Credit Scores Used for Auto Insurance Rates


90191789Last week, the Insurance Institute of Michigan has succeeded in using customer credit scores as basis for auto insurance pricing. The Supreme Court of Michigan has ruled in favor of the insurance institute with a vote of 4-3.

The Office of Financial and Insurance Regulations has attempted to ban the use of the credit scores to determine auto insurance prices since the consequences may be too harsh for the Detroit residents. The office lost but the battle goes on. Michigan’s insurance consumer representative, Melvin Butch Hallowell, states that there is no relationship between a person’s credit score and driving. Insurance companies just wanted to have a high retention rate on their rich customers.

The ruling has an unfair verdict and the court has chosen the insurance companies over the consumers, Hallowell added. He said that the group will continue fighting back.

In 2004, Governor Jennifer Granholm and former Commissioner Linda Watters have proposed a state rule that prevents insurers from using insurance scoring for auto and home insurance. This is to reduce base rates to help people with financial troubles afford the insurance policies. In August 2008, the Court of Appeals in the same state overruled a decision from the lower court that the practice is allowed and must not be banned. The case was brought to the Supreme Court.

It was held that the commissioner’s promulgated laws were contrary to the insurance code. It was further held that she exceeded her authority because of her actions. The high court stated that the insurance scoring rates was not proven as unfair and discriminatory, thus the scoring should be still be allowed.

David Snyder, American Insurance Association vice president, states that the ruling will be raise concerns from the other states. Many states have applied the scores as their official rating and underwriting tool.

Michigan insurance rates are among the most expensive rates in the United States. Consumers claim that with the city’s high unemployment and poverty rates, it would be difficult for Detroit residents to make up with their insurance late payments. However, statistics indicate that there is an above-average risk of accidents and theft in Detroit making it obvious why premiums are very high in the city. With the high rates, at least a half of Detroit drivers do not avail of insurance coverage.

Insurance industry advocates, on the other hand, support the high court’s ruling stating that the scoring is a proven and acceptable estimator of risk. The Federal Trade Commission also agrees to this idea. Analysts say that disallowing the practice will increase rates for over two-thirds of drivers in Michigan who also have to burden part of the costs of high risk drivers. Insurance consumer groups are now hoping for the passage of the bill from Michigan House of Representatives that would officially ban the use of credit scores in insurance rating. The bill is now set before the Senate.