Michigan Challenging New Home Insurance Filings Based on Credit

The Michigan Office of Financial and Insurance Regulation (OFIR) announced April 7 that all new rate filings by homeowners insurance companies that rely on insurance credit scoring as a factor in determining their discounts are being challenged by the agency.

The expansion to all home rate filings using insurance credit scoring is based on the fact that insurance credit scoring is unfairly discriminatory and also does not result in reasonably anticipated reductions in losses or expenses and therefore does not meet the requirements Michigan’s Insurance Code.

OFIR has now challenged three rate filings from home insurance companies based upon the use of credit scoring in addition to its challenge to 17 rate filings from auto insurance companies. OFIR has determined that the companies have violated Chapters 21, 24 or 26 of the Insurance Code.

Chapter 21 of the Insurance Code, also called the Essential Insurance Act, supplies a list of approved rating factors an auto or home insurer may use to set premiums. Insurance credit scoring does not appear on the list.

Chapter 21 does permit an insurer to offer premium discount plans if the plan “reflects reasonably anticipated reductions in losses or expenses.”

OFIR has determined that insurance credit scoring does not reflect reasonably anticipated reductions in losses or expenses because it is not associated with a reduction in aggregate losses. Instead, insurance scoring only redistributes the cost of covering anticipated losses by giving discounts to persons with better insurance scores at the expense of those with less favorable insurance scores.

Chapters 24 and 26 prohibit rates that are “unfairly discriminatory.” OFIR has determined that rates using insurance credit scoring are unfairly discriminatory because insurance scoring depends on information that is inaccurate and unreliable.

Insurance credit scoring relies on behavior, including debt and bill payment history that is unrelated to the risk presented when purchasing a home insurance policy. Instead of basing home insurance premiums on factors such as the condition of a home’s roof, or whether or not it has smoke detectors, many insurers place huge weight on how high a credit score is, because statistics tell them that those with great credit have a propensity to file fewer claims.

In 2005, OFIR promulgated administrative rules banning the use of credit scoring. The insurance industry challenged the rules and OFIR has been prohibited from enforcing them while the issue has worked its way through the legal system over the past four years. Both parties have pending applications for leave to appeal in the Michigan Supreme Court. The new agency action is not based upon the challenged rules, but is instead based upon the law as passed by the legislature.

Source: Michigan Office of Financial and Insurance Regulation

Topics Michigan Homeowners