The Michigan Chamber of Commerce believes governments should have the following objectives:

1. To focus on priorities by determining, through comprehensive analysis, the appropriate role of government and identifying opportunities where the private sector can assist in the achievement of those functions necessary to fulfill government responsibilities.
2. To provide the level and quality of services that citizens require in the most cost efficient manner possible.

The Michigan Chamber of Commerce supports public policies that promote fair competition and prevent unfair competition by government. Such policies are critical especially when governments seek to compete in traditional private sector markets. The Michigan Chamber believes that “Fair Play” legislation is now needed in Michigan, in part, to address the emergence of local units of government competing against telecommunications businesses. The Michigan Chamber supports the following “Fair Play” policy:

• A government-funded business activity must be subject to the same regulation as private sector competitors providing the same service(s). Fair Play promotes vigorous competition.
• A government-funded business activity enjoys substantial unfair advantages over private sector competitors through access to financial subsidies such as tax exemptions (including income, property, gross receipts and excise taxes), and tax exempt bond financing. Government funded business activities must be subject to the same tax rules and regulations as private sector competitors.
• A government must not use its sovereign powers, such as control of rights-of-ways or powers of condemnation, to advantage its business activities over private sector competitors. In addition, a government must not delegate its sovereign powers to a competitive non-government funded business activity.
• A government-funded business activity should have no greater ability to allocate costs among other services/departments/agencies than private sector providers.
• Government-funded business activity must impute to its cost of providing service the cost of taxes and fees consistent with the obligations of private competitors. A government-funded business activity should also impute to its cost of providing services a cost of capital consistent with the cost of capital available to private firms.
• One competitor in a business market should not be able to regulate another competitor. In other words, a government-funded business activity should not be regulated by the same government entity that funds it.

The Michigan Chamber of Commerce supports public energy policies that improve fuel economy standards through traditional market forces and consumer demand. The Chamber supports such measures as federal income tax credits and other consumer incentives toward the purchase of vehicles with advanced energy efficient technologies.

The Chamber opposes legislation that directly increases the Corporate Average Fuel Economy (CAFE) standards. We believe that as consumers become more aware of and interested in efficient fuel economy, automakers will respond with the appropriate redesign to their products.

Background

First enacted by Congress in 1975 after the Arab oil embargo, the Corporate Average Fuel Economy (CAFE) program mandates all auto manufacturers selling in the United States to meet certain fuel economy levels. The intended purpose was reduce reliance on foreign oil supplies and to lessen air pollution levels. Today, each manufacturer’s fleet must average 27.5 mpg for cars and 20.7 mpg for light trucks (pickups, minivans and sport utility vehicles). Unfortunately, CAFE failed to meet its objectives and had several unanticipated side effects:

In 1974 the import share of U.S. oil consumption was 35 percent. Since then, new car fuel economy has doubled, but oil imports have risen about 50 percent nevertheless. Since CAFE brings the cost of driving down, it allows for more miles to be driven for the same cost to the consumer. As more miles are driven, the reductions in the consumption of gasoline from higher fuel economy are eroded. Over the life of the CAFE program, consumers have reacted to higher fuel economy by driving more.

The Clean Air Act regulates tailpipe emissions on a “grams per mile” basis. All vehicles, regardless of the amount of gasoline they use to drive a mile, cannot emit more than established levels permitted by the Act. Raising CAFÉ standards does not directly improve air quality because CAFÉ standards affect fuel economy, not emissions levels.

Increasing CAFE standards puts auto manufacturers at odds with consumers. To meet the standards, automakers must divert resources from the development of promising advanced fuel efficiency technology to the production of lower performing smaller and lighter cars. However, consumers today are more interested in vehicle size and utility than they are in fuel economy levels. The CAFÉ standard is also a sales-weighted fleet average, meaning that meeting the standard depends on what the consumer purchases. If not enough customers purchase the higher fuel economy models (smaller, lighter cars), then the fleet average for that manufacturer may drop below the CAFE standard exposing the manufacturer to fines or costly product restrictions or changes.

On April 1, 1994 the National Highway Traffic Safety Administration (NHTSA) issued a proposed standard, which suggested an increase of up to 40% in the light truck CAFE standard. As a reaction to these proposed increases in light truck CAFE standards, Congress prohibited the use of funds to increase the passenger car or light truck CAFE standards in the FY 96 DOT appropriations bill. The FY 97, FY 98, FY 99, FY 00 and FY 01 DOT appropriation bills contained identical provisions continuing the freeze.

Rising gas prices in recent months have motivated policy makers to discuss our dependence on foreign oil and vulnerability to future fluctuations in prices. Changes being deliberated would require cars, vans, pick-ups and sport utility vehicles to meet much higher mile per gallon fuel requirements.

Consequently, higher CAFE standards would adversely affect vehicle safety, consumer choice and the development of advanced technology solutions. The Michigan Chamber feels there are better ways to approach this important national goal that balance consumer choice and safety with the need to decrease American consumption of imported oil. In addition, technological advances that were not even conceived when CAFE was enacted present an opportunity to shift to a new and more effective direction in automotive fuel economy.

PROS AND CONS RELATING TO INCREASING CAFÉ STANDARDS

Supporters of CAFÉ Comments:

• Conserves a depletable, irreplaceable natural resource
• Reduces the U.S. trade deficit
• Protects the U.S. economy from national security threat posed by reliance on foreign oil supplies
• Reduces greenhouse gas emissions
• Reduces pollution
• Limits vehicle performance and acceleration, thereby making highways safer
• Saves consumers money
• Stimulates technological innovation and more frequent product updates
• Necessary to force the domestic automakers to make products that are competitive with imported vehicles.
• CAFÉ makes U.S. produce small cars in U.S.
• Creates lower, subsidized prices for poorer, small car buyers at the expense of richer, large car buyers

Opponents of CAFÉ Comments:

• Increase in CAFÉ would have a major adverse impact on the employees, operations and overall production at automotive plants and the domestic auto industry.
• CAFÉ increase would result in less production of some of the most popular vehicles, including SUVs and pickup trucks. (Pickup trucks are an integral part of jobs held by farmers, suppliers, construction workers, etc.
• CAFÉ standards will adversely affect vehicle safety, customer choice and the development of advanced technology solutions.
• To meet CAFÉ standards, automakers must reduce vehicle mass, compromising vehicle safety.
• The National Highway Traffic Safety Administration, as well as independent research groups and think tanks, have concluded CAFÉ has increased the fatality rate on our highways.
• CAFÉ disproportionately penalizes domestic automakers, which make a full range of vehicles and will have to restrict the sale of larger vehicles to help their fleet average, allowing foreign automakers to increase their competitive foothold.
• More breakthroughs in fuel efficiency will come from development of advance technologies– on which the auto industry spends nearly $18 billion each year. Substantial increases in fuel economy will come from introducing these market-tested advanced technologies into the cars and trucks consumers want to buy.
• Efforts to meet increased CAFÉ standards directs financial and technical resources away from advanced technology efforts.
• Increases in CAFÉ standards ignore market forces and will have a significant adverse effect on our economy.

The Michigan Chamber reaffirms its position to support open, competitive markets.  Government should seek to create or maintain an economic environment that enhances consumer well-being and promotes a dynamic business climate.  It is an accepted economic principle that the widest range of services and products are most likely to be provided at the lowest price when competition between businesses is decided in the marketplace instead of the political arena.  Government’s primary regulatory role should focus on adequate safeguards for consumers. 

In the context of the current debate over the use of credit scoring for insurance purposes, the Michigan Chamber supports legislative efforts to implement adequate safeguards for insurance policyholders while preserving the use of credit for Michigan insurers.  The Michigan Chamber is opposed to efforts by the Granholm administration to ban the use of credit scoring through the administrative rules process.  The Chamber opposes this action because it is a deliberate attempt to circumvent the legislative process and ignores the fact that credit scoring is fair and legal for all segments of the financial services industry under state and federal laws.

Background

During the debate in 1994 over whether banks should be prohibited from offering insurance, the Michigan Chamber’s Board of Directors adopted a policy in support of open competition and free enterprise within the financial services industry.  The Official Policy Relating to Regulation, Competition and Barriers to Entry has served the Michigan Chamber well over the years and allowed Chamber staff to remain consistent in its messaging.

A bill was introduced in April of 2004 in the Michigan House of Representatives to limit how and when insurers may establish and maintain premium discount plans based upon an applicant or insured’s credit history or lack thereof.  Four days after introduction, the Insurance Commissioner — at the urging of Governor Granholm — proposed an administrative rule to ban the use of credit information for insurance purposes. 

Due the potentially widespread implications for all sectors of the financial services industry, the Michigan Chamber became involved in this issue.  Using the Official Policy Relating to Regulation, Competition and Barriers to Entry, the Chamber Staff testified in opposition to the proposed rule.  (See attached testimony.) 

Given the controversy surrounding the use of credit for insurance purposes, the impasse between the Legislature and the Granholm administration, and the potential for the Chamber to be involved in litigation challenging the legality of the proposed rule, Chamber Staff felt it was both timely and appropriate to bring the Board up-to-date on this issue and reaffirm support for the principles incorporated in the Official Policy Relating to Regulation, Competition and Barriers to Entry.

MICHIGAN CHAMBER OF COMMERCE
Testimony to the Office of Financial and Insurance Services on the Proposed Rule to Ban the Use of Insurance Scoring
July 19, 2004

Presented by
Wendy Hofmeyer, Director of Health Policy and Human Resources

Good afternoon Commissioner Watters.  My name is Wendy Hofmeyer and I am the Director of Health Policy and Human Resources for the Michigan Chamber of Commerce.  I am pleased to have the opportunity to discuss the proposed rule to ban the use of credit scoring, or “insurance scoring”.

The Michigan Chamber of Commerce represents a broad cross-section of businesses throughout the state. Over 380 of our nearly 6,500 members include insurers, financial institutions, real estate companies and other creditors.

After a thorough review of federal and state laws, the proposed rules, and the pending legislation introduced in the Michigan House of Representatives to regulate the use of insurance scoring, we have come to the conclusion that we must oppose the Office of Financial and Insurance Services’ (OFIS) proposed rule 2004-022 LG.

The proposed rule would ban the use of insurance scoring in setting automobile and home insurance rates and require insurers to make a “base rate” adjustment when they discontinue their insurance scoring discount plans.  The Michigan Chamber believes this rule, if adopted, would set a dangerous precedent by delivering into the hands of a regulator the power to circumvent the legislative process.  Further, we believe this politically charged proposal ignores state and federal laws authorizing the use of credit information, the separation of powers provisions found in the state constitution, and questions over whether a ban on insurance scoring will actually save Michigan policyholders money. 

The debate over the use of credit is not new nor is it unique to the insurance industry.  In fact, the federal Fair Credit Reporting Act (15 U.S.C. § 1681b), passed over 30 years ago and renewed in 2003, expressly authorizes consumer reporting agencies to furnish consumer reports to persons which they have reason to believe “[intend] to use the information in connection with the underwriting of insurance involving the consumer”.  The law also authorizes consumer reporting agencies to furnish consumer reports to others who have a legitimate business need for the information, such as creditors, financial institutions, employers, landlords and others. 

In addition to federal law, Michigan’s Essential Insurance Act (PA 145 of 1979) specifically authorizes the use of risk classifications, such as credit information, for insurance purposes—but constrains the use of this information more tightly than any other state.  Specifically, the EIA prohibits insurers from using risk classifications to refuse to write, cancel or nonrenew a policy because it guarantees all eligible persons access to automobile and homeowners’ insurance. This is not the case in other states.  Michigan is unique in that insurers may only use credit and other risk factors to offer premium discount plans in an effort to classify those individuals who are less likely to experience a loss and/or file an insurance claim.  For automobile and homeowners coverage, insurers offer discounts based upon insurance scoring by authority of Section 2110a of the Insurance Code of 1956 (MCL 500.2110a), which provides:

If uniformly applied to all its insureds, an insurer may establish and maintain a premium discount plan utilizing factors in addition to those permitted by section 2111 for insurance if the plan is consistent with the purposes of this act and reflects reasonably anticipated reductions in losses or expenses....

The Michigan Chamber recognizes that many policyholders question the correlation between insurance scores and the likelihood of loss.  We believe these questions are only natural but that we cannot ignore the overwhelming amount of evidence and actuarial data submitted by insurance regulators, universities, independent auditors and insurance companies to support the fact that certain aspects of an individual’s credit history are a proven, strong indicator of how likely that person is to file a future claim. 

If adopted, Michigan would be the first and only state to ban the use of credit information for a sector of the financial services industry by administrative rule.  To date, 19 states have enacted laws based upon the National Conference of Insurance Legislators’ model act regulating the use of credit by the insurance industry. In context, Maryland is the only state that has legislatively banned the use of credit information in its homeowners’ market.   Their experience has not been positive.  Since enactment, rates reportedly have been increased by a higher margin than they would have if a ban had not been in effect and the writing of new business has been curtailed. We do not wish to see this scenario repeated in Michigan. 

The Michigan Chamber believes the Commissioner’s actions and proposed rule 2004-022 LG pose a serious threat to all segments of the financial services industry that rely on credit for risk-related purposes.   We believe this outright circumvention of the legislative process sets a bad precedent because it ignores the plain language of Article 3, Section 2 of the Michigan Constitution which reads:  “The powers of government are divided into three branches; legislative, executive and judicial.  No person exercising powers of one branch shall exercise powers properly belonging to another branch except as expressly provided in this constitution.”

The Michigan Chamber is opposed to proposed rule 2004-022 LG because it is an attempt by the regulator to usurp power from the legislature and reduce legislative oversight of the insurance industry.  We are also very concerned that the proposed rule will later be used to argue that the Commissioner should be given the authority to limit the use of credit for other sectors of the financial services industry, such as banks, credit unions, landlords, retailers and employers. 

Finally, although we recognize that the public is skeptical about the use of credit for insurance purposes, we are very concerned that this rule will do little to address the rising cost of insurance in Michigan, as the Governor and Commissioner have promised it will.  We recognize that the proposed rule requires insurers to make an adjustment to their “base rates” but would like to remind you that a “base rate” reduction does not automatically translate to a reduction in the premiums charged to policyholders.  In the end, we estimate that under this cost-shifting ploy up to 2/3 of all policyholders could see an actual increase in their insurance premiums because they would lose their “good credit” discounts.

In summary, the Michigan Chamber believes some regulation of the use of credit information for insurance purposes may be appropriate.  However, we believe OFIS has over-stepped its constitutional authority by proposing a ban by administrative rule.  For this reason, we respectfully request that OFIS abandon proposed rule 2004-022 LG.  

Thank you for your consideration of our views. I would be happy to take any questions.