Michigan OFIR Says No to Michigan Basic Rate Hike

Office of Financial and Insurance Regulation (OFIR) Commissioner Ken Ross has issued an order disapproving a rate filing for Michigan Basic Property and Insurance Association (Michigan Basic), the insurer of last resort for homeowners’ insurance in Michigan. If approved, the rate filing would have raised Michigan Basic’s insurance rates by 18.9 percent.

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 this state. Michigan Basic has traditionally averaged the base rates of the top 10 insurer groups. However, according to the Order issued by Ross, rates calculated in this manner are no longer appropriate or lawful.

According to the Office, new rating factors, especially the use of insurance credit scoring, have greatly influenced the calculation of premiums. Base rates have been driven up so that insurers may 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.

“Michigan Basic’s rate setting process was broken—and this Order fixes it. As the insurer of last resort for Michigan homeowners, their rates must be fair, reasonable, equitable, and nondiscriminatory,” said Ross. “The rate-setting method they were using unnecessarily increased rates in a way not required by Michigan law.”

Ross ordered 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 any person 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%.