In the Matter of Conforming Insurance Credit Scoring Practices With Insurance Code Requirements

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/ cis_ofis_credit_scoring_report_52885_7.pdf

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:

1. 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.
2. 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 credit score.
3. Companies using an insurance credit scoring discount must recalculate and then apply an insured’s insurance credit score at least once annually.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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