The Michigan Office of Financial and Insurance Regulation (the “OFIR”) announced last week that it has begun disapproving insurance rate filings made by automobile insurance companies that use insurance credit scoring as a factor in determining premium rates. The OFIR has taken the position that credit scoring is unfairly discriminatory and does not meet the requirements of Michigan’s Insurance Code.
The OFIR’s position is as a direct response to Michigan Governor Jennifer Granholm’s Executive Directive No. 2009–1, issued on February 3, 2009 and titled “Fair and Equitable Automobile Insurance Rates”. In Directive 2009-1, Governor Granholm announced that she is asking for automobile insurers doing business in the State of Michigan to pledge to freeze automobile insurance rates for a 12-month period while the Michigan Legislature works to enact comprehensive automobile insurance reform. As of March 9, 2009, 13 insurers have pledged to freeze rates.
For those insurers that do not volunteer to freeze rates, the Governor has instructed the OFIR to use every administrative tool at its disposal to ensure that the rates for automobile insurance are fair and equitable. One such tool is the disapproval of rate increases or the rejection of rate filings. Directive No. 2009–1 shall remain in effective until Governor Granholm determines that the Michigan Legislature has enacted satisfactory comprehensive automobile insurance reform laws.
As discussed in an earlier blog post here, the OFIR sought to implement a set of regulations barring the use of insurance credit scoring. A coalition of insurers successfully sued the Commissioner of the OFIR in state court for a permanent injunction against the enforcement of those rules. Last summer, the Michigan Court of Appeals reversed that decision and lifted the stay. However, the stay on enforcement remains as the matter is now on appeal before the Michigan Supreme Court.
According to Michigan Insurance Commissioner Ken Ross, even though the above mentioned suit remains unresolved, the OFIR can deny the rate increases based on credit scoring even though it cannot enforce a rule against the use of credit scoring. So far, the OFIR has already disapproved seven rate filings that used credit scoring as a rating factor. Commissioner Ross has also stated that those seven insurers can file administrative appeals to contest the denials, and if denied relief at the OFIR, the insurers could sue in court.
Two of the several reasons given by the OFIR in its rejections of rate filings are that (1) credit information contains such a high rate of errors that there is an unacceptable likelihood that person will be classified improperly, and (2) insurance credit scoring relies on consumer behavior that is unrelated to the traditional risk factors when purchasing automobile insurance, such as driving record and driving experience.
Meanwhile, insurance industry representatives contend that credit scores accurately predict risk and that with a higher credit score, the lower the chance that the motorist will file a claim. Therefore, those motorists with higher credit scores deserve lower rates and should be rewarded with premium discounts.
According to Peter Kuhnmuench, executive director of the Insurance Institute of Michigan, using credit scores “simply improves the accuracy of our predictions [and] helps [to] allocate risk.” In response to allegations that credit scoring simply allows insurers to price out motorists believed to pose a higher claims risk, Mr. Kuhnmuench stated that it is not in an insurer’s best interest to selectively provide coverage because, “[i]f we can properly price a customer, we want that customer.”