Insurance Rates

Banning use of credit ratings won't end unfairness

January 18, 2005



Gov. Jennifer Granholm ought to get serious about controlling urban insurance rates. Sending a legislative panel a set of proposed rules to prohibit insurers from using credit scores, as she did last week, won't cut it.





As many or more people would lose from the change as would benefit. More to the point, it would do little or nothing to narrow the gross disparities between urban and suburban insurance rates, even if base rates go down.





Granholm and Financial and Insurance Services Commissioner Linda Watters believe the use of credit scores has driven up insurance rates. The proposed rule change would ban their use, and good credit discounts would go, in effect, toward lowering the base rates charged to all.





But about 60 percent of all policyholders, including those in urban areas like Detroit, get good credit discounts on auto insurance. Credit histories are considered along with driving records, locale, age and other factors. Eliminating credit histories would raise insurance rates for some urban policyholders and lower them for others. But overall, the premiums paid by Detroiters and others would change little, if at all.





The insurance industry has conducted studies showing that credit histories are a reliable indicator of risk. Critics don't see the connection, and even insurance companies can only speculate.





It's also true that credit reports are not always accurate, though banks, mortgage companies and even employers continue to use them. If, because of public skepticism, the Legislature wants to ban the insurance industry from using credit histories, fine, but it won't fix the bigger price problem.





Something must be done. Shelling out $4,000 a year or more for coverage is not unusual in Detroit. Low-income people simply can't afford these rates. That's why more than half the drivers in some neighborhoods drive uninsured -- and that's bad news for everyone.





Government can help. Legislators could rethink the unlimited medical coverage now required by state law. Another, more constructive measure would be to legally restrict how much insurance rates could vary from territory to territory. Politically, that's a tough sell, because policyholders in ZIP codes where claims are lower would probably pay more.





Calling for a ban on the use of credit histories is easy, but it won't get the job done. Granholm owes the state a better answer to this problem.