Michigan’s Auto Insurance Rate Denials Reignite Credit Scoring Fight

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 Financial and Insurance Regulation (OFIR).

According to industry officials, it’s up to the individual carriers whether to appeal the decisions. But they note that rates 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).

In 2005, OFIR promulgated rules banning the use of credit scoring. The ndustry challenged the rules and the issue has been working its way through the legal system for the last four years.

Ross defended his action even though there has yet to be a final court ruling by saying he is not enforcing a broad prohibition against credit scoring as the court enjoined him from doing but is instead ruling case-by-case on 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.

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 discounts for good students and 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 for any discount.

Also, Junkas said, the OFIR publishes a buyer’s guide that shows which insurers use credit scoring and so drivers who do not like credit scoring can choose.