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HB 4127 would ban credit scoring from auto insurance pricing process

March 4, 2015 by Steven M. Gursten

Consumers with poor credit scores pay more for auto insurance – HB 4127 proposes to eliminate this discriminatory practice

Should credit-scoring be banned from the auto insurance pricing process in Michigan?  I feel strongly that it should. I’ve compared credit scoring to legalized discrimination, and believe it has no place in determining how much people should pay for No Fault auto insurance in this state.

“Credit-scoring” is when an auto insurer uses a consumer’s credit score or credit information to determine what price to charge the consumer for auto insurance.

Under existing Michigan law, credit-scoring is perfectly legal, even though the process has been stopped in many other states.

But Rep. Sherry Gay-Dagnogo (D-Detroit) thinks that should change. Rep. Gay-Dagnogo believes Michigan should join the growing number of states that have stopped using credit scoring in determining auto insurance prices: “A person’s credit score has absolutely nothing to do with how they drive, but their score can dramatically affect their auto insurance rate – this is simply unacceptable,” she said in a February 4 statement on the Michigan House Democrats website.

No doubt Rep. Dagnogo has seen the studies (see below) showing that credit-scoring causes consumers with poor credit to pay more for auto insurance than consumers with good credit, even when the driving records and accident claims history is otherwise the same.

Poor people just end up paying more. And that hurts people who live in cities like Detroit. In fact, the disproportionate impact of credit scoring has a huge impact on pricing and affordability of auto No Fault insurance in impoverished cities like Detroit and Flint, where a large number of the population is low income and falls within federal poverty guidelines.

On February 3, 2015, Rep. Gay-Dagnogo introduced House Bill 4127, which seeks to eliminate credit-scoring from the auto insurance pricing process in Michigan. Specifically, HB 4127 proposes the following:

“An insurer [including an auto insurer] shall not use credit information or an insurance score to determine premium installment payment options and availability.”

Not surprisingly, HB 4127 would leave intact the existing prohibition on using credit-scoring “to deny, cancel or nonrenew a personal insurance policy …” (MCL 500.2153)

Important terms of credit scoring

When talking about the Insurance Code’s rules on credit-scoring – and about the proposals to get rid of credit-scoring – it’s important to clarify what the important terminology means:

  • “Credit information” constitutes “any credit-related information derived from a credit report, found on a credit report itself, or provided on an application for personal insurance.” (MCL 500.2151(c))
  • Similarly, an “insurance score” is “a number or rating that is derived from an algorithm, computer application, model, or other process that is based in whole or in part on credit information for the purposes of predicting the future insurance loss exposure of an individual applicant or insured.” (MCL 500.2151(e))

Problems with credit scoring

Studies have shown that credit-scoring (i.e., an auto insurance company’s use of a person’s credit score to set prices) results in higher auto insurance prices for consumers with poor credit.

For example, a 2014 study showed that consumers with poor credit paid approximately 116% more with Allstate; 80% more with Farmers; 48% more with Progressive; and 45% more with State Farm. (See: “How do credit scores punish Detroit residents when paying for auto insurance?”)

Similarly, in a previous study by the Consumer Federation of America, it was revealed that auto insurance prices for State Farm and Allstate were on average 127% and 39% higher, respectively, for consumers with poor credit scores as compared to the prices charged to consumers with excellent credit scores. (See: “Why State Farm and Allstate will charge you more for auto insurance if you have a poor credit score.”)

Recent history of credit scoring

In 2010, the Michigan Supreme Court ruled in Insurance Institute of Michigan, et al., v. Commissioner, Michigan Office Of Financial and Insurance Services (#137400), that Michigan’s Insurance Code did not prohibit auto insurance companies’ use of credit scoring in their rate-setting process.

In 2013, the Insurance Code was amended to specifically allow insurers’ use of credit-scoring (“[C]redit information and an insurance score may be used to determine premium installment payment options and availability …”)(See MCL 500.2153)

However, certain requirements, including, but not limited to the following, must be met: Disclosure of credit-scoring; and, prohibition against using gender, ethnicity or religion in calculating a person’s insurance score.

It’s a hot topic

In just six short weeks of the 2015-16 legislative session, HB 4127 is already the second bill proposing to prohibit auto insurance companies from using credit-scoring to set prices for consumers.

The other bill is House Bill 4117 (introduced on January 29, 2015, by Rep. Alberta Tinsley-Talabi (D- Detroit) which proposes to abolish the practice of credit-scoring as “an unfair method of competition and an unfair or deceptive act or practice in the business of insurance.”

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