No Resolution on Credit Scores

The use of credit scores by insurance companies in rating methodologies continues to be unresolved in several Midwest states, as evidenced by ongoing court battles and legislative actions aimed at tweaking existing laws.

Michigan’s battle against credit scoring in insurance is back on track after the Michigan Supreme Court agreed hear a case stemming from rules banning insurance credit scoring put in place by the Office of Financial and Insurance Regulation’s (OFIR) in 2005.

The Insurance Institute of Michigan, the Michigan Insurance Coalition, and several insurers had challenged those rules and the issue has been working its way through the legal system for the last four years. In April, Barry County Circuit Judge James Fisher issued an injunction preventing Michigan insurance regulators from challenging home and auto insurance rate filings that use credit scoring in determining premiums. Michigan Insurance Commissioner Ken Ross vowed at that time to appeal.

According to the Associated Press, Ross is hopeful that the state’s high court, which begins hearing arguments in the case in October, will resolve the issue in favor of Michigan insurance personal lines consumers.

In Indiana, which allows the use of credit history in the rating of personal lines, lawmakers have removed a provision in state law requiring insurers to re-rate an insurance policy at least once every three years based on current credit information. Commonly referred to as the “three-year look back” provision, it was put into law in 2003 to benefit consumers. The Indiana General Assembly believed credit scores would improve over time and insurance premiums would drop as new scores were re-run, according to The Insurance Institute of Indiana.

Insurers recently advised lawmakers, however, that the mandatory three-year look back could have an adverse effect consumers due to current economic conditions. As a result, beginning July 1, consumer credit may be a factor in the initial underwriting process, but an insurer will not be required to re-run the credit score arbitrarily every three years. Consumers may, however, request a re-rating with current credit information once a year at renewal.

In late March, insurer representatives gathered in Minnesota to fend off a Senate bill that would have prohibited the use of consumer credit history in rating auto and homeowners policies there. Interestingly, insurance industry advocates switched course in Minnesota, refuting the assumption that credit scores decrease during times of economic hardship.

Consumer advocates argue that that consumers’ scores are dropping as lenders tighten credit terms and that the use of credit scores by insurers should be more carefully scrutinized. Brenda Cude, professor of housing and consumer economics at the University of Georgia, has warned that if insurers don’t adjust for the decline in consumers’ scores because of the economic crisis, then consumers and insurers “will be worse off.”

So, it appears that insurers’ use of credit scores will remain controversial, or at least in flux, for some time to come, especially if the current economic slump drags on.

Topics Carriers Legislation Michigan