Michigan OFIS Report on Credit Scoring Raises Eyebrows Over Tie Between Credit Scores and Insurance Rates

LANSING, Mich. – One day before the National Credit Reporting Association and the Consumer Federation of America released their joint study they said showed the effects inconsistencies in credit reporting practices among the three leading credit repositories have on consumers’ accessibility to credit, insurance and utilities (CU Times, Jan. 1), the Michigan Office of Financial and Insurance Services issued its own Credit Scoring Report that raises the agency’s concerns about the use of credit scores to set insurance rates. The report also makes several recommendations to improve consumer protections and the availability of information to them concerning how insurance companies use credit scores to set insurance rates. The agency said the recommendations are based on complaints it has received from consumers and public hearing testimony received by OFIS in recently held public hearings “Consumers overwhelming concern is the lack of information available about the credit scores their insurance companies are using to set their rates. Consumers are entitled by law to know how their premiums are determined, and the report recommendations remove the mystery regarding calculation of credit scores for insurance premiums,” said OFIS Commissioner Frank Fitzgerald. Insurance companies in Michigan are prohibited from using credit scoring in underwriting automobile or homeowners insurance – an insurance company cannot refuse to write a policy, cancel a policy or not renew a policy based on a person’s insurance credit score. But OFIS says many insurance companies have started using credit scoring in determining the rate a consumer will pay. In addition, says OFIS, “because there is no intuitive connection between a person’s credit history and the likelihood that they will incur a loss, this practice has become controversial and raised several questions.” Michigan law allows a discount based on insurance credit scores. However, the report noted “a significant number of consumer concerns and possible insurance Code violations were identified.” Among the possible violations and concerns cited in the report were: * the variety of ways that insurance credit scoring is used; * a wide range of insurance credit scoring discounts; and * a lack of information available to consumers so they can determine if insurance credit scores and rates are accurate. In response to the OFIS’ report, the agency plans to implement several administrative recommendations over the coming weeks. Among their recommendations: * all Michigan insurance companies will be required to inform policyholders of insurance credit scores and levels of discount annually. The companies will also have to file with OFIS the insurance credit scoring formula used to apply a discount and the factors used to calculate the credit score. * all insurance companies using an insurance credit scoring discount will be required to recalculate and apply a policyholder’s insurance credit score at least once annually and at any time a consumer has successfully disputed their credit history information; * insurance companies using credit score discount will have to file with OFIS an actuarial certification justifying discount levels and tier annually. OFIS also plans to recommend several legislative changes be made by the state legislature such as: * consider prohibiting the practices of denying, canceling, or limiting coverage or surcharging insureds or applicants for personal lines of insurance other than auto or homeowners, based on an insurance score; * consider amending laws pertaining to group auto and homeowners insurance to prohibit surcharging based on an insurance score; * consider requiring insurance companies to review the credit history of all adults covered by an auto or homeowner policy and then mandate applying an insurance credit discount based on the best numerical credit score reviewed. [email protected]