Opinion ID: 830914
Heading Depth: 4
Heading Rank: 2

Heading: insurance scoring may be used to establish a premium discount plan

Text: Chapter 21 of the Insurance Code, MCL 500.2110a, [20] permits insurers to establish and maintain a premium discount plan using factors in addition to those specifically enumerated in MCL 500.2111, provided that the plan is consistent with the purposes of this act and reflects reasonably anticipated reductions in losses or expenses and is uniformly applied to all the insurer's insureds. The evidence establishes that a premium discount plan using insurance scoring may reflect reasonably anticipated reductions in losses or expenses on the part of the insurer employing the plan. Commissioner Fitzgerald's 2002 report concluded that [t]here exists a correlation between a person's insurance credit score and the likelihood that a claim will be filed. A thorough review of material submitted by ChoicePoint and by a number of companies demonstrates that better scores are connected to fewer claims and thus lower expenses than are the scores of persons with weaker credit histories. [Fitzgerald Report, supra at 22.] In addition, several affidavits submitted by plaintiffs in the lower court record indicate a correlation between insurance scores and risk of loss. The affidavit of Morrall Claramunt, Executive Vice President and Secretary of plaintiff Frankenmuth Mutual Insurance Company, is representative. Claramunt stated in his affidavit that Frankenmuth's experience shows that there is a clear and direct correlation between insurance scores and risk. Among our insureds, people with higher insurance scores are better risks. Claramunt stated that 91 percent of Frankenmuth's homeowners insurance customers and 89 percent of its automobile insurance customers receive insurance score discounts on their premiums. He estimated that 68.1 percent of Frankenmuth's homeowners insurance customers and 43.5 percent of its automobile insurance customers would experience premium increases as a result of the OFIS rules' ban on insurance scoring. Claramunt stated that [t]hese premiums do not reflect a shift in corresponding risk of loss, but result in low-risk insureds subsidizing the insurance rates of high-risk insureds. Proposed Intervenors' Appendix to Brief in Support of Motion for Preliminary Injunction, March 29, 2005, included in Plaintiffs Appendix in Docket No. 137407, p. 116a. Affidavits of representatives of plaintiffs Farm Bureau Insurance Company, Progressive Michigan Insurance Company, Hastings Mutual Insurance Company, and Citizens Insurance Company of America similarly stated that those companies' experiences show a correlation between insurance scores and risk, and that the OFIS rules would result in lower-risk insureds subsidizing the rates of higher-risk insureds. See id. at 115a-152a. Evidence in the administrative record also supports the conclusion that there is a correlation between insurance scores and risk of loss. For example, according to a statement submitted by Allstate Insurance Company, the use of credit information is the most powerful predictor of losses to be developed in the past 30 years. Plaintiffs' Appendix in Docket No. 137400, p. 200b. A chart submitted by Allstate Insurance Company based on Michigan data demonstrates that insureds ... that have superior insurance scores have [a] corresponding superior loss cost experience, and that insureds with the lowest insurance scores have over 50% more claims paid than insureds with the highest insurance scores. Id. at 203b. In addition, Michigan data submitted by Farm Bureau Insurance of Michigan clearly suggests that, as a group, insureds with better insurance scores have better loss experience. Id. at 98b. The personal auto product manager for Progressive Michigan Insurance Company testified that [o]ur data shows that credit information is highly predictive of loss.... Id. at 105b. A comprehensive study conducted by EPIC Actuaries, LLC, concluded that the propensity for loss decreases as [the] insurance score increases. Id. at 59b. Finally, the Virginia Bureau of Insurance Study concluded that there is a concrete statistical correlation between insurance scores based on credit bureau data and the likelihood of an individual filing an insurance claim. Id. at 132b. [21] Defendant acknowledges that there is no dispute that [MCL 500.2110a] authorizes a premium discount plan based on factors that correlate to expected reductions in losses or expenses. For example, discounts may be based on maintaining fire extinguishers in the home because it is expected that the presence of fire extinguishers will be associated with reduced losses. Defendant's Brief in Docket No. 137400, p. 18. Defendant argues, however, that MCL 500.2110a does not permit a premium discount plan using insurance scoring because insurance scoring is not associated with anticipated reductions in overall losses. In other words, insurers do not expect their overall losses to change whether or not they have an insurance-scoring discount plan. Id. (emphasis deleted). In support of this conclusion, defendant states that insurers admitted at the public hearings and as part of the public comment process that doing away with insurance scoring would not change overall premiums. Id. Defendant quotes testimony from a spokesperson for State Farm Insurance Company: Insurance scoring does not change the total amount of premium collected by the insurance companies and a ban of its use will not change the total amount either. Id. at 19. From insurers' testimony that the OFIS rules banning insurance scoring would not result in an industry-wide reduction in premiums for insurance consumers, [22] defendant argues that insurers do not expect a reduction in overall losses to be associated with offering discounts for insurance scores. Defendant's argument misreads MCL 500.2110a, which says nothing about overall losses or expenses. MCL 500.2110a allows an insurer to establish a plan if the plan ... reflects reasonably anticipated reductions in losses or expenses. The plain meaning of this provision is that an insurer may establish a plan that it reasonably anticipates will reduce its own losses or expenses. It is unclear how an insurer would reasonably anticipate[ ] the effect of its premium discount plan on industry-wide losses or expenses. [23] Individual insurers do, of course, anticipate reductions in their own losses or expenses to result from the use of premium discount plans using insurance scoring. Specifically, they anticipate that insurance score discounts will enable them to attract and retain more low-risk customers by offering these customers lower rates. Plaintiffs have demonstrated a clear correlation between insurance scores and risk of loss, as already discussed. Therefore, they have established that a discount plan that enables an insurer to attract and retain more lower risk insureds reflects reasonably anticipated reductions in losses or expenses for that insurer. [24] Defendant's attempts to distinguish the use of insurance scores to establish a premium discount plan from the use of safety devices to establish such a plan fails to acknowledge that MCL 500.2111 already permits insurers to take into account [s]ecurity and safety devices, including smoke detectors and similar, related devices. MCL 500.2111(7)(b). Similarly, for automobile insurance, the statute permits [u]se of a safety belt to be used as a classification factor. MCL 500.2111 2(b)( iv ). The Legislature added MCL 500.2110a in 1997 to permit insurers to offer discounts on the basis of factors in addition to those permitted by MCL 500.2111. Defendant's effort to distinguish discounts for safety devices from discounts for higher insurance scores also fails to recognize that offering discounts for high insurance scores, like offering discounts for safety devices, allows insurers to attract insureds who present less risk (because they currently have safety devices or high insurance scores), and may provide future incentives for insureds to acquire safety devices or improve their insurance scores, and thus become statistically less risky customers. There is little difference between providing a discount for anti-lock brakes, for example, and providing a discount based on high insurance scores. [25] Discounts for anti-lock brakes are offered because they reduce the risk of loss, and discounts for high insurance scores are offered because they reduce the risk of loss. The more insureds there are with anti-lock brakes, the lower the risk of overall loss. Likewise, the more insureds there are with high insurance scores, the lower the risk of overall loss. Defendant also argues that a premium discount plan using insurance scoring is impermissible under MCL 500.2110a because it ignores one of the express purposes of the Insurance Code: to make insurance available and affordable for everyone. [26] Defendant contends that, unless a premium discount plan reduces overall losses and reduces premiums for some policyholders without a corresponding increase in premiums for others industry-wide, it is inconsistent with the Legislature's purpose of making insurance available and affordable for everyone. These assertions about the overarching purposes of the insurance code are unavailing because, as discussed above, MCL 500.2110a expressly permits  an insurer to establish  a plan  if the plan ... reflects reasonably anticipated reductions in losses or expenses. Moreover, in his 2002 report, Commissioner Fitzgerald concluded that insurance credit scoring contributes to the continued availability and affordability of automobile and homeowners insurance. Fitzgerald Report, supra at 17. There is also evidence in the administrative record that the majority of Michigan residents will see an increase in their insurance premiums if insurance scoring is prohibited. See Plaintiffs' Appendix in Docket No. 137400 at 98b, 106b, 169b, 194b, and 204b. If so, the prohibition of insurance scoring would obviously make insurance less affordable for many Michigan policyholders. The availability of insurance would be diminished because insurers would no longer be able to use the most powerful predictor of losses to determine rates. Id. at 200b. A number of insurers submitted testimony indicating that competition in Michigan would likely decrease because of the increased risks associated with a less sophisticated and precise classification structure, thereby decreasing the availability of insurance. Id. at 100b and 177b. For example, one insurer opined: If Michigan joins the distinct minority of states rejecting [insurance scoring] and depriving carriers of this highly predictive rating tool, [we] fear[] that many national carriers will decline to write in this state. Declining carrier presence will translate to fewer options for consumers and ultimately, higher rates. [ Id. at 177b.] The Federal Trade Commission (FTC) also explained in a report to Congress that using insurance scoring is of broad benefit: Insurance companies have a strong economic incentive to try to predict risk as accurately as possible. In a competitive market for insurance in which all firms have access to the same information about risk, competition for customers will force insurance companies to offer the lowest rates that cover the expected cost of each policy sold. If an insurance company is able to predict risk better than its competitors, it can identify consumers who currently are paying more than they should based on the risk they pose, and target those consumers by offering them a slightly lower price. Thus, developing and using better risk prediction methods is an important form of competition among insurance companies. [27] It seems unlikely that more available and more affordable insurance will result from decreased competition among insurers any more than such a market phenomenon would likely result in the increased availability or affordability of any other product or service. That is, it is the prohibition, not the allowance, of insurance scoring that will, in fact, make insurance both less available and less affordable to Michigan residents. It is noteworthy in this regard that after the Maryland legislature banned the use of insurance scoring for homeowners insurance, rates increased as much as 20 percent for homeowner policyholders, and at least one insurer indicated that about 75 percent of its homeowner policyholders incurred rate increases. [28] Even defendant does not appear to dispute that while banning insurance scoring would lower insurance premiums for insurance customers with lower credit scores, it would raise premiums for many others with higher insurance scores who are now receiving discounts on the basis of those scores. It is difficult to see how offering discounts to some insureds on the basis of good insurance scores is inconsistent with the Insurance Code's general purpose of availability and affordability of insurance for all consumers. Defendant has not shown that insurance scoring cannot be used to establish a premium discount plan that complies with MCL 500.2110a.