Automobile insurance -- secondary or merit rating plan

Issued and entered August 29, 1980 by E.C. Mackey, Acting Commissioner of Insurance

Public Act 145 of 1979 (Act), enacted on November 13, 1979 adds Section 2111(3) to the Michigan Insurance Code (Code). This section requires all automobile insurers to establish secondary or merit rating plans to be used in rating insurance for private passenger, non-fleet automobiles. This bulletin explains the provisions of the Act with respect to secondary or merit rating plans and provides guidelines for filing such rating plans with the Commissioner of Insurance.

PROVISIONS OF THE ACT

Several sections of Chapter 21 of P.A. 145 set limitations and requirements that automobile insurance rating and classification systems must meet. Under Section 2111(3) of the Act, all insurers subject to Chapter 21 must establish secondary rating plans for private passenger cars. These plans must provide for premium surcharges based on substantially at-fault accidents, and/or for judicially established violations of Chapter 6 of the Michigan Motor Vehicle Code (MVC), when such information becomes available to the insurance company. The surcharges may be applied to any or all automobile insurance coverages.

These secondary rating plans are also required to comply with the general rating standards of Sections 2109 and 2111(5)(b) and (c) of the Act. Under Section 2109(c) the difference between rates for the same auto insurance coverage must be justified by differences in losses and/or expenses, or by differences in the risk of loss for individuals or risks to which the rates apply. The justification must be supported by a reasonable system of risk classifications; by actual and credible loss and expense statistics, or in the case of new coverages or classifications, by reasonably anticipated loss and expense experience; and by sound actuarial principles, when applicable.

In addition, the secondary rating plans must produce rates for package policies that conform to the requirements of Sections 2111(5)(b) and (c) of the Act. These sections place limits on the amount that the rates may vary by geographical location for drivers with the same primary rating factors and the same driving records, who purchase identical auto insurance policies from a given company. These sections of the Code take effect January 1, 1981.

INTERPRETIVE GUIDELINES

A. Application of Surcharge

1. Surcharge plans may be based on:

a) substantially at-fault accidents only

b) judicially determined MVC violations only

c) various combinations of substantially at-fault accidents and judicially determined MV violations provided: If a single occurrence results in both a substantially at-fault accident and a judicially determined MVC violation, a surcharge may be assessed for either the accident or the violation, but not both. The company may, if it wishes,choose to assess for the action that carries the higher surcharge.

Substantially at-fault accidents or judicially determined violations resulting from the operation of a commercial vehicle may be treated the same as those arising from the use of a private passenger car. The details of the construction of merit rating surcharge plan are not specified in P.A. 145. The Insurance Bureau will review all plans for compliance with all relevant requirements in Chapter 21.

2. A secondary rating plan may assess surcharges on any or all auto insurance coverages. Rate surcharges must be justified by loss and/or expense data, as required by Section 2109(c) of the Act. Merit rating plans that assess surcharges on coverages such as comprehensive where such justification is not possible may be approved if the total amount of premium expected to be generated by the surcharge program can be justified based on the loss statistics of those coverages where at-fault accidents and traffic law violations are related to size or risk of loss.

3. Some existing merit rating plans provide for a surcharge where the principal operator is an inexperienced driver. Inexperienced operator surcharges are no longer permitted in secondary rating plans, because Section 2111(3) only allows surcharges for accidents and convictions. Under Section 2111(2)(a)(ii), EITHER the number of years licensed to operate a motor vehicle OR the length of driving experience OR the age of driver may be used as a primary rating classification.

4. Any surcharges in effect as a result of a merit rating plan which was used by an insurer prior to January 1, 1981 may not be continued at renewal of a policy on or after January 1 unless the surcharges are based on substantially at-fault accidents or judicially determined MVC violations as provided in Section 2111(3).

5. Merit rating plan surcharges do not have to be based on insurance eligibility points as defined in Section 2103(4).

6. The application of surcharge points must be consistent for both new and renewal business. If accidents and/or judicially determined violations are retroactive (prior experience) for new business, the same experience period should apply for renewals. Similarly, if experience were prospective (i.e. after January 1, 1981) it should be equal for both renewals and new business.

B. Procedures for Obtaining Information About Judicially Determined MVC Violations

All merit rating plans should include the criteria that will be used by the company in obtaining information about judicial determinations of MVC violations. This information is normally available from such sources as the motor vehicle record (MVR) compiled by the Secretary of State, a person's own admission and police accident reports. The criteria used by an insurer to decide when and for whom to order MVR's must not unfairly discriminate against particular classes of applicants or insureds on the basis of age, sex, marital status, residence, location of risk, handicap or lawful occupation.

C. Determination of Substantially At-Fault

The initial determination of whether a driver was substantially at-fault for purposes of merit rating will normally be made by the insurance company. The criteria to be used in making the determination should be a part of the merit rating plan. If an insured believes that an incorrect determination of fault was made which resulted in an incorrect premium charge, she or he may challenge the determination through the review and hearing process set forth in Section 2113 of the Act.

D. Definition of Accident

P.A. 145 does not define what constitutes an accident for purposes of merit rating plans. All secondary rating plans surcharging for substantially at-fault accidents must contain a definition of accident which includes at least the following elements:

1. A description of the type or cause of damage or injury.

2. Specification of the driver involved and her or his relationship to the insurance policy being rated.

FILING GUIDELINES

Each insurer shall submit the following for approval by the Commissioner:

1. the rules defining and governing the application of its merit rating plan.

2. the certification and supporting information specified in Section 2108 of the Act.

3. any relevant information specified in the forms with instructions issued May 14, 1980: Order No. 80-1935-M.

This material should include but need not be limited to:

a. the specific MVC violations for which surcharges will be assessed, expressed in terminology similar to that used on MVR's.

b. the surcharges that will be assessed for various accidents and/or judicially determined violations.

c. a justification of those surcharges, including an explanation of how each surcharged driving record category relates to differences in losses, expenses, and/or uncertainty of loss between groups of people with those driving records.

d. the criteria that will be used to determine when a driver is substantially at-fault.

e. the definition of accident, if any, being used in the plan.

f. the criteria to be used by the company in obtaining information about judicially determined violations and/or accidents.

g. the experience period during which accidents and/or judicially determined violations, will be charged and a justification for choosing
such a period.

RIGHTS AND PROCEDURES

This bulletin is effective September 1, 1980. In conformity with Section 3(6) of the Administrative Procedures Act of 1969, MCLA 24.203(6); MSA 3.560(103)(6), these guidelines are a statement of policy that the agency intends to follow, which does not have the force or effect of law, and which binds the agency, but does not bind any other person.

The Bureau shall use these guidelines in reviewing all filings of secondary rating plans as described in Section 2111(3) of the Act for approval by the Commissioner. The operation of this bulletin does not suspend operation of any guidelines currently in effect.