New Credit–Scoring Regs In Effect

    LANSING — Insurance companies that use credit scoring to discount homeowners and auto policies began following a new set of regulations last week.

    Effective July 1, every firm selling these policies to Michigan consumers must file the formula it uses to apply a discount.

    They will file the information with the Office of Financial and Insurance Services (OFIS).

    The new regulations, issued last February by past OFIS Commissioner Frank Fitzgerald, contained eight new code requirements for insurers. But Linda Watters, current OFIS commissioner, rescinded one of the eight in May.

    Watters removed the regulation requiring companies that credit score to recalculate and then apply it on an annual basis.

    “This revision empowers Michigan consumers and allows them to determine when, and if, credit re-scoring will impact their premium,” Watters said.

    “Now, with this new bulletin, re-scoring is required only at the request of the policyholder if they have a reason to believe they will see a discount — if they are not currently receiving one — or a higher discount.”

    Penny Davis, OFIS spokeswoman, told the Business Journal that consumers can request credit-scoring information once a year.

    “The companies came forward and said they wouldn’t re-score a book of business every year because it’s very costly. On top of that, there could be a negative effect for consumers when they’re getting re-scored every year and they’re suffering from a small discount or no discount at all when it comes to credit scoring,” said Davis.

    “The revision says that we’re not going to make you do that every year. But when a consumer requests it, you must do so,” she added.

    Among other requirements of the new code:

    • Insurance firms must file the specific credit classification factors used to calculate the insurance credit score.
    • Insurers that use a credit-score discount must file an annual actuarial certification that justifies the discount levels and the tiers offered.
    • Firms must annually certify discounts made to policyholders with no credit history.

    More information can be obtained at or by calling (877) 999-6442.

    Insurance company and trade association representatives, agents and consumers testified at public hearings held by OFIS before the credit-scoring code was finalized.

    Industry reps said credit scoring was a valuable tool because it helps predict the risk for loss and assists in rating those risks with more precision.

    They added that using credit scoring allowed them to give consumers better rates on auto and home policies and to offer more products to more people, thus increasing competition within the industry.

    Somewhat surprisingly, those testifying indicated that lower-income groups do not have lower scores than those from higher-income groups, at least not disproportionately lower.

    They also reported that Michigan has one of the most restrictive credit-scoring laws in the nation.

    Agents, however, said that they haven’t seen credit scoring serve as an accurate predictor of loss; that the method isn’t explained very well to them by their insurance firms; and some reported that it shouldn’t be used at all, because it leads to discriminating against people.

    As for consumers, they testified that they’re not told why they received the score they got and how they can raise it.

    So Watters encouraged insurers to tell policyholders why they have a low insurance credit score, and encouraged those consumers to work at improving their credit rating.

    “In the long run, consumers will also be able to achieve lower premiums by improving their credit management practices,” she said, “benefiting companies as well as policyholders, for lower premiums promote policyholder retention.”

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