger auto in Michigan in 2002, according to A.M. Best Co. state/line data, were: Auto Club Group, with 20.10% market share; State Farm Group, with 18.72%; Allmerica Financial Property & Casualty Cos., with 8.58%; Auto-Owners Insurance Group, with 8.30%, and Allstate Insurance Group, with 8.21% (BestWire, April 29, 2004).

Michigan's top five writers of homeowners multiperil in 2002 were: State Farm Group, 18.59%; Auto-Owners Insurance Group, with 13.11; Auto Club Group, with 11.59%; Allmerica Financial Property & Casualty Cos., with 10.39%, and Allstate Insurance Group, with 10.37% (BestWire, April 29, 2004).

An online information service of the United Farmers Agents Association, Inc.