Battle Lines Drawn in Mich. Credit Scoring War

Credit-based insurance scoring–and the use of select credit information to help insurers establish auto and homeowners insurance premiums–is a growing practice in Michigan and across the nation, Mr. Fitzgerald said.

In the report, he calls for insurers that use credit-based insurance scores to inform policyholders annually of their scores and their effect on premiums. Other recommendations include requiring insurers that use a credit-based insurance scoring discount to recalculate it at least once a year or any time consumers successfully disputes their credit history.

The study also makes several legislative recommendations that range from prohibiting insurers from denying or canceling coverage based on credit-based scores, to notifying insureds when their credit histories are used or an adverse action has occurred.

However, the recommendation that NAMIC criticized as "the most disturbing" is the proposed requirement for insurers to submit their scoring formula to the state, and for the insurance department, in turn, to make them available to the public under Michigan's Freedom of Information Act.

"We are concerned about how companies are going to do this going forward," NAMIC's market regulation manager, David Reddick, told National Underwriter, adding that insurers would end up handing over their proprietary information to their competitors by following this proposal.

"Submitting scoring formulas is not a problem as long as regulators don't make it available to others. State regulators sometimes ask companies, 'Help us understand how you compile these formulas,' and companies agree to offer their formulas as long as regulators don't make them available to others," Mr. Reddick said.

But making these formulas accessible to the public is an entirely different matter, he argued.

"This is proprietary information–these are trade secrets," Mr. Reddick added. "If this administrative regulation goes forward, any company or the public would have access to them, and I don't think that's appropriate. It is likely that companies or vendors would sue Michigan's insurance department to prevent that from happening."

But Mr. Fitzgerald told National Underwriter that he doesn't think the proposed regulation–which could go into effect next July–would necessarily result in a legal battle. "My feeling is that this can be done without any litigation. If litigation were to occur, it would ultimately be pointless," he said.

He also referred to the state of Virginia, where insurance regulators have recently implemented a similar rule without facing any lawsuits. "I spoke with the Virginia insurance department and its commissioner, who told me that their regulation was implemented last September without any litigation," he said.

Insurance credit scores, Mr. Fitzgerald noted, are derived from complex formulas that use specific factors in consumers' credit histories–including bankruptcy, payment history, late payments, number of open accounts, and debt-to-credit ratio–to identify those who are likely to experience losses and file insurance claims.

These formulas are developed and maintained by credit scoring companies such as Fair, Isaac and Company Inc. in San Rafael, Calif., and Alpharetta, Ga.-based ChoicePoint Inc., or they may be created independently by insurers for their own policyholders.

But he explained that he has been hearing concerns from consumers and insurance agents who say insurers do not always notify the applicants or insureds whether their credit information will be used at all.

Furthermore, methods and formulas used for insurance credit scores are often considered confidential information, which makes it difficult for consumers to know what factors might cause good or bad insurance credit scores.