LANSING – After more than four years of legal proceedings, the issue of whether the Office of Financial and Insurance Regulation (OFIR) can administer rules banning the use of insurance credit scoring will ultimately be decided following a Michigan Supreme Court hearing which begins tomorrow.

“Michigan drivers have waited long enough for relief on this issue,” OFIR Commissioner Ken Ross said. “Rather than placing such heavy reliance on surrogate underwriting schemes like insurance credit scoring, Michigan insurers need to get back to basics, basing premiums on relevant information such as driving record, experience, and miles—not whether a driver paid their phone bill late.”

One of OFIR’s key arguments is based on the fact that Michigan’s Insurance Code explicitly states that there must be reasonably anticipated reductions in losses in discounts, such as credit scoring discounts, offered by automobile insurance companies. During hearings on OFIR’s proposed rule to ban insurance credit scoring, more than one insurance company acknowledged that credit scoring is a redistribution of costs, and not a net reduction. The same amount of money is collected, but it’s shifted between who is paying it among consumers.

One insurance agent testified about the inequities that he saw with the system. He was disgusted that he was able to get big discounts for a customer with “gold credit” even though the customer had a driving while intoxicated on his record. The agent was hard pressed to explain to another customer with a clean driving record, but blemished credit, why she was going to see increases in her premium.

OFIR’s other key argument is based on the fact that the Insurance Code states that automobile insurance rates shall not be “unfairly discriminatory.” Rates that use credit scoring are unfairly discriminatory because they are based on insurance scoring which depends on information that is unreliable. Credit information has been found to contain such a high rate of errors that there is an unacceptable likelihood that persons will be misclassified. Insurance scoring discounts are not based on a reasonable classification system and sound actuarial principles.

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

Michigan Government Television will air tomorrow’s hearing live at 9:30 AM. For more information, visit: www.mgtv.org

History of OFIR’s Rules Banning Insurance Credit Scoring:

In 2004, Governor Granholm and then-OFIR Commissioner Linda Watters proposed a new state rule to reduce base rates for all insurance customers by prohibiting the use of credit scoring in determining rates for homeowners and auto insurance sold in Michigan.

In March, 2005, after extensive public hearings across the state, the commissioner promulgated these rules. The Insurance Institute of Michigan, the Michigan Insurance Coalition, and several insurers challenged the rules in Barry County Circuit Court.

In April, 2005, Judge James Fisher issued an opinion and order declaring the rules invalid and permanently enjoined the commissioner from enforcing them against any plaintiff in the action.  Commissioner Watters immediately appealed Judge Fisher’s decision to the Michigan Court of Appeals.

In August, 2008, the Michigan Court of Appeals issued a split decision and three separate opinions on the challenge to the rules. The common points among the three opinions resulted in the Court of Appeals vacating Judge Fisher’s order and injunction and lifting the stay he had imposed on the enforcement of the rules.

On October 1, 2008, Commissioner Ken Ross filed an application for leave to appeal and specifically asked the Michigan Supreme Court to rule that the insurance credit scoring rules are valid. On October 2, 2008, the insurance industry filed an application for leave to appeal and asked the Michigan Supreme Court to reverse the Court of Appeals and reinstate Judge Fisher’s order. Both sides filed briefs in support of the applications, and each responded to the brief filed by the opposing party. The stay continued in force as the Michigan Supreme Court considered these appeals.

In February, 2009, OFIR began enforcing the statute that governs insurance rate filings and disapproved filings made by auto and home insurance companies that use insurance credit scoring. The agency determined that insurance credit scoring relies on information that is unreliable, unfairly discriminatory and does not meet the requirements of Michigan’s Insurance Code. On April 10, 2009, Judge Fisher expanded his 2005 injunction and prevented OFIR from enforcing the statute. OFIR has appealed the expansion of the 2005 injunction to the Michigan Court of Appeals.

On May 8, 2009, the Michigan Supreme Court granted the applications for leave to appeal the 2005 injunction. The court will begin hearing arguments on October 7, 2009.

On September 25, 2009, Judge Fisher expanded his previous injunction against OFIR to include all insurance company rate filings. The previous injunction was limited to the rate filings of several named individual companies and two state trade associations.