PCI: MI Ruling Against Credit-Based Scoring May Result in Higher Rates

A Michigan Court of Appeals ruling on Friday to prohibit the use of credit-based insurance scoring could increase insurance premiums and have a negative effect on consumers, says the Property Casualty Insurers Association of America (PCI) in a press release sent out today. 
 
The PCI strongly disagrees with the decision in the Insurance Institute of Michigan et al v. Office of Financial and Insurance Services (OFIS) case and will support the industry’s appeal of the ruling to the state’s Supreme Court.  
 
Friday's ruling would reverse a lower court decision allowing the use of credit-based insurance scoring to provide lower rates to policyholders. The case stems from a March 2005 rule by OFIS banning the use of credit scoring to provide discounts in automobile and homeowners insurance. The insurance industry filed suit in response to the rule, and a circuit court ruled that the OFIS ruling was illegal, invalid and unenforceable. OFIS then pursued litigation by appealing that ruling.  
 
“We are disappointed with [Friday's] Michigan court ruling, as credit scoring has been shown to greatly benefit consumers,” said Ann Weber, PCI vice president and regional manager. “Credit information is more likely to help consumers obtain lower insurance rates. PCI supports the ability of insurers to use this tool because it has proven to be a very accurate predictor of the risk of loss.”  
 
Insurers use credit information in developing credit-based insurance scores to predict the likelihood of future insurance loss. Much like factors such as years of driving experience, previous crashes, and the age of a vehicle or home, credit scores are a way for insurance companies to differentiate between lower and higher insurance risks.  
 
In Michigan, credit-based insurance scoring is used only to provide discounts for insurance customers. Credit-based insurance scores are not used in Michigan to apply a surcharge or to determine whether a person can be insured by the company.  
 
“This decision will hurt policyholders’ ability to secure discounts, because it would deprive insurers of one of the most predictive underwriting tools at their disposal,” said Weber. “The use of credit information allows insurers to provide more coverage and create financial benefits for policyholders with good credit.”  
 
A strong connection exists between a person’s credit history and their likelihood of filing a claim. A study last year by the Federal Trade Commission (FTC) reaffirmed the correlation between credit information and loss risks and the soundness of using credit scoring to determine rates.  
 
About PCI  
 
PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association. PCI members write over $195 billion in annual premium, 39.8 percent of the nation’s property casualty insurance.