An appeals hearing has been held regarding the legality of using credit-based insurance scores in determining insurance rates.

The case, Insurance Institute of Michigan et al v. Office of Financial and Insurance Services (OFIS), was appealed by OFIS after its banning of the use of credit scoring was ruled illegal, invalid, and unenforceable by Circuit Court Judge James H. Fisher. OFIS said that it expects a ruling on the appeal in the next few months.

According to a summary on the Hot Topics section of the Insurance Information Institutes (I.I.I.) website, the lawsuit stemmed from a decision by Michigan Governor Jennifer Granholm and Insurance Commissioner Linda Wattersthat the state would ban the use of insurance scoring in personal lines insurance as a rating factor and in underwriting.

The I.I.I. summary adds that Judge Fisher said that the rule, as proposed by the Office of Financial and Insurance Services (OFIS), was illegal, invalid, and unenforceable because the office was attempting to rewrite the Insurance Code through administrative rulemaking. The judge said that the evidence shows that policyholders with low credit scores present a higher risk than policyholders with higher scores, and that one of the basic principles of insurance was that higher risk policyholders should pay higher rates.

Credit Scores unreliable and arbitrary

After Fishers ruling against the ban, OFIS appealed.

Its wrong that insurance companies use credit scores to set insurance rates. Its expensive for ratepayers and I dont want it happening in Michigan, Granholm stated. I am optimistic that the court will uphold Commissioner Watters rules, so that consumers in Michigan can once again expect their insurance rates to be based on actions they take, rather than on unreliable and arbitrary credit scores.

Watters said that under the rules struck down by the circuit court, insurers would be required to reduce the base premium rates charged to all policyholders. In recent years, she said, insurers have increased base rates to provide discounts to policyholders with better credit scores.

In conjunction with the base rate reduction, Watters added, the rules would ban the use of insurance credit scores in rating and underwriting for personal insurance. She declared that its critical that consumers have access to affordable insurance, especially in urban areas, where skyrocketing insurance premiums amount to a significant barrier to economic redevelopment.

Watters stated, Inflating the base rates of home and automobile insurance and using insurance credit scoring is unfair to consumers and illegal under the Michigan Insurance Code.

In defending her decision to ban the use of insurance scores, Watters said, You can have a low credit score because you made your mortgage payment late, but that does not increase the likelihood that your house will be struck by lightning.

Credit Scores Used for Discounts

The Property Casualty Insurers Association of America (PCI) disagreed. Ann Weber, PCI regional manager, said, Although not every insurer chooses to use credit information, there is virtually universal recognition of the importance of preserving the right to use objective and accurate underwriting tools.We commend the court for its prior ruling on this important issue.When insurers are able to use actuarially sound and accurate underwriting tools, the vast majority of consumers benefit with lower overall insurance rates and more choice in the marketplace.

Lynn Knauf, PCI director for personal lines, added, Michigan is one of the most restrictive states when it comes to insurers use of credit scores. Under current law, the use of credit scoring is used in providing insurance discounts. Insurers are not allowed to use credit scores for underwriting and rating consumers. However, [Granholm], in a recent statement to the press, called the use of credit history by insurers unreliable or arbitrary. But if this were the case, the use of credit scores would serve no use for insurers. Studies have shown that credit-based insurance scoring is a reliable tool use for predicting the likelihood of insurance loss. These studies also show that people with good credit file fewer claims. The OFIS overstepped its authority and is attempting to pick their own set of winners and losers by requiring people with good credit who pose less risk of loss to subsidize those with poor credit records.