Mich. Appeals Court Hears Oral Arguments on Use of Credit Scores

A hearing on the legality of the use of credit scoring in setting insurance rates took place this week in Lansing, Mich. at the Hall of Justice.

The appeals hearing follows the ruling by Judge James H. Fisher to strike down rules issued by the Michigan Commissioner Linda Watters that banned the use of insurance credit scoring in the rating and underwriting of automobile, home, and other personal lines of insurance. The court’s decision is expected to be made in the next few months.

“It’s wrong that insurance companies use credit scores to set insurance rates, it’s expensive for ratepayers and I don’t want it happening in Michigan,” Governor Jennifer Granholm said. “I am optimistic that the court will uphold Commissioner Watters’ rules, so that consumers in Michigan can once again expect their insurance rates to be based on actions they take, rather than on unreliable and arbitrary credit scores.”

The release issued by OFIS said that under the rules, insurers would be required to reduce the base premium rates charged to all policyholders. In recent years, insurers have increased base rates to provide discounts to policyholders with better credit scores.

In conjunction with the base rate reduction, the rules would ban the use of insurance credit scores in rating and underwriting for personal insurance. It’s critical that consumers have access to affordable insurance, especially in urban areas, where skyrocketing insurance premiums amount to a significant barrier to economic redevelopment, the OFIS statement said.

“Inflating the base rates of home and automobile insurance and using insurance credit scoring is unfair to consumers and illegal under the Michigan Insurance Code,” said Watters. “You can have a low credit score because you made your mortgage payment late, but that does not increase the likelihood that your house will be struck by lightning.”
A definitive court opinion called the OFIS’ rule “illegal and invalid.” OFIS appealed to the Michigan Court of Appeals.

The American Insurance Association (AIA) provided a different position on the Michigan ruling.

“Despite Commissioner Watters and Governor Granholm’s politically slanted opinion, banning insurer use of credit is the wrong public policy action that will only serve to force both insurers and policyholders to accept actuarially unsound and unfair premiums,” said David Snyder, AIA vice president and assistant general counsel. “Michigan should rejoin the overwhelming majority of states that allow credit scoring to be used within the framework of reasonable, actuarially sound and lawfully issued regulations.”

Snyder added that studies by insurance regulators, universities, independent auditors and insurance companies all have shown that an individual’s credit history is a proven, strong indicator of how likely that person is to file a future claim. Also, often more than 60 percent of policyholders benefit from the use of credit as cited in the court briefs filed by companies.

“Some basic, undisputed facts about credit-based insurance scores are that they allow insurers to charge lower premiums to customers who are better risks, they are totally objective and ‘blind’ – they never factor in a consumer’s race, income, nationality or similar factors – and they promote competition, which means more choices for consumers.”

Source: Michigan OFIC, American Insurance Association