December 16, 2002

A report released today about the use of credit scores to set insurance rates raises significant concerns about the way insurance credit scoring is used and how much information is available to consumers. Produced by the Michigan Office of Financial and Insurance Services (OFIS), the report makes several recommendations to enhance consumer protections.

“The report makes recommendations based on consumer complaints and public hearing testimony received by OFIS as well as current state law,” said OFIS Commissioner Frank M. Fitzgerald. “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.”

While the study finds that Michigan law permits a discount that is based on insurance credit scoring, a significant number of consumer concerns and possible Insurance Code violations were identified. These concerns and possible violations include:

• 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 report, OFIS will begin to implement several administrative recommendations over the next several weeks. Those include:

• Requiring all Michigan insurance companies to inform policyholders of insurance credit scores and levels of discount annually. In addition, the companies will have to file with OFIS the insurance credit scoring formula used to apply a discount and the specific factors used to calculate the credit score. The formulas and factors will be available for public inspection pursuant to the Michigan Freedom of Information Act.
• Requiring companies using an insurance credit scoring discount to recalculate and then apply a policyholder’s insurance credit score at least once annually and at any time a consumer has successfully disputed his or her credit history information.
• Requiring companies using an insurance credit score discount to file with OFIS an actuarial certification justifying discount levels and tiers annually, including those discounts granted to policyholders with no credit history (“no hits”) or whose credit histories do not reveal all the credit factors used by the company’s formula (“thin files”) to determine the insurance credit score.

In addition, OFIS will make the following recommendations to the Michigan legislature:

• Consider prohibiting the practices of denying coverage, canceling coverage, limiting coverage or surcharging insureds or applicants for personal lines of insurance other than automobile or homeowners based on an insurance credit score.
• Consider amending the laws pertaining to group automobile and homeowners insurance to prohibit a surcharging based on an insurance credit score.
• Consider requiring insurers to review the credit history of all adults, known to be covered by an automobile or homeowner policy, and then mandate applying an insurance credit discount based on the best numerical credit score reviewed.
• Consider directing insurance companies on how to apply insurance credit scoring discounts involving the lack of credit history (“no hits”) and credit histories revealing fewer than all the factors used by a company to determine its insurance credit score (“thin files”).
• Require notification to consumers that an insurance credit scoring discount is being applied at the time of either application for coverage or renewal of coverage.
• Require companies to give notice to insureds, with specificity, as to why an adverse in insurance credit scoring action is occurring. This should require disclosing the specific attributes of the credit history that result in the adverse action. Although the federal Fair Credit Reporting Act requires this, placing this requirement in Michigan law will empower the commissioner to penalize violations of this provision.
• Prohibit certain types of credit inquiries from negatively affecting a person’s insurance credit score. Inquiries to consider banning from use include, but are not limited to: inquiries relating to insurance coverage; collection accounts with a medical industry code; and multiple lender inquiries from the automobile lending industry made within 45 days of one another.
• The Legislature may wish to fund a comprehensive study under the direction of the Commissioner of outstanding issues pertaining to credit scoring. Such issues could include why there exists a predictive link between an insurance credit score and the likelihood of loss, and whether insurance credit scoring impermissibly affects persons based on socio-economic or other factors.
• The Legislature should consider repealing MCL 500.2129, which allows some insurance companies to be exempt from the Essential Insurance Act requirements. Presently, these exempt companies can use insurance credit scoring for both underwriting (denying or canceling coverage) and surcharging because the policyholders of these companies are not afforded these protections under current law.

OFIS insurance credit scoring material is available at www.michigan.gov/ofis by clicking on the credit scoring logo at the bottom of the page. The OFIS insurance credit scoring report can be directly linked at http://www.michigan.gov/documents/ cis_ofis_credit_scoring_report_52885_7.pdf and the OFIS Insurance Counselor on insurance credit scoring (a publication for consumers) is available at http://www.michigan.gov/documents/ cis_ofis_ip222_53168_7.pdf. All information is also available by contacting OFIS toll free at 877-999-6442.

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The Michigan Office of Financial and Insurance Services (OFIS) is responsible for the regulation of Blue Cross Blue Shield, 29 HMOs, 138 banks, 280 credit unions, almost 1,500 insurance companies, 1,583 investment advisers, 2,164 securities broker-dealers, 6,000 consumer finance lenders, 89,000 insurance agents, and 120,715 securities agents. OFIS is part of the Department of Consumer and Industry Services and is primarily fee-funded, requiring minimal public tax dollars for its regulatory and consumer assistance activities. OFIS has insurance, financial institutions and securities information available online at the OFIS web site, www.michigan.gov/ofis, or at the Michigan government home page, www.michigan.gov. All information is also available through the OFIS toll free number, (877) 999-6442. If you would like to receive OFIS press releases electronically, please email ofis-info@michigan.gov.