Credit Scoring Ban Struck Down in Michigan

Published July 20, 2010

The Michigan Supreme Court has struck down regulations against using credit scoring in underwriting insurance policies.

The issue came to a head in Michigan last year, after Gov. Jennifer Granholm (D) and State Insurance Commissioner Ken Ross attempted to ban the use of credit scores in determining insurance rates and eligibility.

Previous efforts to ban insurers from using credit information in underwriting and rating had failed in the Michigan Legislature. Granholm and Ross moved to ban the practice through regulations. This led to an immediate challenge by the insurance industry, which eventually advanced to the Michigan State Supreme Court. On July 8 the court voted 4-3 against the credit scoring regulations and immediately stopped their enforcement.

Representing the majority opinion of the court, Michigan Supreme Court Justice Maura Corrigan argued the use of credit scores did not violate Michigan’s insurance statutes.

‘Consistent with Affordability’
“It is difficult to see how offering discounts to some insureds on the basis of good insurance scores is inconsistent with the [law’s] general purpose of availability and affordability of insurance for all consumers,” wrote Corrigan.

The issue of credit scoring has been contentious in Michigan, with some politicians and consumer groups arguing the practice is unfair because the scores do not directly affect risky behavior or correlate with the frequency of claims, only their cost.

The reaction to the Supreme Court’s ruling from Michigan’s consumer organizations was solidly negative. Linda Teeter, executive director of Michigan Citizen Action, argued the Supreme Court’s decision hurts consumers in favor of insurers.

‘Nothing to Do with Driving’
“Using a person’s credit score as one of the factors used to determine an insurance rate has nothing to do with their driving record, which is the only standard that should matter in a person’s driving record, not their financial standing,” Teeter said. “Instead of standing up for Michigan residents, the Supreme Court today slammed the doors of justice in their faces and showed just how out of touch it is with the people of Michigan.”

Insurance industry groups argue most consumers actually benefit from the use of credit scores and a ban would lead to rate hikes. “We are very pleased with the court’s decision,” said Ann Weber, vice president of state government relations for the Property Casualty Insurers Association of America.

Peter Kuhnmuench, executive director of the Insurance Institute of Michigan (IIM), praised the decision as a boon for Michiganders.

‘Win for Policyholders’
“This decision is a win for Michigan policyholders,” said Kuhnmuench, whose organization represents multiple state property and casualty insurance companies. “Insurance carriers will continue to be able to offer discounts to policyholders who are less likely to have a claim.”

Kuhnmuench also cited a 2007 study by the Federal Trade Commission which found credit-based insurance scores are accurate predictors of payout risk. Using them allows insurance companies to offer policies at lower prices to less risky policyholders and to sell more policies overall.

David Snyder, vice president and associate general counsel of the American Insurance Association (AIA), said another reason the Michigan Supreme Court ruling is important is that it disallows the state insurance commissioner from arbitrarily making a decision that could affect thousands of insurance policies.

“Insurance scoring has resulted in reducing rates for the majority of policyholders, thus making insurance more affordable,” he said. “By improving accuracy in risk assessment, it has also led to greater availability and competition, and historically low populations in high-risk insurance pools.”

Synder noted the court’s decision follows a national trend.

“Insurance scoring is widely permitted and regulated in 46 states and has been repeatedly validated by state, federal, and academic studies,” Snyder said. “It has been the subject of dozens of federal and state legislative and administrative proceedings and has prevailed.”

Matt Glans ([email protected]) is legislative specialist in insurance and finance at The Heartland Institute.