Legislature(2003 - 2004)
05/12/2003 01:12 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 13-INSURANCE DISCRIMINATION BY CREDIT RATING
MS. ANNETTE SKIBINSKI, staff to Senator Cowdery, co-sponsor of
SB 13, told members this legislation originally banned insurance
companies from using credit histories to determine insurance
rates when underwriting policies. It has evolved, after hours of
work, into a seven-page bill that:
· allows credit information to be used for underwriting and
rate setting for personal insurance, not for commercial
insurance, on new policies only
· allows the insurance industry 60 days to cancel an
insurance policy for bad credit or a poor driving record
· bans the use of credit information from being used to
determine rates or underwriting when a policy is renewed
She repeated that the use of credit scoring is allowed for new
policies only but it cannot be the sole factor used to rate or
underwrite a policy. It must be combined with other substantive
factors, such as the customer's driving record, payment history,
and claims submitted. It will allow the Division of Insurance to
look at the data models used by insurance companies for scoring
to make sure that customers are not discriminated against. The
data models are protected as trade secrets and are not available
to the public. The Division of Insurance will provide the public
with a general description of the scoring models to foster
consumer awareness.
MS. SKIBINSKI said that some of the factors that an insurance
company cannot consider when underwriting new policies are
medical collections, adverse credit, lack of credit, absence of
credit, and particular types of credit cards. An insurance
company must inform a customer if it takes an adverse action
against that customer and it must provide information on how to
correct the problem. In addition, the bill requires the
establishment of a dispute resolution process. She said the bill
is a compromise between Senator Cowdery, the insurance industry,
and the Division of Insurance.
SENATOR THERRIAULT moved to adopt Version S as the working
document of the committee.
CHAIR SEEKINS announced that without objection, the motion
carried.
SENATOR THERRIAULT asked if a person has been a good customer
and qualifies for a policy, an insurance company cannot use
credit scoring when that policy comes up for renewal.
MS. SKIBINSKI said that is correct, however, the insurance
company always has the right to cancel a policy for other
reasons, such as claims, accidents, non-payment, or a DUI.
SENATOR OGAN noted that insurance companies give students with
good grades a reduced rate based on the philosophy that those
students use good judgment. He asked if using credit history
when setting rates is based on the same reasoning. He pointed
out that some people have credit problems because of illness or
circumstances beyond their control.
MS. SKIBINSKI said she assumes the philosophy behind good credit
is the same as good grades yet sometimes life events are beyond
one's control. She said that Senator Cowdery has received over
1,000 e-mails from people who have been affected. Some of those
people never had any traffic violations but had credit problems
due to divorce or for other reasons and their rates jumped 400
percent.
SENATOR THERRIAULT asked how different types of credit cards are
viewed negatively.
MS. SKIBINSKI said the perfect credit model would be of a person
who owned a home, had one or two car payments, and had a VISA or
Mastercard, which was used to 30 percent maximum. She said some
cards, such as an American Express card with no limit, are
considered to be risky. Entertainment cards, such as a Discover
card or Nordstrom credit card, are also considered risky. She
said that information is confidential so it has been difficult
to get from insurance companies.
SENATOR COWDERY said during the interim he found out that a
person may have a credit card limit of $10,000 but spent and
paid an average of $2,000 each month. However, during one month,
the person spent $2,800. The credit report does not show the
available credit limit of $10,000; it appears that the high
spending month was the limit. Also, three basic credit agencies
do credit reports and there is a good chance that each of those
agencies give the same person a different rating. He said the
process is very subjective, which is why the bill allows the
Director of the Division of Insurance to review the data models.
CHAIR SEEKINS asked whether the model would work against a
person who uses a credit card to pay all bills, for the purpose
of gaining mileage, but pays those bills in a timely fashion.
TAPE 03-44, SIDE B
MS. SKIBINSKI said that some banks and finance companies view
paying one's card off every month negatively. She said that was
not addressed in the legislation. She then added that, regarding
Senator Cowdery's statement about a person's full line of
credit, the bill says a person's total line of credit cannot be
considered, but the debt ratio can be considered.
CHAIR SEEKINS asked if a person pays off a $2,000 bill each
month even though that person's credit limit is $10,000, that
person's debt ratio would be 2:10.
MS. SKIBINSKI said she does not believe so; she believes that
person would show up as having paid.
CHAIR SEEKINS said he needed to have an American Express card to
get a COSTCO card and asked whether that would work against him.
SENATOR KIM ELTON, co-sponsor of SB 13, said that unfortunately
many of the committee members' questions cannot be answered. He
explained that this bill opens up a "black box" known as the
credit score, but the formula is unknown because it is a trade
secret. The good thing about SB 13 is that it mandates that the
credit scoring formula be filed with the Division of Insurance
to enable division employees to find answers to the questions
and to determine whether any discrimination is taking place.
SENATOR FRENCH thanked Senators Cowdery, Elton and staff for
introducing this legislation. He said he was interested in an
outright ban because he believes one could make the case that it
was the advent of credit scoring that caused the insurance
industry to begin to lose money in Alaska. The industry has
complained that it began losing money three years ago, a year or
two after it began to use credit scoring.
SENATOR ELTON said it would be unfair to characterize the bill
as one that everyone is happy with. He and Senator Cowdery have
had extensive discussions with members of the insurance
industry. He said all sides have been uncomfortable with some of
the compromises made.
SENATOR THERRIAULT asked where the provision that requires
insurance companies to provide data models to the Division of
Insurance is located in the bill.
MR. JESSE KIEHL, staff to Senator Elton, referred to Section 3
on page 6, line 25. It requires insurers to file their credit
scoring models and any computer algorithms or methods used to
incorporate credit history with the Division of Insurance.
CHAIR SEEKINS referred to page 7, line 11, which says, "the
Director of Insurance shall make available to the public a
general description of insurance scoring models" and asked if
that description will be of each company's model or a general
description of the elements of all models.
MR. KIEHL said that was another issue of compromise. The
Division of Insurance has a two-part mission statement: to
ensure a healthy industry and to protect consumers. This
provision would satisfy both in that it would permit the
division to educate consumers about how their credit history
impacts and affects their insurance. At the same time, it would
protect the industry's substantial investment in these credit
scoring models.
CHAIR SEEKINS took public testimony.
2:10 p.m.
MR. STEVE CONN, Director of the Alaska Public Interest Research
Group (AkPIRG), told members he would leave it to them to decide
whether this legislation protects the consumer. He said the
issue of whether using credit scores as an analytical device to
adequately predict a person's driving record or potential to
file claims is secondary because the credit data that flows into
the three credit reporting agencies is filled with errors. He
referred to a study done by Fair Isaac Corporation, the
developer of reporting software, that pointed out that reports
from the three agencies show extreme variations in the credit
scores; the average variation was 43 percent. That kind of
variation could affect a person's mortgage rates or insurance
premium drastically. He said there is no way to tell whether
credit scores are good devices to use because they are flawed
and unpredictable. Legislators must determine to what degree
this device will impact Alaskans prematurely. He is happy to
hear that a credit score will not be used to establish a
relationship, but it will affect new customers. He is also glad
to see that the bill contains a dispute resolution provision but
it seems to diminish the role and autonomy of local insurance
agents with whom people have been dealing for decades. The agent
will become less relevant in addressing problems, and the
customer will have to use an abstract dispute settlement
process. He said the fundamental issue is that until the data
introduced into credit reporting systems is capable of handling
corrections and certainty, Alaskan consumers should be protected
from the use of credit scores as much as possible.
MR. MICHAEL LESSMEIER, representing State Farm Insurance, told
members that Ms. Skibinksi described the history of SB 13 well.
A tremendous amount of time was spent to reach a compromise to
allow the use of what the industry believes is a valuable tool
to predict loss and to provide consumer protections that address
the kinds of concerns raised by Mr. Conn. He said that SB 13 is
not a perfect bill but it is a very good start. In response to
one of Mr. Conn's concerns, he said the bill contains a
provision for a person who is denied insurance at the outset or
whose policy is cancelled within the 60-day window that requires
the insurer to re-underwrite that customer if the customer
certifies that his or her credit history is disputed and
initiates the dispute process. The bill contains other
provisions to address disputed credit information and is very
consumer-protection oriented.
MR. LESSMEIER said that State Farm Insurance still takes issue
with whether this tool should be used to re-underwrite or re-
write [page 3, line 4, (d)(1)]. As written, an insurer could not
fail to renew a policy based on a consumer's credit history or
insurance score. He believes the industry is okay with failing
to renew on that basis, but it would like to preserve the
ability to re-underwrite or re-rate. That affects consumers in
several ways. For example, for a consumer who has had an
accident, an insurer would prefer to use the best tools it has
for predicting future loss to determine whether that consumer
should be in a standard or preferred company and what the
appropriate rate should be. When that flexibility is removed, an
insurer cannot use the predictive power of the tool. He said
State Farm could not give a good credit discount to a consumer
under this bill. State Farm was not able to work that out in the
discussions about this bill.
MR. LESSMEIER said State Farm is also concerned about the
language on page 3, lines 10 through 12, which pertains to the
absence of credit history. State Farm had previously used a
qualifier, "unless otherwise approved by the Director of the
Division of Insurance," to deal with the absence of credit in
the rating aspect, as well as the use of particular types of
credit cards. He said that is a strong predictive factor in both
a positive and negative way. State Farm's final concern is with
the effective dates of the bill. He said the Division of
Insurance played an important role in the compromise that was
reached. One compromise required that insurers file scoring
models. State Farm has never opposed that filing as long as the
information is kept confidential. However, the bill requires
filing by June 1, 2003, which is unrealistic. He believes the
intent during the discussions was that the guarantee of
confidentiality would go into effect immediately so that various
insurers could file as soon as able but it wasn't to require
them to do so by June 1.
2:20 p.m.
CHAIR SEEKINS said he could not predict that an exclusive
marketing deal between Costco and American Express would
negatively affect his insurance rate.
MR. LESSMEIER said he does not believe it did.
CHAIR SEEKINS said he hopes not, but heard testimony that led
him to believe it did and he cannot peek into the "black box."
He said he knows of exclusive marketing deals that, if they
affect insurance rates in Alaska, would not be fair.
MR. LESSMEIER said he believes the Director of the Division of
Insurance would have the opportunity to look at and prohibit
that.
CHAIR SEEKINS said that Alaska has a mandatory auto insurance
law so the Legislature has an affirmative responsibility to make
sure that people are not unnecessarily discriminated against. He
said having been in the car business, [Ford] rates people on the
predictability to pay and is sometimes wrong. He expressed
concern that a person could be forced to drive uninsured because
the state took a position that allows the use of credit scoring
that affects that person very negatively.
MR. LESSMEIER said he understands that concern and said the
insurance industry opposed the adoption of the mandatory
insurance law in Alaska 20 years ago, one reason being that
people who cannot afford to buy insurance will not do so. The
insurance industry was then challenged with creating a system in
which people could protect themselves from uninsured motorists.
Another challenge has been to make insurance products
affordable. State Farm believes it can predict loss by using
credit scoring as a tool. That tool helps State Farm to achieve
fairness in the system. He said that for every person that may
have to pay more because of credit scoring, many others pay
less.
CHAIR SEEKINS said he is looking for what is fair and affordable
for everyone.
MS. RUSSINA SGOUREVA, Progressive Insurance, said she was
available to answer questions and that she worked with other
industry members to help draft this legislation. Although the
bill contains provisions that will require Progressive to modify
its current marketing in Alaska, it believes that all involved
made progress when responding to the use of credit scoring in
Alaska.
MR. JOHN GEORGE, representing National Association of
Independent Insurers (NAII), said that NAII was also involved in
the negotiations and made some concessions. He said that NAII
does not object to moving the bill out of committee with the
understanding that further negotiations will take place. He
stated the insurance industry would only use credit scoring if
it believed that it truly was predictive. It wants to charge an
appropriate rate to all customers.
SENATOR FRENCH asked Mr. George what sections of the bill he
believes will be renegotiated after it moves from committee.
MR. GEORGE said the biggest issues that remain are re-rating and
re-underwriting using credit scoring, the use of specific types
of credit cards and the lack of a credit card. He said the lack
of a credit card is a more important predictor than which credit
card a person has. He added that obtaining a credit score within
60 days of writing a policy might be problematic for some of the
direct writers who review someone's credit and then mail a
solicitation. He said the issues are not critical but are the
fine details of a negotiation.
CHAIR SEEKINS asked Mr. George if he is speaking for the
industry when he said he would prefer that the committee take
action on the bill in its current form at this time.
MR. GEORGE said he believes everyone he has spoken to would like
to see legislation this year. He stated:
I think the sponsors would like to see a bill, the
insurance industry would like to see a bill. We may
not agree on what that bill is but I think it's
important that we move forward and if it takes moving
it out of this committee to make sure that a bill
happens this year, then I think we could support that.
If we can fix it here and take another two days and it
moves and can still pass, that would be fine too.
SENATOR COWDERY asked what specific credit card is bad for a
credit score.
MR. GEORGE said he cannot answer that. The more important issue
would be whether or not a person has a credit card. He said he
does not believe there is any dispute with the mainstream credit
cards, such as Mastercard, Visa, or American Express. He said he
has not heard that having a store-brand credit card is a major
problem.
SENATOR THERRIAULT said that although an American Express card
has no limit, it is more difficult to get. He questioned what a
specific type of card might say about a person.
MR. GEORGE said that question would be more appropriate for
Isaac Corporation. He said he asked about a Nordstrom credit
card and was told the issue is how a person manages the credit.
CHAIR SEEKINS said that some credit cards are fully
collateralized, which is an indication of a bad credit risk to
begin with. He said it is not the card that is raising the risk,
it is the reason a person has to have that type of card.
SENATOR OGAN asked if Chair Seekins was referring to a debit
card.
CHAIR SEEKINS said he was referring to a card that is backed by
collateral. He noted that many people use credit cards as a
matter of convenience, rather than because they need the credit.
With no one else wishing to testify, he closed public testimony
and announced a three-minute at-ease. Upon reconvening, he asked
Ms. Hall to testify.
MS. LINDA HALL, Director of the Division of Insurance, echoed
many of the previous speakers' statements, one being that a
tremendous amount of work has gone into the compromise committee
substitute. She said all involved parties left the Senate Labor
and Commerce Committee meeting with Senator Seekins' concurrence
that the participants would work on a compromise bill. She said
the bill contains some very good language.
MS. HALL said when she testified at the Senate Labor and
Commerce Committee hearing, she asked for five things, the first
being the filing of the underwriting rating models. This
committee substitute allows the division to look at the scoring
model to make sure it is not unfairly discriminatory and that it
meets the guidelines set out in the legislation. Her second
request was for more consumer protections. She thinks the
committee substitute provides a tremendous amount of consumer
protection. She would categorize the list of prohibitions in
this legislation as among the most stringent in the country. The
consumer protections in the bill address many of the issues that
have come before committee members. This legislation also
contains a dispute resolution process that is more readily
accessible than merely filing a dispute resolution under the
Fair Credit Reporting Act, which places some burdens on the
carriers to help the consumer by requiring that clear reasons be
given for an adverse action. Her fourth request was that credit
scoring not be used as a sole determining factor; other
substantive factors need to be considered. That language is used
by many other states.
MS. HALL said she is still somewhat uncomfortable with the
language on page 3, line 5. Her concern is that if a policy is
not underwritten or rated at renewal, there is the potential to
not allow a person's rates to increase or to be put in a
different tier. If that provision is adopted, there is the
potential to use a whole new set of underwriting criteria for
renewals, which the division will not have access to. Those are
not currently filed. She said all parties involved in this
compromise bill have had lengthy discussions and made
concessions.
SENATOR FRENCH asked Ms. Hall to articulate what criteria might
be used during the renewal process that might not be good.
MS. HALL said she does not want to say they would not be good;
they would be the same criteria used now. Those criteria might
be use of prior insurance, use of the limits purchased that she
hopes has to do with one's driving record; and various types of
underwriting and rating factors. She said the division currently
has rating factors on file but it does not have underwriting
factors on file. In the insurance industry today, underwriting
and rating have become blended. Underwriting factors tend to be
utilized to place consumers in tiers. Historically, insurance
companies had multiple companies: a preferred company, a middle-
ground company, and a non-standard company. Company placement is
considered to be an underwriting factor. However, as technology
advances, computers do more underwriting and less human
involvement occurs. Various factors affect the tiers as they are
put together. That is one reason the division has emphasized the
need to be able to look at both underwriting and rating factors
in this bill.
SENATOR THERRIAULT asked if the division supports the compromise
bill before the committee.
MS. HALL said it does.
CHAIR SEEKINS called for discussion among members.
TAPE 03-45, SIDE A
SENATOR FRENCH said he believes the bill is a step in the right
direction and is better than the protections that exist now,
which are none. He said he intends to watch this legislation as
it moves through the other body as he thinks the real
battleground will be the maintenance of the ban on credit
scoring at renewal.
SENATOR ELLIS gave a "thumbs up" to Senators Cowdery and Elton
for the work they did on this legislation.
CHAIR SEEKINS said he is glad the Division of Insurance will be
actively involved in monitoring what happens as this legislation
goes forward. He said he hopes that other substantive factors,
meaning at least 25 percent or more, will come into play. He is
also eager that people be educated on what factors affect their
insurance rates.
SENATOR ELLIS moved and asked unanimous consent that CSSB
13(JUD) move to the next committee of referral with its
accompanying fiscal notes.
CHAIR SEEKINS noted that without objection, the motion carried.
There being no further business to come before the committee, he
adjourned the meeting at 2:51 p.m.
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