Issued and entered July 20, 1994 by David J. Dykhouse, Commissioner
On June 21, 1994, Commissioner of Insurance David J. Dykhouse
issued an order which allows insurers to use two additional
rating factors for auto insurance. The factors are: "years
accident free" and "years insured by the insurer."
Section 2111(15) of the Code provides a process whereby additional
rating factors can be used if approved by the Commissioner.
This section states:
(15) An insurer shall not utilize factors other than those
prescribed in this section in establishing classifications
for automobile insurance and home insurance until January
1, 1982. However, on and after January 1, 1982, an insurer
may utilize factors in addition to those specified in this
section if the commissioner finds, after a hearing held pursuant
to the administrative procedures act of 1969, Act No. 306
of the Public Acts as amended being section 24.201 to 24.328
of the Michigan Compiled Laws that the factors would encourage
innovation, would encourage insureds to minimize the risks
of loss from hazards insured against, and would be consistent
with the purposes of this chapter.
On September 16, 1992, State Farm Mutual Insurance Company
(State Farm) submitted a filing for approval by the Commissioner
in which it sought to implement changes to its merit rating
plan by means of a "forgiveness plan." The forgiveness
plan proposed to offer a discount to policyholders based on
two factors: "years accident free" and "years
insured with the insurer." The additional rating factors
submitted in that filing were not among those permissible in
Michigan under Section 2111(2). On March 5, 1993, the Commissioner
issued a notice of hearing setting the matter for hearing before
an administrative law judge.
In a hearing on August 2, 1993, State Farm introduced its
proposed "forgiveness plan." Under the plan, policyholders
who have good driving records would have merit rating plan surcharges
for a conviction or at-fault accident waived or reduced depending
upon the length of time insured with State Farm. The forgiveness
plan would also allow policyholders to leave the insurer and
return within three years with the same forgiveness provisions.
State Farm successfully presented data to show that a "forgiveness
plan" which uses "time insured by the insurer"
and "years accident free" to reduce a policyholder's
premium would be an innovation in Michigan, as contemplated
in section 2111(15), which would encourage insureds to minimize
the risks of loss from hazards insured against. The plan would
encourage safe driving by rewarding policyholders who have been
insured with the company over a long period and remained accident-free.
State Farm also provided policyholder data which demonstrated
that the loss experience of Michigan policyholders improves
as the length of time the policyholder remains with the company
The purpose of the Essential Insurance Act is to assure that
automobile coverage for Michigan insureds is provided in a manner
that encourages competition in the marketplace, and that rates
and rating systems are offered and available in a manner that
is not unfairly discriminatory. Also, the proposed new rating
factors, which were actuarially justified, introduce an additional
element of affordability into the insurance rates charged to
long term policyholders. Therefore, it has been determined that
the new rating factors would be consistent with the purposes
of Chapter 21 of the Code.
Any questions regarding this bulletin should be directed to:
Mr. Randy Parlor
MI Insurance Bureau
611 West Ottawa, 2nd Floor
Lansing, MI 48933