Legislature(2001 - 2002)
05/01/2002 03:55 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 395-INSURANCE DISCRIMINATION BY CREDIT RATING Number 0901 CHAIR MURKOWSKI announced that the final order of business would be HOUSE BILL NO. 395, "An Act prohibiting discrimination by credit rating or credit scoring in insurance rates; and providing for an effective date." REPRESENTATIVE ROKEBERG moved to adopt CS HB 395, 22-LS1425\0, Ford, 5/01/02, as the work draft. There being no objection, it was so ordered. DAVID D'AMATO, Staff to Representative Crawford, described the minor changes to the earlier version. He noted that the industry has had the opportunity to review the addition on page 1, lines 6-8, which says an insurer must obtain the applicant's oral or written permission in order to use credit scoring for insurance purposes. He pointed out the language that was inserted in paragraph (4) located on both page 2, line 23 and [on page] 5, line 15. The proposed CS also changes the effective date to January 1, 2003. These provisions were deleted because the insurance industry objected and the Washington Division of Insurance found the provisions unwieldy. REPRESENTATIVE ROKEBERG asked how these provisions were unwieldy. MR. D'AMATO explained that the regulators and insurance industry found the lack of definition for "initial purchase" unwieldy and questioned whether it referred to a new house and car or new financing for a used car or old house. The language was too ambiguous. Originally this bill was the same as Washington and Connecticut's regulations. When those states determined these provisions were not workable, "we" followed their example. Number 1199 MR. D'AMATO further explained how paragraph (4) in [in Version L] worked on page 5, line 15. It was the failure of those provisions to be adequately defined that was problematic, he said. Number 1242 CHAIR MURKOWSKI turned to subsection (b) on page 1, line 9. She recalled from [testimony provided by] Progressive Insurance that if a citizen who receives a notice of adverse action can request get a statement detailing the reasoning behind it. However, subsection (b) has been changed to provide that the insurer shall provide written notice when there is an adverse action. Therefore, any adverse action taken requires the full detailed notice and the statement of the factors that led to the adverse action. Number 1304 MR. D'AMATO said this section has not been changed from the previous version before the committee. He explained the reasoning for providing the notice. The credit score formulated by the insurance company was part of a formula to which people didn't generally have access versus the credit rating that people can access. Credit documents provide an explanation and a table whereby one can see there's a negative score. However, an insurance score is part of a larger algorithm and if there's a problem with it, one wouldn't know what the problem is unless [the insurance industry] actually tells them. For example, the consumer should be aware that the use of a particular credit card is viewed as a problem by the insurance industry. If insurers distinguish themselves from the normal credit model, they should explain how their model works to consumers, he remarked. CHAIR MURKOWSKI acknowledged that subsections (b) wasn't different rather the subsections were relettered. Number 1466 MICHAEL LESSMEIER, Attorney, Lessmeier & Winters, Lobbyist for State Farm Insurance Company, began by relating that there are certain number of things that aren't in reasonable dispute about the issue of credit. For instance, there is general agreement that different companies use [credit scoring] differently, which illustrates that the free market system in this area of insurance is working well in Alaska. He also noted that different companies use [credit scoring] differently at different times. For example, at the time of the last hearing State Farm was using credit scoring with homeowner's insurance and although that is no longer the case, it may change in the future. "The ability to be able to use [credit scoring] is important," he said. He then pointed out that another point beyond dispute is the fact that the Fair Credit Reporting Act will allow the direct writers to use credit scoring to prescreen applicants. Therefore, what is done today will only impact insurance written by Alaskan insurance brokers. MR. LESSMEIER turned to an item he said was beyond reasonable dispute, which is the [notion] that there is a high correlation between the underwriting score that uses credit and the predictability of future loss. He recalled that the representative from the Division of Insurance testified to this correlation. Mr. Lessmeier informed the committee that State Farm began as a skeptic of the use of credit scoring. Therefore, State Farm took 1.3 million records and divided those records into two groups. One group was made up of 800,000 records and the other was a control group of 500,000 records. With the 800,000 records, the company reviewed various factors that were viewed as predictable of future loss. Of those factors, those thought to be most predictive were used to create a model that was subsequently applied to the control group of 500,000 records. That control group was followed for two years. The result was the finding that the correlation between the underwriting score that uses credit and the predictability of future loss was very high. That model was applied to 1 million live cases and again the correlation was found to be remarkably high. For example, those in the 10 percent highest category have more than twice the loss than those in the lowest category. Mr. Lessmeier characterized [credit scoring] as a powerful tool predicting future loss. Therefore, if the goal is for insurers to be able to charge a fair premium, one that correlates with the predictability of loss, then [credit scoring] is a useful tool in helping achieve that goal. MR. LESSMEIER remarked that the use of credit in Alaska hasn't been a problem. Therefore, he suggested that the division has tools in place to address the event that the use of credit is being misused. For example, the division must already have the ability to access credit scoring information when evaluating rates. However, the law is problematic in that the model itself isn't confidential. With regard to underwriting, Mr. Lessmeier pointed out that there is also a statutory provision that if different classes of risk are treated differently, without an adequate justification, then those can be found to be an unfair trade practice. Mr. Lessmeier reiterated that there isn't a problem with credit scoring in Alaska because the director of the division already has the tools to address this issue if it were misused. He noted that he has had extensive discussions with the sponsor in the Senate and with Representative Crawford in an attempt to create additional tools for the director while allowing [credit scoring] to be used on behalf of the industry. To that end, "I think we've come a long way," he said. He expressed hope that there will be legislation that will be agreeable to both Senator Cowdery and Representative Crawford. Number 1787 REPRESENTATIVE MEYER related his understanding that Mr. Lessmeier and the industry he represents do not support [Version O]. MR. LESSMEIER answered in the affirmative. REPRESENTATIVE MEYER asked if Mr. Lessmeier supported the similar legislation in the Senate. MR. LESSMEIER said, "I think we are getting very, very close to having a bill that ... would be acceptable to my client." However, he indicated that the industry may not have had an opportunity to review the [current proposal]. In further response to Representative Meyer, Mr. Lessmeier specified that the division director's job is to monitor complaints. He said he believes there have been very few complaints about credit [scoring]. Furthermore, it's difficult to respond to the misuse of credit [scoring] without knowing the information. He said that the real test is whether there has been a complaint to the division and whether it has been investigated and found to be valid. Mr. Lessmeier acknowledged that [credit scoring], a tool like any other tool, could be misused. Therefore, the question is whether the division director has the adequate ability to stop any misuse. "We have worked very hard to try to create a balance that allows the tool to be used, but also does give the director additional power. We don't think he needs it, but there are some that do," he remarked. Number 1890 REPRESENTATIVE MEYER recalled that in earlier discussions there was some question as to the direct correlation between an individual's credit score and driving record. He interpreted Mr. Lessmeier to be relating that as far as State Farm is concerned there is a direct correlation. MR. LESSMEIER answered that [credit scoring offers] the predictability of loss. He informed the committee that State Farm's model is based on credit and loss history. State Farm believes the correlation is very high, he related, and thus [credit scoring] helps State Farm determine who to write or who not to write. Therefore, State Farm doesn't want to be deprived of that tool. In further response to Representative Meyer, Mr. Lessmeier explained that State Farm's auto insurance model considers loss history and citations, which are combined with credit factors. Each factor is given a weight in order to develop a score. That score is only utilized when someone is making an application initially. Mr. Lessmeier clarified that State Farm doesn't use [credit scoring] to rate. For homeowner's insurance, the only reason State Farm used [credit scoring] was to write someone that it wouldn't have otherwise written whereas for automobile insurance [credit scoring] may have been used to not write someone. Number 1990 REPRESENTATIVE CRAWFORD related his understanding that this legislation isn't precluding the use of credit scoring. MR. LESSMEIER replied no and acknowledged that Representative Crawford has worked hard to craft a compromise. REPRESENTATIVE CRAWFORD recalled Mr. Lessmeier's statement that credit scoring is a good predictor [of risk] and pointed out that redlining of zip codes a few years ago was said to be a good predictor [of risk]. MR. LESSMEIER acknowledged that credit scoring could be used to [do what was done with red-lining of zip codes] a few years ago. He noted that the only [research] he was aware of was a Virginia study which found that [red-lining on the basis of zip codes] was not occurring. Mr. Lessmeier remarked that he didn't know of any evidence that any company in Alaska has used credit scoring to [do red-lining]. REPRESENTATIVE CRAWFORD specified that the insinuation isn't that State Farm is redlining certain areas. However, [credit scoring] has the same effect when certain groups of people are redlined, such as seniors. Representative Crawford emphasized that people have financial setbacks which have no correlation to whether those folks are a good or bad credit risk. This as a policy call with regard to the proper use of credit scoring, he said. MR. LESSMEIER remarked that he didn't know of any evidence that credit scoring penalizes seniors in any way. In fact, if the use of this tool was studied with the assumption that everyone used credit scoring in the same way, he said he would be surprised that it would penalize seniors or young people. He suggested that the findings would reveal that the use of credit scoring with oversight would have a high predictability. Then, the policy decision would be one regarding whether those identified as being in categories of higher groups of loss should be priced accordingly. Without pricing the aforementioned accordingly, the responsible people pay more for those creating the loss, which State Farm views as unfair, he said. He echoed earlier comments that there is no evidence of the misuse of credit scoring in Alaska. Furthermore, the division, even without this legislation, has the tools to prevent misuse. With this legislation, the division has more tools. REPRESENTATIVE CRAWFORD turned to the standardization of laws and noted his observation that the country as a whole is moving toward regulation and limiting the use of credit scoring. This legislation is modeled after legislation in Connecticut and the State of Washington. "Wouldn't it be good to have basically the same set of laws to work with in each state," he asked. MR. LESSMEIER related his understanding that the State of Washington's law is so restrictive that the model cannot be used. Mr. Lessmeier pointed out that every state has a different regulatory system and thus he didn't believe it's possible to achieve a uniform model. Mr. Lessmeier noted that although the National Association of Insurance Commissioners (NAIC) attempts to gain uniformity with the passage of insurance laws, he didn't believe the NAIC has accepted model legislation [in this area]. Ad hoc laws are being created by individual states, he said. "Just because they have a bad bill in Washington, doesn't mean we ought to use that as a model and create a bad bill in Alaska," he remarked. Number 2272 JIM FURUNESS, AARP Capital City Task Force; National Association of Retired Federal Employees, began by saying that credit scoring of insurance rates discriminates against older people. Mr. Furuness announced support of [CSHB 395] because of the belief that it will eliminate some of the discrimination. For example, a individual who doesn't use credit regularly may face a negative and discriminatory score under the credit scoring method. Older individuals who don't use credit shouldn't be forced to pay higher insurance premiums simply because of their reluctance to build debt. Furthermore, credit scoring shouldn't be used in determining automobile insurance rates. TAPE 02-70, SIDE B Number 2323 CARRIE TOLLEFSON, Legislative Director, Washington State Office of the Insurance Commissioner, testified via teleconference. She noted that Representative Crawford had requested that she provide testimony regarding Washington State's credit scoring legislation, in particular the process and the stakeholder involvement. Ms. Tollefson remarked that the credit scoring process in Washington State was very dynamic and began when the current commissioner was running for office. The commissioner heard about credit scoring from insurance agents during his campaign. Insurance agents expressed concern with the use of credit scoring because long-term clients were being turned down for insurance. Furthermore, there was trouble predicting with which company the clients could be placed because the credit scoring formulas were proprietary. The Washington State Office of the Commissioner has received several hundred letters, phone calls, and e-mails from consumers commenting on credit scoring. Therefore, the commissioner felt he had no choice but to review the issue and thus the commissioner met with those in the industry individually and as a group as well as with those companies that create credit scoring models. Additionally, the commissioner held public meetings throughout the state in order to hear what consumers were experiencing. The commissioner was surprised by the turn out at the public meetings. MS. TOLLEFSON informed the committee that in Washington State it was found that credit scoring was being used across the board by nearly all insurance companies. However, companies used credit scoring differently. Therefore, legislation specifying that credit scoring couldn't be used in underwriting at all was developed. Initially, there wasn't much substantive feedback, which she guessed was because of the thought that the legislation was too radical and would easily die. There was really no discussion until it became evident that there was clear bipartisan support for the legislation. Ms. Tollefson pointed out that throughout the process there was concern over the 20 percent rate cap. Companies were concerned that the 20 percent rate cap would result in rates and premiums increasing for those with good credit scores. Therefore, comments were solicited and other states were reviewed in order to develop an alternative approach. That was when [Connecticut's law] was found. [Connecticut's law] seemed to address some of the most egregious factors. For example, small business owners who keep lines of credit open, although those lines of credit aren't in use. Those business owners shouldn't be penalized for having high lines of credit. The Connecticut approach seemed to be moderate and have a lot of logic. Therefore, the [Washington State] legislation was changed to reflect the Connecticut approach, which led to some significant discussions and dialogue. This is the point at which the process became very dynamic in Washington State, she said. She noted that there was industry involvement throughout the process. MS. TOLLEFSON concluded by saying that the final bill passed in Washington State represented a lot of compromise. The insurance industry worked hard with the interested parties. In fact, one of the major companies in Washington supported the bill as did the independent insurance brokers and agents in Washington. She noted that several companies didn't like the bill and agreed to walk away. At the end of the process, the only entity that actively opposed the bill was the National Association of Independent Insurers (NAII). Although the legislation wasn't a consensus bill, it did represent much compromise. MS. TOLLEFSON, in response to Chair Murkowski, clarified that the effective date on Washington State's bill is two part. The underwriting portion of the bill will be effective January 2003 and the rate portion will be effective June 2003. Number 1996 BOB LOHR, Director, Division of Insurance, Department of Community & Economic Development, announced that the division supports HB 395 because the division believes there is a need for additional regulation of the use of credit history and credit scoring in insurance underwriting and rating. This legislation addressed issues that are of concern to consumers, such as not being renewed because of a credit score. Furthermore, this legislation provides appropriate restrictions on some types of credit information that may not be considered in calculating a credit score, such as medical credit history, purchase of a home or vehicle, and type of credit card used by the consumer. Mr. Lohr noted that previous testimony has indicated that limitations on the use of credit information will make insurance less available and less competitive. However, these claims haven't been supported by documentation. MR. LOHR stated that the division believes there are three important provisions in HB 395 that should be retained. He indicated that those provisions are in the following locations: page 2, lines 1-4; page 2, lines 15-25; and page 5, lines 6-19. Those specific regulatory tools are highly desirable for the division. Mr. Lohr pointed out that the debate surrounding the authority the division needs could quickly devolve into a philosophical discussion. Mr. Lohr hoped that the division has shown that it's not a rogue regulator. Therefore, he suggested that if the authority in HB 395 is assigned to the division, the division would use the tool responsibly. Mr. Lohr related the division's belief that credit scoring is a valid tool. Furthermore, there is a sufficiently valid correlation between credit scoring and the loss experienced for auto and home insurance to justify its use when properly regulated. Number 1831 CHAIR MURKOWSKI highlighted Mr. Lessmeier's testimony that there was no NAIC model available that relates to credit scoring for insurance. MR. LOHR said he believes that is the case, although there is work being done in that area. He highlighted that NAIC models are often the result of a state's idea. Therefore, he wasn't sure that the lack of an NAIC model is an argument against legislation such as HB 395. MR. LOHR, in further response to Chair Murkowski, said that there have been a number of complaints. The typical consumer complaint has been that a renewal quote was astronomically larger than what the consumer has been paying, although the consumer hasn't had tickets or accidents. In those cases, credit scoring seems to have been the factor, he remarked. Such complaints [are often] moot because the consumer moves to an insurance carrier that doesn't use credit scoring. However, as the number of companies using credit scoring increases, finding companies not using credit scoring may become difficult. Number 1736 REPRESENTATIVE CRAWFORD asked if the tools and the report provided under the legislation are appropriate. MR. LOHR answered that the current version of HB 395 provides the division with the necessary tools to appropriately restrict the use of credit scoring while preserving its purpose as a rating and underwriting tool for insurers. He related his belief that the legislation does achieve the proper balance of providing restrictions to ensure that unfair discrimination is not the result of the use of this tool and that the uses of it for purposes of underwriting and rating are proper. CHAIR MURKOWSKI drew attention to Section 1 of [Version O] where the language specifies that credit scoring can't be used unless oral or written permission is obtained from the applicant. It seems that allowing oral permission would provide the insurer an easy out when there are complaints. MR. LOHR said that Chair Murkowski has a good point, although requiring written permission requires paperwork. Therefore, he viewed this as a judgment call with regard to the appropriate balance. Mr. Lohr highlighted that Section 1 [could also be problematic] when a customer denies permission to use credit scoring; what are the consequences in such a situation, he asked. Therefore, Section 1 could perhaps have some clarity in regard to the consequences of the denial of permission and the degree of documentation required. CHAIR MURKOWSKI agreed that [Section 1] is a loose area. MR. LOHR mentioned that he agrees there may be proprietary value to [credit scoring] models and confidentiality of the model as a trade secret is probably appropriate. However, the public deserves to know that the division has the tools and is regulating credit scoring properly before the models "go behind the black curtain." Therefore, adequate legislation and implementation of that legislation are required. [HB 395 was held over.]
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