Michigan’s OFIS Releases Credit Scoring Report, NAII Comments

Michigan’s Office of Financial and Insurance Services (OFIS) has released its long awaited report examining the use of credit scores to set insurance rates, raising some significant concerns about the way insurance credit scoring is used and how much information is available to consumers.

“The report makes recommendations based on consumer complaints and public hearing testimony received by OFIS as well as current state law,” commented OFIS Commissioner Frank M. Fitzgerald. “Consumers’ overwhelming concern is the lack of information available about the credit scores their insurance companies are using to set their rates. Consumers are entitled by law to know how their premiums are determined and the report recommendations remove the mystery regarding calculation of credit scores for insurance premiums.”

The report listed numerous public concerns, chiefly about the accuracy and the privacy of reports using credit scoring, but also indicated that the methods insurers use in calculating the scores will have to be disclosed.

Laura Kotelman, counsel for the National Association of Independent Insurers commented that “Commissioner Fitzgerald and his staff did a tremendous job in conducting such an extensive study on the use of insurance scoring in auto and homeowners insurance. The study upholds the legality of insurance scoring, acknowledges the correlation between insurance scores and risk of loss, and recognizes that consumers are benefiting from the use of this highly predictive tool.”

She noted, however that the report also made “several troubling recommendations that if implemented may exceed the authority of the commissioner.”

The NAII finds problems not so much with the requirement that Michigan’s insurers inform policyholders annually of their credit scores and discount levels, but with the additional obligation that the companies file “the insurance credit scoring formula used to apply a discount and the specific factors used to calculate the credit score” with OFIS, which would then make them publicly available “pursuant to the Michigan Freedom of Information Act.”

“This recommendation is an attempt to provide consumers with additional information regarding how insurance scores are developed, however it is likely to create problems in the marketplace. This would be similar to requiring Coke and Pepsi reveal the formulas for their soda pop in the interest of providing nutritional information to the consumer. The insurance industry does not object to providing the scoring formulas to the commissioner on a confidential basis. However we are concerned that the lack of confidentiality could provide a company’s competitors with an unfair advantage and damage the marketplace. Many individual companies are already taking steps toward greater openness about the use of insurance scores and recognize the need for consumers to better understand how the industry uses credit information,” stated Kotelman.

Topics Michigan