The vote by the Michigan Legislature’s Joint Committee on Administrative Rules to file a notice of objection to Democratic Gov. Jennifer Granholm’s rule banning the use of credit scores in underwriting was perhaps symbolic of where the Wolverine State’s insurance industry finds itself these days.
The vote was a stinging rebuke accompanied on both sides by colorful language but thanks to the nature of the administrative rule-making process probably won’t amount to much. Similarly, Granholm is pushing ahead with plans to more than double the tax burden on insurers in spite of howls from the industry.
No matter how much noise gets made about how these policies might detrimentally effect Michigan’s insurance marketplace and ultimately its consumers, the administration has plunged ahead. This was the situation facing a large contingent of the state’s independent agents as they gathered at the Michigan Association of Insurance Agents’ annual convention, said to be the largest industry gathering in the state each year.
While insurers and agents may view Granholm’s policies as threatening, some of the administration’s opponents are taking things even more personally. After the joint committee’s vote, Office of Financial and Insurance Services Commissioner Linda Watters issued a news release calling it a “partisan vote” and a “gift to the insurance industry.” Republican Sen. Mike Bishop of Rochester, a member of the joint committee and chair of the Banking and Financial Institutions Committee, responded angrily.
“That’s an insulting characterization,” he told IJ. “The fact that she’s the commissioner of this industry and she had time to think about that comment, I thought that was insulting, especially to the industry itself. She has to learn to work with these people, not insult them.”
Watters made sure to steer clear of insults during her brief talk before the MAIA’s “President’s Forum” Feb. 23, though she was spared any questions from the audience. In an interview with IJ afterward she wouldn’t respond to Bishop’s comment, reiterating her disappointment with the vote but adding, “I’m not going to go back and forth on that.”
The Michigan Legislature had 15 session days to come up with alternate insurance scoring legislation after the committee vote but it seems clear that anything short of a ban is unlikely to satisfy Granholm and Watters. The basis for promulgating Rule Set 500.2151-55 is an interpretation of section 210 Michigan’s Essential Insurance Act which prohibits unfair discounts. The administration began to pursue the ban via the administrative rule process once it became clear that the Republican-led legislature was unprepared to move forward with a ban.
Bishop and others in the legislature had the support of agents’ and insurers’ groups for a bill that would regulate the use of credit-based insurance scoring along the lines of the National Conference of Insurance Legislators’ model act, which calls for excluding unpaid medical bills from credit history and prohibits insurers from charging more to insureds without a credit history or from making credit the “sole basis” for an underwriting or rating decision.
House Bill 4243 still has that support, according to MAIA President Bob Pierce.
“We don’t support the proposed ban on credit scoring,” he told IJ, “but we don’t support the status quo in use of credit scoring either.”
Assuming no legislation is forthcoming or that it is vetoed by Granholm, the rule set will be filed with the Secretary of State and become effective July 1, though insurers are likely to take the matter before court seeking a temporary injunction before then. Insurers will have to file new rates with the insurance department by May 1.
“No final decision has been made on litigation, but we’re certainly seriously considering it,” said Peter Kuehnmuench (pronounced, “koon-mench”), executive director of the Insurance Institute of Michigan. “We have the ability to provide credit-related discounts to our customers and we want to retain the authority to do so. We believe that authority exists under the statute. We have been using it as one of the components in rating since the mid-1990s. … We disagree with the commissioner’s assertion that such a practice is illegal.”
Kuehnmuench said 60 percent of insurance consumers could see their rates rise as a result of the ban. While a 2002 insurance department study under a Republican administration appointee, Commissioner Frank Fitzgerald, found that problems existed in insurers’ use of credit scores it did not suggest that the practice might be illegal under existing law. During that year’s gubernatorial campaign, Granholm attacked the study, noting that credit-based insurance scores had prompted thousands of consumer complaints, especially from Detroit-area residents who seemed to be most affected by hard-market rate increases.
“Michigan’s law states that if you’re going to give a discount to customers that it should be uniformly applied and demonstrated a reduction in losses, and we don’t feel credit scoring does that,” Watters told IJ. “I have a constitutional duty to enforce the law. I don’t think that previous commissioners weren’t doing their duty. The 2002 study on scoring brought these issues to light and resulted in my effort to take a look and determine if it was lawful.”
Insurance company executives who participated in the MAIA panel discussion were skeptical that outlawing insurance scoring would help much.
“We credit score in every state where we do business,” said Bill Wallace, president CEO of Hastings Mutual Insurance Co. “We find it to be best predictor of loss for groups of people that I’ve seen in my career of 30 years. If you’re looking to lower insurance rates only way to make a meaningful difference is to lower loss costs. I don’t see where having scoring or not having scoring makes a difference. We all want lower insurance rates, but this isn’t going to do it.”
The taxman cometh
Meanwhile, the tax plan Granholm unveiled in a speech but has still yet to nail down in the form of a bill could further hurt insurers, agents and consumers. Insurers are currently taxed at an effective rate of 1.0375 percent under Michigan’s complicated single business tax system. Under the plan they would be taxed at 2 percent on premium, which is not out of line with the national average though Kuehnmuench argued it would be “above average on a regional basis” compared to Ohio’s 1.3 percent tax, for example. Insurers would also lose a number of tax breaks that could send further costs onto consumers.
Wallace said that by losing tax credits for contributions to guaranty funds, pools and facilities and an increase in the retaliatory premium tax would mean a 250 percent tax increase for his company. “And that comes right out of profit,” he said.