Michigan’s regulator has reignited a debate over credit scoring by denying auto insurance companies requested rate increases because their proposed rate schemes include discounts for good credit scores.
Commissioner Ken Ross said he has disapproved rate filings for seven insurers and will reject any future rate filings that incorporate credit scoring despite the fact the state Supreme Court has yet to rule whether credit scoring should be prohibited.
The seven insurers denied rate increases are Progressive, Frankenmuth Mutual, Michigan Millers, Farm Bureau General, Farm Bureau Mutual, Allied P&C and AMCO. Combined these insurers write about 12 percent of the auto insurance market in the state, according to the Office of Insurance Regulation (OFIR).
According to industry officials, it’s up to the individual carriers whether to appeal the decisions. But they note that insurance filings with credit scores have been approved for the past several years while the issue has been in the courts. Now Ross has stopped that.
The insurance industry thinks it is inappropriate for Ross to deny rates based on credit scoring while the issue is still before the state’s high court.
“This is him [Ross] using another tool to make a broad-based decision that’s not his to make,” said David Snyder, vice president and assistant general counsel for the American Insurance Association (AIA).
This is not the only move by the state to keep auto rates from going up. In January, Gov. Jennifer Granholm called for a voluntary freeze on all auto insurance rates. Since then 13 insurers with small market share have agreed to the freeze. At the time, Granholm said she would use whatever tools she could to halt rate hikes if insurers did not comply with her request.
In the Ross rate denials and Granholm’s rate freeze, Snyder sees the Granholm Administration attempting to impose its “peculiar view of social policy” even though doing so is likely to harm one of the few sectors of the state’s economy — the auto insurance industry– that is still strong.
“If they have their way this part of the economy that is functioning well will be disrupted,” commented Snyder. “The administration is trying to break what ain’t broken.”
State insurance chief Ross said that he disapproved the rates as “unfairly discriminatory because they were based on insurance scoring which depends on information that is unreliable.”
In 2005, OFIR promulgated rules banning the use of insurance credit scoring. The insurance industry challenged the rules and the issue has been working its way through the legal system for the last four years. The issue is currently before the Michigan Supreme Court.
Ross defended his action even there has yet to be a final court ruling. He said he is not enforcing a broad prohibition against credit scoring as the court enjoined him from doing but is instead ruling on case-by-case review of the base rates proposed by insurers.
According to Ross, insurance companies have inflated their base rates so that they can then offer discounts off of those rates to certain drivers with good credit scores. But, he said, the base rates are unfair.
In reiterating the OFIR’s opposition to the use of credit scoring, Ross did not dispute industry contentions that credit scores are a reliable indicator of whether a driver is likely to file a claim, although he maintained there is a high error rate in credit reports.
Instead, Ross criticized credit scoring as bad public policy because it does not reflect driving records and experience and does nothing to encourage driving safety.
“Credit scoring is a zero-sum game,” he said. “Credit scoring redistributes risk but does not reduce risk and does not reward drivers who take steps to reduce risk.”
However, the industry argues that a discount factor is not legally or actuarially required to be a risk mitigator, pointing to other approved discounts for good students and for customers with multiple policies.
According to Jeffrey L. Junkas, director of Midwest public affairs for AIA, Michigan only allows carriers to discount down from an approved, higher base rate, not just for credit scores but for any discount.
Also, Junkas said, the OFIR publishes a buyer’s guide that shows which insurers use credit scoring and which do not so drivers who do not like credit scoring can choose.
According to the industry, more than 60 percent of drivers benefit from discounts based on credit scoring. “Why would you go out of your way to harm most of the people?” Snyder asked.
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