Issued and entered February 14, 2003 by Frank M. Fitzgerald, Commissioner
of Financial and Insurance Services
In December, the Commissioner issued a report (the "Report")
entitled, "The Use of Insurance Credit Scoring in Automobile and
Homeowners Insurance." The Report contains a detailed explanation
of the use of insurance credit scoring and an analysis of its impact and
legality. The Report is may be found on the OFIS website at: http://www.michigan.gov/documents/
Highlights from the report include the following:
- The use of insurance credit scoring in the rating of automobile and
homeowners insurance is widespread.
- Using insurance credit scoring to discount automobile and homeowners
insurance rates is lawful.
- In general, a person with a good credit history is less likely to
file automobile or homeowners insurance claims than a person with a
bad credit history.
- Independent studies should be undertaken to establish whether insurance
credit scoring results in unfair or prohibited discrimination.
- Legislation is recommended to enhance consumer protection, including
improved notification to consumers, restrictions against underwriting
by use of insurance credit scoring in certain lines of insurance, and
prohibitions on the consideration of certain factors in a credit history.
- Many insurance companies are failing to adhere to requirements in
Michigan and federal law in their use of insurance credit scoring.
To secure company compliance with Michigan law, the Commissioner issued
an order dated February 14, 2003, which ordered the Staff to diligently
monitor company compliance with the following directives taken from the
Report and to initiate compliance actions as appropriate based upon laws
underlying the directives that are identified and discussed in the Report:
- Any company using an insurance credit scoring discount must file with
OFIS the formula used to apply the discount. Filing must occur by July
1, 2003 for any new coverage or the renewal of coverage effective on
or after that date.
- Companies must file with OFIS the specific credit classification factors
used to calculate the insurance credit score. Filing of the factors
must occur on or before July 1, 2003 in their rate manual. Re-filing
of the credit classification factors must occur whenever the company
adds, modifies, or deletes a factor used to calculate the insurance
- Companies using an insurance credit scoring discount must recalculate
and then apply an insured's insurance credit score at least once annually.
- Companies using an insurance credit score discount must annually file
with OFIS an actuarial certification justifying the discount levels
and discount tiers offered by the company. The initial filing of the
certification must occur between July 1, 2003, and June 30, 2004.
- Companies must annually actuarially certify the discount granted to
policyholders or applicants with no credit history ("no hits"), or whose
credit history does not reveal all the credit factors used by the company's
formula ("thin files") to determine the insurance credit score. This
certification must occur for any new coverage or renewal coverage effective
on or after January 1, 2004.
- Companies using insurance credit scoring for personal lines insurance
other than automobile or homeowners must file their formulas with OFIS.
The filing must occur by July 1, 2003 for new and renewal coverage effective
on or after that date. Also, companies must file the specific credit
classification factors used to determine the insurance credit score
by July 1, 2003. Re-filing of the credit classification factors must
occur whenever the company adds, modifies, or deletes a factor used
to calculate the insurance credit score.
- Companies using insurance credit scoring must annually inform their
automobile and homeowners policyholders or applicants of the credit
score used to apply an insurance credit scoring discount, and the discount
tier in which the insured or applicant is placed.
- Companies using insurance credit scoring must recalculate an insurance
credit score and apply an appropriate discount if an insured successfully
disputes information in his or her credit history.
As discussed in the Report, rating formulas and classification factors
are directly required by applicable rate filing sections of the Insurance
Code, MCL 500.2108, 500.2406, and 500.2606. As to the actuarial certifications,
this Bulletin serves as notice to companies that without the certifications
the Commissioner does not have sufficient information to determine whether
filings meet the requirements of their respective chapters. Actuarial
standards are contained in MCL 500.2109(1)(c), 500.2403(1)(d), and 500.2603(1)(d).
These statutory requirements are clarified and expanded upon by parallel
rules for each chapter at 1979 ACS 2, R 500.1201 et seq., 1979 ACS 2,
R 500.1301 et seq., and 1979 ACS 8, R 500.1501 et seq.
As noted in the Report, rating materials filed with this agency are accessible
to the inspection of the public.
To further compliance with the federal Fair Credit Reporting Act, under
which states may bring enforcement actions, insurers are reminded that
the Act requires them to inform applicants and policyholders of any "adverse
action" stemming from the use of credit histories in the rating or underwriting
of insurance. As interpreted by the Federal Trade Commission, an adverse
action occurs where an applicant or policyholder is placed in any rating
tier other than the one that would produce the lowest premium.
Any questions regarding this bulletin should be directed to:
Office of Financial and Insurance Services
Division of Conduct Review and Securities
Product Review Unit
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720
Phone: (517) 373-4948
Toll Free: (877) 999-6442