Legislature(2003 - 2004)
02/06/2003 08:01 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 47 - INSURANCE DISCRIMINATION BY CREDIT RATING [Contains brief mention of HB 5.] CHAIR WEYHRAUCH announced that the final order of business would be HOUSE BILL NO. 47, "An Act prohibiting discrimination by credit rating or credit scoring in certain insurance rates; and providing for an effective date." Number 2395 CHAIR WEYHRAUCH noted that a great deal of information came in late yesterday and the committee hasn't had time to digest it all. Therefore, the committee won't take any action on HB 47 today. However, he invited testimony. Number 2346 REPRESENTATIVE GRUENBERG pointed out that HB 5 is similar to HB 47. Regardless which legislation moves forward from the committee, he asked if it was the chair's intention to allow testimony on both pieces of legislation. CHAIR WEYHRAUCH expressed the need to use the committee's time efficiently. Number 2303 MICHAEL LESSMEIER, Attorney at Law, Lessmeier & Winters, Lobbyist for State Farm Insurance Company, recalled that there was quite a bit of legislation on credit scoring last session. Furthermore, as a result of the work on that legislation, much was learned. For example, he noted, it was learned that there is a strong correlation between a high credit score and the predictability of loss. He said he doesn't believe that there's any reasonable dispute about that. MR. LESSMEIER stated that another thing learned was that the insurance industry in Alaska uses credit [scoring] in different ways, depending upon the company. As far as Mr. Lessmeier knew, he said, there is only one company in Alaska that is approved to use credit [scoring] for purposes of making rates, although there are probably a number of companies that use credit [scoring] for underwriting. He remarked that work on the legislation last session also educated everyone with regard to the lack of history of a problem with the use of credit [scoring] in Alaska. Number 2153 MR. LESSMEIER identified the issue before the committee as one of fairness. If the ability exists to predict which groups of people will cause the most losses, should the [insurance industry] be able to price their insurance accordingly? He proffered that fundamental fairness seems to dictate that if the aforementioned ability exists, the [insurance industry] should be able to use it. Those presenting a lower risk should pay a lower premium, while those presenting a higher risk should pay a higher premium. MR. LESSMEIER explained that State Farm reviewed many of its closed records and many of the factors involved, in an attempt to determine which factors are predictive of loss. The actuaries then developed a formula that was applied to a number of closed cases in order to determine whether it had predictive value, he said. The predictive value turned out to be very high. Therefore, Alaska State Farm uses credit scoring. MR. LESSMEIER noted that State Farm refers to it as underwriting scoring rather than credit scoring because it isn't intended to predict whether someone is a good credit risk or not; rather, it's intended to predict whether someone is a good underwriting risk. The aforementioned was used for a short period of time for homeowner's insurance when State Farm was attempting to write more business; that is, the [underwriting scoring] was used to "write people" that State Farm wouldn't have otherwise written. State Farm no longer uses it for homeowner's insurance in Alaska, although it is used for automobile insurance, but only for new business. State Farm doesn't use [underwriting scoring] to cancel or renew policies. Number 1982 MR. LESSMEIER recalled that at the end of last session, he worked very hard with the Senate to develop a compromise. However, there was a lack of time. Since last year there have been a number of developments that deserve review, he said. For example, he noted that the National Council on Insurance Legislators (NCOIL) has [introduced] model legislation which is included in the committee packet. He said that the committee packet should also have a recent study by the State of Washington's Division of Insurance that doesn't reach any significant conclusion. He noted that Alaska's Division of Insurance study should be available February 10, 2003. MR. LESSMEIER related State Farm's belief that [credit scoring] is a valuable tool that is in the interest of State Farm's policyholders. State Farm is willing to work with the legislature to accomplish ways to ensure that this tool is used fairly. Mr. Lessmeier stressed that Alaska's Division of Insurance has the power, the authority, and the responsibility to investigate any instances of unfair discrimination in insurance. Therefore, if credit [scoring] is being used unfairly by any company, the division has the power, responsibility, and authority to address it and stop it. He added that the division also has the power, responsibility, and authority to approve rates for insurance companies in Alaska. If an insurance company is using credit [scoring] to determine rates in Alaska, it is being done with the approval of the Division of Insurance. Number 1764 MR. LESSMEIER suggested that, for future hearings, it would be helpful to have a State Farm actuary available for questions. However, he informed the committee that State Farm doesn't review records that are identified as medical or utility collections. Also, State Farm writes people without a credit history with traditional underwriting factors. He said that if an individual believes that their credit history is inaccurate, there are mechanisms for correcting it. Mr. Lessmeier specified that the ultimate goal is to ensure that people are charged a rate that's commensurate with their risk. MR. LESSMEIER informed the committee that there are maybe one or two states that have completely banned the use of credit, which is the goal of [HB 47 and HB 5]. However, under the provisions of the Fair Credit Reporting Act, the direct writers of insurance will still be able to use credit [scoring] in terms of how insurance is solicited, because those direct writers will continue to target who they want to solicit through the mail. Number 1613 REPRESENTATIVE BERKOWITZ inquired as to what other criteria besides credit scoring [State Farm] uses to access an individual's risk and ultimately how that risk is used in the calculation of the rate. He asked about the credit rating of Alaskans as a whole compared to national averages. Representative Berkowitz expressed the need to see the evidence that credit scoring correlates to loss. REPRESENTATIVE BERKOWITZ turned to Mr. Lessmeier's earlier statement that it's okay to use credit [scoring] to access, based on groupings of people, and he said that it doesn't always seem to be appropriate to do so. He noted, for example, that rates can't be based on one's race, gender, religion, and he said he suspected someone's economic status couldn't be used either. He added that if rates somehow had a de facto effect of reflecting these other criteria, that would be suspect as well. Therefore, [using credit scoring] as a means of de facto discrimination against poor people may be one of the concerns driving this legislation, he suggested. MR. LESSMEIER said Representative Berkowitz's questions are all good and he believes all of those issues have been reviewed, in particular the last issue. He informed the committee that [State Farm] does not discriminate based on income, race, or gender. REPRESENTATIVE BERKOWITZ expressed concern that if there is an unnaturally high correlation between poor credit scoring and economic status, then that would mean that people are being discriminated against based on their economic status. MR. LESSMEIER related that he believes that Representative Berkowitz's concern has been addressed and that he would provide that information to the committee. REPRESENTATIVE GRUENBERG inquired as to who NCOIL is. MR. LESSMEIER answered that every state is invited to have a legislative delegate to NCOIL, which is a group of state legislators interested in insurance issues. In the past, Senator Donley was Alaska's representative. He said he didn't believe there is currently an Alaskan legislator in NCOIL. Number 1375 REPRESENTATIVE SEATON recalled Mr. Lessmeier's earlier statement regarding [the need] for the rate to be commensurate with the risk. However, he said he understood Mr. Lessmeier to say that State Farm isn't using credit scoring to base the rates but rather in determining whether to offer insurance. Therefore, he inquired as to how credit scoring can impact a rate to be commensurate with the risk. MR. LESSMEIER explained that State Farm's use of credit scoring is primarily used in determining whether to write insurance or not for an individual and whether that individual would be placed in a mutual company or standard company. He noted that it's possible that those placed in the mutual company may receive a better rate than those placed in a standard company. Mr. Lessmeier further explained that one group ends up subsidizing the other. He expressed the need to accomplish fairness in terms of what people pay and the risk they present, which can be accomplished in different ways. REPRESENTATIVE SEATON surmised then that the credit score is going to determine an individual's rate because of the policy or company in which the individual will be placed. MR. LESSMEIER related his understanding that [credit scoring] could determine what company the individual is placed with, and that could determine the individual's premium. Number 1190 REPRESENTATIVE DAHLSTROM related her understanding that various insurance companies determine at certain points during the year that the company will not write certain types of insurance policies for the remainder of the year, depending upon the number of policies written and money made in that area. She asked if that is correct. MR. LESSMEIER said he didn't know the answer. However, he offered that economic conditions may impact whether a company chooses to continue writing a particular line of business, which is of concern in Alaska. Mr. Lessmeier related that what State Farm has experienced with automobile insurance has been disastrous. He specified that one of the things that may impact a company's desire to write business in a state such as Alaska is the question of how much market share the company wants. Mr. Lessmeier noted that State Farm stopped writing homeowner's insurance for a period of time, but has begun to do so again. He indicated a concern that State Farm was holding too much of the market as well as the loss experience. REPRESENTATIVE DAHLSTROM asked if Mr. Lessmeier is able to provide the committee with information specifying the percentage of business State Farm is interested in writing in Alaska for homeowners and automobile as well as for small businesses. She related constituent concerns regarding the lack of insurance being written for small businesses. Number 0974 MR. LESSMEIER stated that there are many factors determining whether companies choose to write insurance. He provided the following example with automobile insurance: He explained that Alaska requires mandatory insurance and mandated authors of uninsured and underinsured motorists. The Lawrence decision interpreted the mandated offers under umbrella policies. As a result, there are companies that have stopped writing that coverage. Although State Farm continues to write it, it's a large problem. The uninsured/underinsured coverage has become dramatically more expensive. MR. LESSMEIER said that one of the reasons for the increase is due to the Alaska Supreme Court's ruling that if one's liability policy can cover punitive damages, then the uninsured/underinsured motorist coverage would have to provide protection for punitive damages as well. He said it doesn't make sense that anyone would want to buy that kind of protection for himself or herself. This needs to be fixed, he said. Although he agreed that [coverage for] uninsured motorists has to be addressed, he stated that there will always be a certain number of people driving without insurance and thus uninsured/underinsured motorist coverage is necessary. However, the more expensive it is the more difficult it is to have. MR. LESSMEIER noted that insurance is a necessity, but also noted that the more impediments that are created in a state such as Alaska, the more problems there will be. Mr. Lessmeier suggested talking with some of the agents regarding the availability of insurance. He related that he has anecdotal knowledge that a number of insurance companies have left the state because it isn't an easy place to do business. REPRESENTATIVE DAHLSTROM directed her earlier question to business insurance. Number 0688 MR. LESSMEIER noted that most businesses have to provide insurance for vehicles. He said that he wasn't familiar with the issue of the availability of commercial insurance. However, he said that he was more familiar with the types of problems that have occurred with commercial construction and issues such as mold coverage. Those types of problems have created significant problems for insurance, he said. Number 0592 REPRESENTATIVE LYNN inquired as to the health of the insurance industry in Alaska as compared to other states. Furthermore, he inquired as to how passage of HB 47 would impact the overall insurance business in Alaska for insurers as well as for consumers. Number 0536 MR. LESSMEIER related his understanding that in the years 1999, 2000, and 2001 State Farm had an underwriting loss with automobile insurance in Alaska that amounted to close to $50 million. Although he said he understood that the rest of the country has also experienced a bad trend [in this area], he couldn't compare Alaska to the rest of the country. He informed the committee that there will have to be rate increases. State Farm's experience with homeowner's insurance was better and he recalled that for 2002 there was an underwriting profit. MR. LESSMEIER, with regard to how HB 47 would impact this, said that an underwriting score is the best tool to predict loss. Mr. Lessmeier said that he didn't think this state, an already difficult market, would want to create barriers for insurers to do business. He noted that although the insurance industry is a highly regulated industry, it's fiercely competitive. The more competition, the better it is for the consumer, he said. He noted that historically, Alaska's insurance rates have been good when one considers the cost of living. Mr. Lessmeier concluded, "This is something that would help. How much of a difference it would make I can't tell you." Number 0132 REPRESENTATIVE DAHLSTROM asked whether an individual with bad credit from the point of view of the insurance company would ever have the ability to restore good credit. MS. LESSMEIER responded that he didn't know, but offered to find out. TAPE 03-5, SIDE A Number 0001 MR. LESSMEIER, in response to a question by Representative Holm, said that he believes all insurers, in terms of the insurance pool, have to take a certain number of people in that pool. He noted that State Farm has a mutual company and a standard company. REPRESENTATIVE HOLM asked if the $50 million loss is related to the pool participation. MR. LESSMEIER answered that he didn't believe it was related to the pool participation. He said he believes that loss is across the board. REPRESENTATIVE HOLM remarked that he believes that HB 47 is good because it elevates the idea that people have a responsibility to pay their bills on time and pay for their insurance. Although there is no constitutional right to insurance, he said he believes that it's important of the state's economic survival to have insurance companies. Representative Holm inquired as to how Mr. Lessmeier would rate HB 47 with regard to State Farm's desire to remain in Alaska and do business here. MR. LESSMEIER replied that it isn't his belief that State Farm isn't going to do business in Alaska if HB 47 is passed. However, it's one factor in an overall struggle for State Farm to try to keep its products available and affordable. He mentioned that there is also legislation regarding whether [insurance companies] can use after-market automobile parts, which is a huge issue for automobile insurance. Number 0352 SHARALYN WRIGHT, Staff to Representative Mike Chenault, Alaska State Legislature, presented HB 47 on behalf of Representative Chenault, sponsor. She informed the committee that over two- thirds of the states are reviewing abolishing credit scoring. The states of Kentucky and Washington are in the group of several states that have abolished credit scoring. Ms. Wright characterized some of the facts presented today as misleading. MS. WRIGHT mentioned the legislature's responsibility to young people, some who have difficulty obtaining insurance of any type due to their lack of a credit record. Insurance companies are using bad credit records as well as no credit records to elevate insurance rates in Alaska, she charged. For instance, her own daughter would have faced double insurance rates had she obtained insurance on her own; she attributed this to her daughter's lack of credit [history]. Therefore, Ms. Wright's husband placed his name on the vehicle and insured the vehicle for less than half the premium she was quoted by several insurance companies. She mentioned that some of the younger fishermen in the state are having difficulty obtaining boat insurance due to the lack of a credit [history], a bad credit rating, or questionable credit rating. Ms. Wright said that everyone has had financial problems at some point, and if insurance had been required and that individual couldn't afford it, she suggested that the individual would've driven without insurance. Forcing the economically deprived into the arena of not paying their insurance and driving without insurance is a concern of Representative Chenault, she related. Number 0682 MS. WRIGHT turned to the issue of underinsured premiums. She informed the committee that her uninsured/underinsured rate was less than $20 annually, and that insures four vehicles. That [rate] isn't a huge factor. Ms. Wright said the aforementioned isn't under discussion here; rather, the discussion involves individuals with obligations and children buying a new car. The decisions related to HB 47 will impact whether or not such individuals can afford insurance or medicine for their children, she said. Furthermore, some older citizens can't afford the premiums. Ms. Wright related her belief that [credit scoring] does discriminate against young and old individuals as well as those less fortunate. In closing, Ms. Wright suggested that the committee needs to take a good look at this before the insurance companies present their statistics and say that they don't use [credit scoring]. She noted that her credit rating has been set before her during a settlement conference and thus she charged that insurance companies do use [credit scoring]. Number 0908 REPRESENTATIVE LYNN asked if the passage of HB 47 as written would raise the cost of insurance for everyone. MS. WRIGHT related that a wise lawyer once told her that insurance companies aren't in the business to pay claims or determine risks, but rather are in the business to collect premiums. Ms. Wright related her belief that HB 47 isn't a cure-all, but it will address one portion of the problem. Furthermore, she stated that she didn't believe that any insurance company making money in this state would pull out. Number 1058 RUSSINA SGOUREVA, Product Manager, Progressive Insurance, informed the committee that she is responsible for overseeing all of the company's business that flows through its independent agents in Alaska. Ms. Sgoureva pointed out that Progressive Insurance, the fourth largest auto insurer, is the largest writer of private passenger auto insurance through independent agents in the nation. Progressive Insurance does business in 48 states with over 30,000 independent agents in the nation. Progressive Insurance is the fifth largest writer of auto insurance in Alaska with over 16 independent agents through which Progressive Insurance sells insurance. Progressive Insurance also sells insurance through its call center and the Internet. In total, Progressive Insurance has over 17,000 policies in the State of Alaska and last year over 13,000 of those policies were sold to Progressive Insurance's independent agents. Ms. Sgoureva explained that she wanted to provide the committee with some background on how Progressive Insurance uses credit [scoring] and the measures the company has taken to address the concerns of the general public and legislators. Number 1220 MS. SGOUREVA echoed Mr. Lessmeier's earlier comment that credit [scoring] is a powerful and important predictor of future losses. Credit is one of many things that insurers consider when determining rates. An individual's driving record, type of vehicle, location of the insurer, gender, and age are used when determining an individual's rate. Age is already a factor included in the rate order of calculations for most insurance companies. All of the actuarial support associated with using age has been filed with the Alaska Division of Insurance. Ms. Sgoureva said that the use of credit [scoring] allows insurance companies to more accurately predict future losses for policyholders. There are many studies that have demonstrated the predictive power of credit [scoring] and she offered to share those with the committee and the legislature. MS. SGOUREVA said that since Progressive Insurance started using credit [scoring], it was able to offer better rates to many consumers who otherwise wouldn't have been eligible for these rates. She related that Progressive Insurance estimates that over 60 percent of its policyholders were eligible for a lower rate once credit was used as a rating variable. She explained that credit scores focus on an individual's bill paying behavior and how they use their available credit; for a consumer who has been responsible with his/her use of credit, it reflects positively on the score. Number 1476 MS. SGOUREVA specified that the credit information Progressive Insurance reviews doesn't contain any reference to income, race, color, creed, or physical handicap or disability. As a company, Progressive Insurance has worked hard to use credit [scoring] responsibly in order to ensure that the process is transparent to the regulators, consumers, and agents in the state. Progressive Insurance doesn't use credit history to refuse to insure a consumer or to cancel an existing customer. Furthermore, credit information that is disputed by the consumer with the credit reporting agency isn't considered in the credit scoring. All medical, business, and commercial debts and liens are excluded from consideration. She announced that Progressive Insurance is willing to share with the regulators, media, and consumers, information about how it uses credit [scoring] in the process of determining rates. MS. SGOUREVA noted that Progressive Insurance was very actively involved in the discussions of credit scoring during the last Alaska State Legislature. She noted that, since that time, Progressive Insurance has employed a number of measures to address issues that were brought to the company's attention. For instance, Progressive Insurance has filed its credit scoring methodology with the Alaska Division of Insurance. Furthermore, Progressive Insurance has modified its credit scoring methodology in order to ensure that medical and business debt are excluded. Ms. Sgoureva told the committee that Progressive Insurance has also collaborated extensively with the Alaska Division of Insurance in the preparation of the report that will be out on Monday. Number 1500 MS. SGOUREVA turned to what Progressive Insurance sees as dangers associated with an outright ban on credit [scoring]. First, consumers will see significant increases if credit [scoring] were banned because there would be less accurate pricing. Progressive Insurance estimates that over 11,000 policies in the state might experience increased premiums as a result of the elimination of credit [scoring]. She highlighted the issue of fairness and asked if those policyholders who currently experience better rates due to their better financial responsibility deserve to lose those rates. Second, the removal of credit [scoring] would create an uneven playing field for agents and the insurance companies that write through agents. The Federal Credit Reporting Act allows the use of credit [scoring] in designing solicitations for insurance for direct companies and chapter companies. With the elimination of credit, Progressive Insurance's agents in Alaska will be disadvantaged because they won't be able to obtain the more profitable and higher attention business. Therefore, Progressive Insurance doesn't feel that the aforementioned is a fair decision with regard to its agents. Number 1600 MS. SGOUREVA turned to the challenges of doing business in Alaska. In 2001, Alaska fared significantly worse than most other western states. She referred to an analysis from AM Best (ph), which illustrates that insurers in Alaska lost about $.24 per $1.00 of premium that they wrote in 2001 in Alaska, compared with about $.12 in other states. In regard to an earlier comment that [the elimination of credit scoring] is a nationwide trend, Ms. Sgoureva emphasized that no state banned credit [scoring] last year. Furthermore, the State of Washington passed legislation limiting the use of credit [scoring], but does not ban it. Similarly, the states of Kentucky, Michigan, and Maryland have legislation providing various restrictions on how credit [scoring] can be used and monitored; however, credit [scoring] has not been banned. Number 1725 CHAIR WEYHRAUCH announced that HB 47 would be held over.
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