Consumers win as Court of Appeals rules against Michigan Basic's rate hike

LANSING, MI--In a unanimous decision this week, the Michigan Court of Appeals upheld a 2008 order by OFIR Commissioner Ken Ross that denied Michigan Basic Property Insurance Association an 18.9% rate hike. In reversing the lower court, a Court of Appeals panel found that the Commissioner properly applied Michigan law when he ruled that Michigan Basic's ratemaking was fundamentally flawed.

The court's decision will also impact OFIR's review of a 50.8% rate hike requested by Michigan Basic in December of 2009 for identical reasons.

Michigan law provides that Michigan Basic's rates for home insurance must be equal to the weighted average of the 10 voluntary market insurer groups with the largest premium volume in Michigan. Michigan Basic has traditionally averaged the "base rates" of the top 10 insurer groups, even though state law requires them to use average "rates" not "base rates." Recognizing that new rating factors used by the top 10 insurer groups, especially the use of insurance credit scoring have effectively undermined Michigan Basic's ratemaking structure, the Commissioner found that rates calculated in this manner are no longer appropriate or lawful.

Since 1996, base rates have been driven up by insurers so they can deeply discount the rates of persons with high insurance credit scores. Base rates, which once had some meaningful correlation with expected losses, have now become just a starting point in a methodology that arrives at expected losses.

"This is an important victory for Michigan consumers," Ross said. "Michigan Basic exists to provide access to affordable homeowners coverage--its aggressive efforts to make coverage more expensive than what Michigan law requires is simply unconscionable."

The court upheld Ross' order that requires Michigan Basic to calculate their home insurance rates based upon average premium charged by the top 10 insurer groups and not the base rates of the top 10 insurer groups.

In 1968, the Michigan Legislature established Michigan Basic after finding that home insurance is essential to purchase a home because lenders require it and it's essential to the responsible ownership of a home to prevent large losses. Michigan Basic was designed to provide home insurance for anyone who cannot afford or is denied home insurance in the regular or "voluntary" insurance market.

Under the Insurance Code, Michigan Basic's rates may not be unfairly discriminatory. A rate is unfairly discriminatory in relation to another rate for the same coverage if the differential between the rates is not reasonably justified by differences in losses, expenses, or both, or by differences in the uncertainty of loss, for the individuals or risks to which the rates apply.

In Michigan Basic's rate filing, because of its reliance on base rates, the differential between the rates is not reasonably justified by differences in losses. There is not a reasonable justification because there is not a reasonable classification system or support by actual and credible loss statistics. According to information from Michigan Basic, actual and credible loss statistics would support a reduction in rates by 6% rather than the proposed increase of 18.9%.

Copyright © 2010 State of Michigan

Published: Thu, Jun 17, 2010