Michigan Negotiations on Credit Scoring Apparently in Vain as Gov. Granholm Pushes for Ban

Jennifer Granholm

When campaigning for her current office, Michigan Gov. Jennifer Granholm made it clear she detested the use of credit in rating and underwriting auto and homeowners insurance policies. Still, that was back in 2002. It was during the campaign. Industry observers thought that, perhaps, her anti-scoring fervor had somehow cooled.

“Evidently we were in error,” said Robert Pierce, CEO of the Michigan Association of Insurance Agents (MAIA).

After a year of negotiations with House legislators, a bill to regulate what are called the worst abuses of the credit-based insurance scoring system in Michigan was introduced in mid-April. Largely based on the National Conference of Insurance Legislators’ (NCOIL) model act on credit with a few wrinkles specific to the Wolverine State’s situation, HB 5803 appeared to be a breakthrough. Staffers from the Office of Financial and Insurance Services (OFIS) were even in on the negotiations.

So it came as somewhat of a surprise when Granholm and OFIS Commissioner Linda A. Watters announced in a televised news conference a week later that not only would they not support the House bill (or its similar Senate version) but they would shortly propose a rule to ban the use insurance scoring altogether. Maryland bans insurance scoring for homeowners insurance while California’s ban applies only to auto insurance. Every other state allows insurance scoring to some degree or another.

In a statement, the MAIA called the move “abrupt” and Pierce told Insurance Journal he was “surprised and disappointed” by the governor’s announcement.

“We feel that by proposing a rule this is the most effective way to provide base rate reductions to our consumers,” Watters told IJ. “The bottom line is that insurance rates in Michigan are just too high. We have seen since credit scoring began to be used in Michigan in 1996 that base rates have increased for auto insurance between 45 and 90 percent and for homeowners between 86 and 162 percent. So we do know that that’s a factor.”

The National Association of Insurance Commissioners has ranked Michigan’s auto insurance rates 13th highest at $872 annually, compared to the national average of $817. Homeowners insurance rates are 30th highest at $487, compared to the national average of $417.

Watters said OFIS had been pushing for a 10 percent limit on the amount an insured’s rate could be discounted due to credit, but when the department did not get its way the administrative option had to be pursued. She also said the ban would bring base rates down between 10 and 45 percent. Both she and Granholm blamed discounts to insureds with good credit for raising base rates.

Doug Cruce, executive director of the Insurance Institute of Michigan, estimated that 50 to 60 percent of insureds are currently receiving a discount, “and they’ll all receive an increase proportionate to the discount they’re getting.”

Michigan already bans the use of insurance scores to raise an insured’s rates, a common feature of the NCOIL-based laws around the country was inapplicable here. Insurers are only allowed to use insurance scores to offer customers discounted rates. Earlier this year, Watters called on all auto and home insurers to file certain loss data with OFIS for a study on whether the rates being charged were justified by insurers’ losses. The study is scheduled to be issued in late summer, but Granholm and Watters felt comfortable moving forward without the study’s conclusions.

“We felt no hesitation to wait until the findings are in,” Watters said. “This is an opportunity for us to eye reductions for consumers. The rule-making process takes four to six months. The results of the study will be out before process is over. So we’re not pre-empting our study by taking this action.”

Watters and Granholm argued that pushing the ban via the administrative rule-making process instead of moving it through the Republican-led legislature is legitimate because insurance scoring violates the state’s Essential Insurance Act by not applying discounts uniformly to all persons across the state. The pair also argued that the unreliability of credit reports and the lack of uniformity in insurers’ scoring models made the practice illegal.

“The thrust of it seemed to be that a priori the use of credit scores is discriminatory against minorities and poor people,” Pierce said. “Credit scoring has been turned upside down and inside out and in the majority of cases the conclusion has been reached is that it is an appropriate rating tool because every other state that has examined it has decided not to ban it.”

Sean McManamy, Midwest vice president for the American Insurance Association, argued that bottom-line loss costs would not change, but that a ban would merely shift the costs.

“Yes, absolutely somebody’s rates are going to come down,” McManamy told IJ. “Somebody’s rates are going to go up at the same time. You are just going to have a situation where you’re increasing exponentially the subsidy that good risks are going to pay for bad risks.” He added that Maryland is experiencing a backlash from consumers who’ve rates have gone up since its ban was put in place, and the legislature there is working on reversing course.

The irony is that thanks to many insurers’ lack of openness about the role that insurance scoring plays in their rating decisions, many of the insureds now receiving discounts because of good credit may not know it, thus diluting a potentially strong pool of grassroots opposition to the proposed rule. By the time insurance consumers figure out what they’ve lost, it may be too little too late.

Editor’s note: A version of this story appears in the May 17 issue of Insurance Journal Midwest, which covers Ohio, Michigan, Indiana, Wisconsin, Illinois, Missouri, Minnesota, Iowa, North Dakota, South Dakota, Nebraska and Kansas.

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Topics Auto Homeowners Michigan