Legislature(2001 - 2002)
04/18/2002 01:35 PM Senate L&C
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SB 320-MOTOR VEHICLE INSURANCE & REPAIRS
CHAIRMAN BEN STEVENS called the Senate Labor & Commerce Committee
meeting to order at 1:35 pm and announced SB 320 to be up for
consideration.
CHAIRMAN TORGERSON moved to adopt the proposed committee
substitute, LS1462\B. There were no objections and it was so
ordered.
MR. KURT OLSON, Staff to Senator Torgerson, explained that the CS
differs significantly from the previous version of this bill,
which was one paragraph long and prohibited the use of credit
scoring for personal insurance. The CS allows it under certain
circumstances. Section 1 deals primarily with the restriction on
the use of credit history and credit scoring and outlines the
duties and the responsibilities of the insurers who are going to
be using it. Section 2 deals with filings the insurance companies
have to make to the Division of Insurance. Probably the most
important part of the section is the fact that it would require
the insurance companies to give the scoring model to the Division
of Insurance. This is what actually makes the credit rating
program work and up until this time, they haven't had access to
the model. This will allow the Division to determine whether or
not there's anything that might have an adverse impact on the
consumers in Alaska that are buying insurance. Section 3 is a
sunset provision and takes effect July 2006. The final section is
the effective date, January 1, 2003.
MR. DAVID MCCARTER, consumer from Fairbanks, said he was
testifying due to credit scoring and because there is no
recourse. He said that he thought his insurance rates would go
down when he hadn't had any tickets or accidents. But with
Atlanta Casualty, his rate on a 2001 Buick Regal - for him and
his wife - for a 2001 Ford F250 pickup was $2,400 for
comprehensive, collision and liability. Now it's going to go up
to $4,400 because of his credit score, which according to his
mortgage company is 620, 650 and 680, with a combined score of
about 640. This is bad economics, because it's going to make him
not want to buy any more vehicles. Furthermore the new bill says
that the guy just needs to get oral permission, so he could lie.
There's no proof. "This bill has no teeth whatsoever…"
MR. MCCARTER said they are not protecting the consumer and that
credit fraud is a number one crime in the U.S. right now.
SENATOR DAVIS said he was acting like they were already passing
this bill out of committee and all they are doing is having a
hearing to debate the issue.
MR. DAVID VALDEZ, Fairbanks resident, said this bill would have
an adverse impact on the working poor, minorities and people from
the villages who can't establish credit. He said they should
change Article 1 to an Act that allows rate discrimination based
on credit ratings or credit scoring.
CHAIRMAN STEVENS encouraged the public to stay on line to hear
what transpires in committee before they make a judgment on the
final product.
MR. STEVE CONN, Executive Director, Alaska Public Interest
Research Group, agreed with the previous testifier. He was
shocked to see the committee substitute.
It is absolutely worthless in terms of the original
motivation of Senator Cowdery and it's in fact anti
consumer. All of the so-called rights in this bill are
already guaranteed by federal law. The way this bill
simply deals with the subject is that it mixes credit
scoring and credit history and, of course, they're not
the same. Section 1 still gives the insurance company,
upon the refusal of the consumer, the right to allow it
to use credit scoring, but the absolute right to reject
that consumer as a customer. This the problem we
confronted with the original bill and the reason for
the ban was several-fold. The credit histories are
known throughout the country, which are the material
used by these mysterious credit scores to be in error,
in bad error and if you correct them, they leave the
errors in place. This does nothing for people like
Senator Cowdery's daughter who had a unique and serious
event that effected her credit history or victims of
identity theft or emergency situations. This does
nothing. This bill effectively says that the insurance
companies can do what they want…
MR. MARK NIEHAUS, Progressive Insurance, said he would not repeat
his previous testimony. He thought the CS was far superior to the
original bill and that about two-thirds of their policy holders
in Alaska, about 15,000, are getting significantly lower rates
due to the use of credit as part of the rating formula they are
using today. If that ability were to go away, those people would
get big rate increases and they are trying to prevent that from
happening.
Section 1, paragraph (b) requires an adverse notice action to be
sent, which is fine, but the second sentence says the notice must
state the significant factors of credit history that resulted in
the adverse action and provide information on how credit scores
can be improved. Mr. Niehaus said his company already does that
on request, but that the cost of the reports is significant and
most don't want it. Their adverse action notice says that it is
free of charge and provides an 800 number to call to get it.
MR. NIEHAUS suggested modifying the second sentence to something
like the notice must state "that consumers may obtain upon
request a free report containing the significant factors of the
credit history" as opposed to mandating that it be give to every
consumer.
His second recommendation concerned page 4, section 2, (c)(1),
the absence of credit. His concern was an increase in no-hits, if
they were automatically giving them a better rate. As insurers,
they have no way of determining accuracy or completeness of the
information.
MR. NIEHAUS said, "The requirement that they can't use the
absence of credit history to calculate a rate doesn't make any
sense in a world where we're using credit as part of the rate."
He could not implement that if he wanted to and he thought the
committee might be saying that they want no-hits to be treated as
having average credit or - he just wasn't sure. He said that no-
hits are a very small percentage, less than 5%, of their
business. They have significant data showing that they have
dramatically higher loss costs. He suggested using an approach
that was used in Washington to simply require that the filing
justify actuarially the handling of the charges associated with
credit no-hits. He also suggested using the effective date of
January 1, 2003 to give them time for implementation.
SENATOR DAVIS asked if they serve Washington and what do they do
there.
MR. NIEHAUS replied that they serve Washington and are currently
using credit. The bill he mentioned has passed, but it hadn't
taken effect yet. It allows insurers to continue to use credit;
it just has to be filed with the Department of Insurance and
approved and justified actuarially. There are some other
limitations on information within the credit reports that can be
used.
SENATOR DAVIS asked if they are doing business in any state where
they are not allowed to use credit.
MR. NIEHAUS replied yes - in Hawaii and California.
SENATOR DAVIS asked if they are still doing business in those
states.
MR. NIEHAUS replied yes and that it's not a statutory prohibition
in California, but it's a regulatory requirement.
However, there are a lot of people that are paying
rates that are a lot higher than they would have
otherwise been if they would have been able to use
credit…In the state of Alaska we have been using credit
for a number of years now and to take it away…It's one
thing if you've never had it, but to take it away now,
the only way we could accomplish that - the result
would be about two-thirds of the people who get a rate
increase. There's no way around that.
SENATOR DAVIS asked if they had ever had to remove credit as a
factor in rates.
MR. NIEHAUS replied no.
SENATOR LEMAN said that section 2 adds a new section on how to
rate and it says an insurer may not use a methodology that
incorporates gender, race, nationality or religion. He understood
that for automobile coverage it's common to use gender.
MR. NIEHAUS replied that he would be happy to have that deleted.
"They don't want us to treat the credit of a woman any
differently from that of a man. A credit score is a credit
score…We already use gender ratings anyway…"
CHAIRMAN STEVENS said the language came from Washington State
that prohibits certain types of credit history from being used.
MR. KURT OLSON said the intent was to specifically outline that
credit scoring couldn't be factored in with race and gender.
CHAIRMAN STEVENS said that the majority of the issues that are
brought up now are related to the use of the credit history, not
to the use of how the credit scoring is used in the rate making.
"This was an attempt to say if you're going to use the credit
history, you've got to treat all credit histories exactly the
same."
MR. OLSON indicated that was right.
CHAIRMAN STEVENS asked how many years they were using credit
scoring in Alaska.
2:05 pm
MR. NIEHAUS replied approximately four years.
CHAIRMAN STEVENS asked if they had approval from the Division of
Investments.
MR. NIEHAUS replied yes.
CHAIRMAN STEVENS asked if any other state had used credit scoring
and then removed the ability to use it.
MR. NIEHAUS replied none that he was aware of.
CHAIRMAN STEVENS asked him to explain how two-thirds of Alaskan
customers' rates would be affected.
MR. NIEHAUS replied that almost all rates would be affected.
About two-thirds of their customers would see higher rates,
hypothetically, if they were required to completely remove credit
from the underwriting process.
CHAIRMAN STEVENS asked, "Why would everybody's rates go up if you
eliminated this?"
MR. NIEHAUS replied, "It's a zero sum game. The total amount of
premium we would collect would be unchanged."
He said that about 30% of folks would get rate decreases and
about two-thirds would get rate increases. "The sum of all those
changes would be zero."
MR. JOHN FURUNESS, AARP Capitol City Task Force, said he is also
the legislative representative for the local chapter of National
Association of Retired Federal Employees (NARFE). He hadn't had a
chance to study the revised bill, but they just don't think that
credit ratings should be used to determine auto insurance rates.
MS. SARAH MCNAIR GROVE, Division of Insurance, said:
We support the legislature's efforts to place
parameters on the use of credit information in
insurance rating and underwriting. Now that the
discussion has turned from a prohibition of the use of
credit information to identifying what the appropriate
parameters should be, we would like to offer just a
couple of comments on the committee substitute.
Some of the issues that the Division hears from
consumers relate to credit problems that seem to be
beyond the control of the consumer. As they have
identified, it really is the use of credit history that
seems to be an issue - not complaints about how it's
actually used in the rate-making process, but should it
be used at all. For example, some of the issues we hear
about are medical bills that are caused by a serious
injury or sickness that can result in poor credit
through no fault of the consumer, themselves. Some of
the other issues we hear about are denying coverage
because of the number of hits on your credit report.
Part of the insurance industry and the increased use of
credit information has created the number of hits on
the reports, so it seems like there needs to be some
way to alleviate that effect when it is being used.
Including some of these kinds of prohibitions on the
pieces of information that can be used on a credit
report, I think, would go a long way towards addressing
some of the consumer issues we have heard about.
I just have one other suggestion on the bill, itself,
and that is that the definition of 'adverse action,'
while it's fine, is defined by the federal Fair Credit
Reporting Act and it might be good to put specifically
what we mean in Alaska law rather than relying on
federal legislation.
SENATOR AUSTERMAN asked if she heard the Progressive Insurance
position saying if credit rating is eliminated altogether, that
the rates would change and, if she would have any say on how
those rate changes would take place.
MS. GROVE replied:
Every rate filing or every change in rates must be
filed with the Division of Insurance and we look at
them and review them to be sure they comply with Alaska
law. So a change could not be made without our
approval.
SENATOR AUSTERMAN asked if she anticipated approving the rate
change they are suggesting taking place if there is no credit
rating.
MS. GROVE replied that she would have to look at the reasons and
support for that and couldn't say yes or no at this point.
MR. MICHAEL HARROLD, Northwest Manager, National Association of
Independent Insurers, said:
I think this is a workable and good compromise bill,
but certainly contains aspects that I would prefer not
be in law. We truly believe that the way our companies
have used credit is to help better price their product
and that they use it to write more business, not less.
They have been giving discounts to consumers who are
less of a risk than other consumers. So I certainly
would not support some of the restrictions that are in
the bill, but I would simply point out again that it's
a compromise that I think we could live with and that
it does simply more than require some type of notice or
disclosure to be given. The fact that it says an
insurer cannot deny personal insurance in whole or in
part on the absence of credit history. It does take
into account the no-hits that Mr. Niehaus was speaking
about. It takes them into account both in regard to
underwriting as well as coming up with a rate.
MR. HARROLD said he disagreed with their treatment of no-hits,
because they have been actuarially proven to be the most
expensive to insure. He passed the committee a chart to
illustrate that fact. He added that it included "thin files"
which is a file with little credit. People who have the worst
credit scores have losses that are well over the amount of a one
to one ratio. It's even more so for the no-hits or thin files.
That's why insurers use that as a tool.
CHAIRMAN STEVENS asked if there were percentages that he had from
his pool of insurers and what percentage had good credit and what
percent had average and high risk credit.
MR. HARROLD replied that insurers could probably have that
information. Individual companies compete in the market place by
choosing where they are going to have their break points.
CHAIRMAN STEVENS asked what is the percentage of consumers who
are going to be affected by this. How many consumers have a good
or average credit rating.
MR. HARROLD replied that he hears from his companies that the
overwhelming majority of consumers have good to excellent credit.
That's why they have testimony saying the majority of them would
have increased rates if they couldn't use credit for a rating
tool.
CHAIRMAN STEVENS asked if this tool was removed and every company
had to file for rate changes, how many of their companies would
participate in that. "Would anyone pull out of the market?"
MR. HARROLD replied that it's possible. "Alaska has not been a
lucrative market from the loss perspective."
CHAIRMAN STEVENS asked how many would leave if the Division of
Insurance didn't approve their rate changes.
MR. HARROLD replied, "Perhaps more would leave or you would have
consumers that are simply paying rates that aren't fair."
CHAIRMAN STEVENS asked if he had 700 companies writing insurance
in this state, what would be the effect on those consumers who
are still looking for insurance.
MR. HARROLD replied, "The less companies you have, the less
availability you have, but all 600 of those companies do not
write in Alaska."
SENATOR AUSTERMAN said one of the concerns he has with using
credit is that, for example, it took his daughter six months to
get something off of her credit rating that she didn't know
anything about. It took him, personally, over one year when he
lost his credit card and had a bill for $3,800, which came back
three years later when it wasn't paid. It took him a year after
that to get rid of it with the credit agencies. He was concerned
about that type of example and how many people don't understand
the whole process of credit rating for insurance and the effects
it has on their rates.
MR. HARROLD responded that specifically there is a provision in
this bill that states if there is incorrect or disputed
information, they could submit that and the insurer has to go
back to the inception of the policy period and rewrite or
reunderwrite and recalculate the premium.
So, something positive could come out of getting it
checked. A more general comment would be that the use
of credit information is just permeating society and it
isn't just insurance. I would say the best job that any
consumer advocate can do is to encourage people to look
at their credit information. If someone has an adverse
action taken against them, underneath this bill they
would be able to get their consumer report free under
the Fair Credit Reporting Act, but I think everybody,
whether you're looking for auto insurance or
homeowner's insurance or you're looking at a mortgage
or buying a car, it simply permeates our life here at
the beginning of the 21 Century and I can't imagine
that we would be willing to stop using the information,
because it has so many other benefits.
SENATOR AUSTERMAN asked for the year that it took him to get the
error off his bill, would they have given him insurance until it
was corrected.
MR. HARROLD replied the way the bill reads, he didn't think it
would go back through the years, but it says to the inception of
the current policy term. He also thought that the Fair Credit
Reporting Act also requires that if somebody says that they have
incorrect data in their report, that they have 30 days to
determine whether or not that is correct. If the credit bureau
has not made that determination within 30 days, then it goes to
the consumer's advantage.
MR. MICHAEL LESSMEIER, State Farm Insurance Co., said they have
approximately 24% of the automobile insurance premium and
approximately 34 - 35% of the homeowners insurance premium
written in Alaska. He said that they have found from all the
testimony up to today that credit is an accurate predictor of
loss. The representative from the Division of Insurance testified
that the correlation between this tool and risk of loss was high.
It has also proven to be a high correlation in their experience.
This is a tool just like many other tools used for
predicting future loss. The second point that I would
make to the committee is that the use of credit in
insurance has not presented a significant problem in
Alaska. I don't know if this testimony was presented to
your committee, but it certainly was presented to the
House Labor and Commerce Committee. The representative
from the Division of Insurance was asked about
complaints about the use of this tool. I recall that
her testimony was that there may have been a few and
she was then asked if there had been any complaints
that had been found to be valid about the use of this
tool and I think she said that there was still an
instance under investigation.
TAPE 02-22, SIDE B
MR. LESSMEIER didn't think it was a significant problem in the
State of Alaska. His third point was that this is a tool that is
used differently by different insurers.
I think it's really important for you to understand
that we in Alaska have a marketplace that is a
competitive marketplace. It is also important that you
understand that as it is used differently by different
insurers and that how it's being used in rating today
requires the approval of the Division of Insurance. To
my knowledge there are very few companies that are
using credit today for rating purposes. State Farm does
not use credit for rating purposes, but if it is used
for rating purposes, it must first be approved by the
Division of Insurance that has the responsibility of
insuring that the use of this tool does not result in a
rate that is excessive. I think that is important.
A final point that I would make is that there are many
tools that already exist in the law that would allow
the Division of Insurance to address issues of credit.
The first one of course is to the extent that it's
being used in rating, that use has already been
approved by the Division of Insurance. To the extent
that it's being used in underwriting, if it results in
unfair discrimination, the Division of Insurance
already has the ability to investigate that to take
significant action through the amendments to the Unfair
Trade Practices Act that this legislature passed two
years ago, Senator Donley's amendment. So, there are
significant tools in the law right now to prevent the
misuse of this tool.
MR. LESSMEIER thought the issue before them was if they could use
this tool to identify those that present higher risk of future
loss and shouldn't they be able to do that.
Isn't that better for the consumer as a whole? Isn't it
better for people to be able to pay an insurance
premium that is more in accord with the risk of loss
that they present? Isn't that better policy? We say it
is…
CHAIRMAN STEVENS asked him what other tools he uses in basing a
customer's rates.
MR. LESSMEIER replied that as he understands it, the rates are
based on frequency and severity of loss. When someone comes in to
State Farm, they are asked about their loss experience, accidents
and tickets for automobiles. Their underwriting tool looks at
loss history, which has an aspect of credit. They do not use it
to determine what rate they will pay, but who to accept and where
to place them.
CHAIRMAN STEVENS asked how they handle a good ratepayer who
hasn't had any losses and all of a sudden has bad credit for some
reason that doesn't have to do with automobiles.
MR. LESSMEIER replied that they don't look at the data other than
at the very beginning when they determine whether to write or not
write.
CHAIRMAN STEVENS asked if they have ever gone back to rerate and
if he knew of anyone who did.
MR. LESSMEIER replied that they had not used this tool in Alaska
to do that.
CHAIRMAN STEVENS asked if he knew of any companies who write in
Alaska that do a credit history with a renewal.
MR. LESSMEIER replied that he didn't know about other companies,
but his didn't.
CHAIRMAN STEVENS asked if Mr. Harrold knew of any companies that
did that in Alaska.
MR. HARROLD replied that he imagined some companies would use it
as a tool.
Different companies treat it differently. Some
companies do not once they get them through the door
they don't look at it upon renewal. Other companies may
look every year and try to reshuffle the deck so to
say.
MR. LESSMEIER finished saying that they looked at 800,000
records, created a formula, and applied it to a control group of
500,000 and followed that control group for two years. They found
that formula was very predictive of future loss and they then
applied it to over one million new cases and found the same
thing. As a tool for them it is very predictable and helps them
in their goal of making sure that people pay a rate that is
commensurate with the risk that they present. He thought it was
important that the legislature does not place unnecessary
restrictions on use of this important tool.
In response to some testimony there were two changes that deal
with the issue of what happens to someone who doesn't have an
accurate credit history. At State Farm Insurance the number of
people who complain about having an inaccurate credit history is
infinitesimally small. A good change is allowing the use of the
credit model to be presented to the Division of Insurance under
confidentiality giving them the tools they need to prevent any
misuse of it.
SENATOR LEMAN moved on page 1, line 11, after "state" to insert
"that consumers may obtain on request".
SENATOR DAVIS objected for purposes of explanation.
SENATOR LEMAN explained that the concern was that there is a
substantial cost to doing this and many people probably won't
necessarily want it. The amendment just says that when somebody
asks for it, they have a right to get it.
SENATOR DAVIS asked if it was an opt in/opt out situation. She
withdrew her objection.
SENATOR AUSTERMAN asked if they would be given the option in the
letter of adverse action.
SENATOR LEMAN explained that there would be directions in the
letter to call an 800 number or return a post card - something
like that and they would send it to them.
SENATOR DAVIS said she understood what it did, but felt that it
needed to be discussed more. She asked if they were going to be
sent a letter of adverse action, why the reason couldn't be
stated in the one letter. "Everybody would get it."
SENATOR LEMAN withdrew his amendment.
CHAIRMAN STEVENS said that he would hold SB 320 at the sponsor's
request.
SENATOR DAVIS said Mr. Niehaus from Progressive Insurance said
they would not be withdrawing credit rating in the state of
Washington and this bill says that it does.
MR. NIEHAUS explained that Senator Davis is under the impression
that the bill passed in Washington disallows credit and he stated
that the bill requires that the credit be filed with the office
of the Insurance Commissioner and approved by them and it does
specifically allow the use of credit saying, "Credit history
shall not be used to determine personal insurance premiums or
eligibility for coverage unless the insurance scoring models are
filed with the commissioner."
CHAIRMAN STEVENS said he understood that the difference with
Washington State is that it prohibits certain types of credit.
SENATOR DAVIS added that it would have to be filed [and
approved].
CHAIRMAN STEVENS said he appreciated everyone's comments and held
the bill.
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