Michigan Needs to Open Up Insurance Scoring Process
An ever increasing number of insurance companies are using your personal credit information—like billing history, the number of credit cards you have, and even the number of credit checks made by businesses offering you services—to determine what you will pay for auto insurance. The use of credit scoring can be an effective means of reducing the cost of insurance.
A report released by the Michigan Office of Financial and Insurance Services (OFIS) suggests that banning insurance credit scoring would likely increase insurance rates for the majority of Michigan consumers. Insurance credit scoring is a valid rating tool with strong predictive qualities, but its use should be regulated to ensure consistent treatment of various credit-related information and strong consumer protections.
The problem with credit scoring is that consumers are not guaranteed easy and understandable access about how their insurance rates are impacted by their credit history. Public hearings conducted across Michigan fewer than 18 months ago by OFIS made very clear the anger and frustration of Michigan consumers regarding the lack of information on how their insurance credit score impacts their insurance premium and the cumbersome process of challenging and correcting erroneous information.
And members of the Michigan Association of Insurance Agents (MAIA), who are the face of insurance to the state’s consumers as they serve their insurance needs on a daily basis, share that same frustration regarding the lack of easily understandable information.
While some insurance companies may respond to public inquiries about how they use credit history to determine the cost of someone’s premium, there is nothing requiring companies to give consumers complete and easily understandable access to their own insurance credit report.
At a time when confidentiality and privacy issues are paramount to the public, the lack of a detailed and thorough explanation of how credit history is used is an unacceptable way to conduct public policy. Most consumers have no idea what personal information is being gathered, how it is being used and who is using it.
MAIA strongly advocates that their needs to be a detailed explanation of the use of insurance credit scoring and how such a mechanism impacts insurance rates. Already at least 16 states to-date have enacted proposals similar to the National Council of Insurance Legislators’ (NCOIL) Model Act Regarding Use of Credit Information in Personal Insurance.
Legislation (Senate Bill 884) has now been introduced in Michigan that would require insurance companies to open up the insurance credit scoring process in this state also. The approach and language contained in the bill is similar to language passed in the above-referenced states, and based upon the recommendations of OFIS after a comprehensive study of insurance credit scoring as used by companies in Michigan. Existing Michigan legislation already prohibits insurance credit scoring from being the factor in accepting or rejecting a risk for personal insurance coverage.
The legislation would:
• Prohibit the use of race, zip codes, income, or addresses in determining a credit score;
• Apply to all lines of personal insurance— group as well as personal;
• Require explicit notice to consumers that their credit information will be considered in determining their insurance premium;
• Prohibit a company from using an insurance credit score as a surcharge;
• Prohibit insureds from arbitrarily being lumped into the highest paying tier simply because they have little or no credit (thin file/no hit);
• Prohibit negative impact of specific factors such as consumer-initiated inquiries, multiple inquiries for auto or home financing, or collection accounts with a medical industry code;
• Allow for a refund if a consumer successfully challenges an error in their credit report and that error caused the consumer to pay more for their insurance.
MAIA strongly supports legislation that balances a good competitive market with strong consumer protections. The adoption of this legislation will go a long in lifting the veil of secrecy and mistrust that now exist over the issue of credit scoring.
Robert Pierce is CEO of the Michigan Association of Insurance Agents. He can be reached at (517) 323-9473.