Legislature(2001 - 2002)
03/26/2002 01:35 PM Senate 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
SB 320-MOTOR VEHICLE INSURANCE & REPAIRS
CHAIRMAN STEVENS announced SB 320 to be up for consideration.
MS. ANNETTE DEAL, staff to Senator Cowdery, sponsor of SB 320,
said this legislation has everything to do with how auto and home
premium rates are determined for insurance purposes.
The idea of the industry is to remove driver behavior,
or base very little percentage on it, meaning your
tickets and your accidents, and replace it with
economic considerations meaning your credit score. This
credit score is a glimpse in time, but it is a seven-
year glimpse in time, because your credit score takes
into account bankruptcies, judgments, late payments and
all of those factors remain on your credit for a seven-
year period, possibly even 10 years where in the past
driving records have used…. In this scenario people
with bad credit who are good drivers are subsidizing
people with good credit who are risky drivers.
She told the story of a Fairbanks woman who is a victim of
identity theft whose premiums have skyrocketed and there's
basically nothing she can do about it. People who are hurt by
this are people with a few glitches on their credit who have a
good driving record. The insurance industry will argue that
driving records are inaccurate, but the DMV says they are very
accurate and they have never heard that they are inaccurate.
Credit reports on the other hand can be anywhere from 10 - 60%
inaccurate. Fixing a credit report can take forever.
MS. DEAL said that insurance companies tell you that there is a
correlation between good credit and fewer accidents, but she
could probably prove to them through some sort of study that
people who eat pickles are in more accidents. They also say they
are able to write more aggressively in urban markets and that's
great except if you consider that about 50% of Alaska is rural.
MR. MARK NIEHAUS, General Manager, Progressive Insurance, said
they are the fourth largest writer of auto insurance in the
country and have used credit as an element of their rating for
over 10 years. Currently, they use credit in 45 of the 48 states
in which they write business. "Credit is allowable and we have
been using it actively in those states."
He said they have about $45 billion of earned premium data using
credit. They have used credit in Alaska successfully for the last
six years. They had an extensive filing and review process with
the Alaska Division of Insurance where they closely examined
their proposal and approved it because they deemed credit to be
correlated with risk of loss, which, it is. About two thirds of
their customers get a lower rate because of credit and they would
get rate increases if they couldn't use credit. Some of the
increases would be very significant like about 30 - 40%. There
had been voluminous studies on credit as a predictor of future
loss and the Alaska Division of Insurance has looked at this as
well.
The beauty of credit as a rating factor is that it's not
correlated with other factors and that's why insurance companies
want to use it. It's not correlated with age, sex, or marital
status. "So, it's powerful and it's an independent predictor of
future losses."
Many independents reviews have been done of this practice
including the NAIC and they have concluded that credit is
predictive of loss. They could not afford to give lower rates if
it weren't justified. "We would go out of business."
They use of credit for prescreening is specifically allowed by
the Fair Credit Reporting Act, which has a lot of disclosing
requirements and prohibitions on using things like age, sex,
religion, race and significant penalties for noncompliance.
"There is already a lot of protection out there today in terms of
the FCRA around use of credit."
Briefly, he said the process is objective and is an electronic
check taking about 30 seconds. They pull raw data from credit
vendors and calculate a score using their algorithm. There are no
privacy issues, because the credit data is not displayed in the
office of the independent agent who is doing the quote. They give
disclosure to the customer and ask permission as required by the
FCRA before they even order their credit report. In the event
that the rate comes out higher than the best rate, customers are
given an 800 number and get a free copy of their credit report.
If there are any errors, they are able to correct them and the
policy will be reissued at the revised rate. He added that they
get very few of those.
Progressive provides reason codes, listing three things a
customer can do to improve their credit score. Things that are on
a credit score include bankruptcies, judgments, tax leans,
information on number of loans, credit limits, late payments,
number of inquiries. Things not in a credit report are income,
race, gender, wealth, nationality, etc. The use of credit does
allow folks who otherwise wouldn't qualify to qualify for their
preferred rates.
MR. NIEHAUS said they have a major problem with this bill. It is
a very broad restriction and no other state has a bill that is so
broad and would completely disallow the use of credit for either
rating or underwriting.
It's going to create an unlevel playing field, frankly,
and disadvantage independent agents and independent
agency companies and the reason for that is direct
writers are specifically allowed to use credit.
He said there's no question that good drivers would be forced to
subsidize bad drivers. Good drivers defined as those people less
likely to have a claim would under this bill have to pay
significantly more insurance because of people who are more
likely to have a claim because of lack of responsibility.
MR. NIEHAUS said this is a powerful tool that would stifle
competition. His company is more willing to do business in
Alaska, because they can write more business and offer lower
rates and that helps them grow.
2:10 p.m.
The AARP wrote a letter saying they support the bill, because
they believe that retirees are being adversely affected by the
use of credit scoring insurance. He looked at the Progressive
credit scores by age, because one of the things they were saying
is that older folks have worse credit and are therefore being
hurt by credit scoring. He found exactly the opposite to be true
and showed them a graph illustrating that as you get older, your
average credit score gets better. He did not think the AARP
letter was based on any data.
He also looked at people without credit called no hits. Overall
nationwide that number is 4.8% of their business and he looked at
it for people over 60 and the number is 5.2% showing that there
is no significant difference in older versus younger folks. "So,
my conclusion is that older folks actually benefit today from the
use of credit."
He offered to share data on low income, consumers, urban
residents, etc. He summarized, "I think this bill is damaging for
Alaska consumers. It's going to cause higher rates and lessen
competition and it's going to force people that have
responsibility in terms of paying their bills and in terms of
their driving and record and behavior, it's going to force them
to pay more to subsidize those people that are less responsible
that don't pay their bills and have more accidents."
SENATOR AUSTERMAN asked him to clarify what states have laws that
don't allow them to use credit.
MR. NIEHAUS replied there are three states - California, Hawaii
and Georgia that don't use credit. In Hawaii, there is a
statutory prohibition on use of credit for rating, although it
doesn't deal with underwriting and there is a lawsuit on that
issue. California has no statutory prohibition on it. It's not
used in auto insurance. It's used in homeowners insurance and
other commercial insurance. It's not used in auto insurance
because of propositions one and three, which allows the insurance
commissioner to decide what rating factors will be used and the
commissioner chose not to allow credit as a rating factor. He
wasn't sure about Georgia's position.
SENATOR AUSTERMAN said he had a question about the credibility of
credit reports, because he was involved in a situation where he
spent eight months getting his credit report straightened out. He
asked Mr. Niehaus to explain in a little more detail how they get
the credit report.
MR. NIEHAUS said they gather the raw data from the credit
providers. There are three primary vendors of credit information
and Progressive uses a company called Trans Union. They get the
raw data and have a mathematical formula that calculates the
score.
He had some data on accuracy. In 2000 his company ordered 11
million credit reports and the number of errors and corrections
was quite small, 21 changes for that year. In 2001, out of 7
million credit reports ordered in the first half of the year they
had 7 changes. Another study they had from Arthur Anderson said
that 2% of 15,703 credit reports were disputed and 25% of 12,023
reports reviewed were disputed and 3% of reports reviewed
resulted in a reversal. There was a total of 36 changes out of
15,703. He thought the data was getting better and better every
day as people become more and more aware of a credit score.
SENATOR AUSTERMAN said he knows that their scoring system takes
in risk factor as well as credit and asked him to explain how
they weigh the risk versus credit.
MR. NIEHAUS replied:
We basically have a matrix where we're looking at risk
factors and we have seven different categories of risk
factors meaning going from the person with no prior
insurance and a lot of points and a younger driver to
the other extreme of an older driver who's clean and
prior insurance, etc. And then we also have credit
scores. So, it's an array of rates. In terms of the
effect of credit score, I can't give you a percentage
affect. It does qualify as I mentioned, people who
otherwise would not get good rates. They can get an
attractive rate. For example, somebody with no prior
insurance and a couple of points can actually get -
normally that person would be considered a non standard
risk, but assuming they have good credit, that person
could qualify for - we have five tiers - they would
qualify for the preferred tier, which is the second
best tier that we have. In terms of premium difference,
you're looking at probably 40%.
SENATOR AUSTERMAN asked if they determined rates by using 50%
risk and 50% credit.
MR. NIEHAUS said he didn't think there was a mathematical answer
to that.
SENATOR TORGERSON asked how long credit scoring had been used in
the industry.
MR. NIEHAUS answered that it probably dates back to the 70s. His
company has been using it for about 10 years and in this state
for about six.
CHAIRMAN STEVENS asked if his algorithms were approved by the
Division of Insurance.
MR. NIEHAUS replied yes.
TAPE 02-15, SIDE B
CHAIRMAN STEVENS asked if the variations within the rates
approved by the Division of Insurance as well.
MR. NIEHAUS replied yes.
MR. STEVE CLEARY, Alaska Public Interest Research Group (AKPIRG),
supported SB 320 and agreed especially with Ms. Deal's testimony.
He said credit scoring is bad for consumers because they don't
know how the score is figured and factors that shouldn't make the
a person's credit score bad can make it bad in a way that
shouldn't happen, like divorce, unemployment and large medical
bills. Figures from their national office show that up to 37% of
credit reports are wrong and this can adversely affect their
score.
CHAIRMAN STEVENS asked him to send that information to the
committee.
MR. JAMES JENKS, Legislative Counsel, U.S.A.A. in the western
United States, said they are an insurance and financial services
company serving military families all over the world. He said
they use credit reports, but very sparingly. They use them for an
initial rating for a new policy, but don't use them for review of
their cancellations. "After the first year of experience with us,
our rates for the person going forward are based upon our
experience with them."
They also recognize that other companies use credit to underwrite
or establish the rate in different ways. The factors used in
establishing rates and underwriting goes to the very nature of
the competitive market place and Alaska is becoming increasing
competitive. So, if someone does not like the rate they get from
one company, they are free to shop around.
MR. JENKS concluded that they oppose the bill and feel that an
insurer should be able to use valid underwriting and rating
criteria if they can be demonstrated to have a valid relationship
to the loss.
MR. GLENN CLARY, Anchorage resident, supported SB 320. There are
two other areas that they could amend that would help Alaskans
even more. Insurance companies operating in Alaska sell auto
policies because residents are required by state law to have it,
but the insurance companies have total control. Only after you
have signed up and paid your premium do they send you a copy of
the policy. Without previous disclosure of the terms of the
policy, the customer finds they have abdicated constitutional
rights and handed over to the insurance companies total control
of their medical pay out through their use of independent medical
examinations (IME).
He said what matters to the insurance company is that they get
the customer to the arbitration table. He suggested requiring
insurance companies to allow their customers the option to choose
between arbitration and a jury trial and requiring insurance
companies to hire local doctors to do IMEs, which will establish
some accountability within a local community and prevent the
insurance company from hiring "prostitute" doctors.
MS. SUZANNE KELLY said she was representing herself and her
family and that she is self-employed. Her insurance rates went up
because of her credit. She has bought a house, refinanced and had
babies; she uses her line of credit for her business and has
expanded her business. "Basically, my credit scores went down
very low. So, that made my insurance rates go up very high."
She got different quotes and found that if she used her husband's
social security number, they would pay low rates. She thought it
was very discriminatory and summarized saying that she supported
SB 320. She said they don't know how much a credit score weighs
from company to company.
MS. SARAH MCNAIR-GROVE, Property Casualty Actuary, supported
their efforts to provide some kind of regulation on the use of
credit scoring by insurance companies in Alaska.
How far to go, including whether it should be totally
banned or whether there should just be some parameters
around it, we believe is a policy call that is best
made by you, but we support your efforts in discussing
this issue. The division is responsible to review auto
insurance rates and approve them only if they are not
excessive, not inadequate and not unfairly
discriminatory. Those are the statutory standards,
which we use to review a rate filing.
Credit information and credit scoring was first
approved for use in Alaska approximately four and a
half years ago. Extensive documentation and information
was required from the insurance company to support its
use and I believe Progressive has already testified to
that. Despite the fact that it defies common sense, the
correlation between credit scores and loss experience
is high.
Approximately seven insurance companies have approved
auto filings that include the use of credit scoring in
Alaska. Since December 2000, the division has received
approximately 11 auto and four homeowner's rate filings
requesting to use credit information. Six of the auto
filings were not approved as filed, either because the
insurer totally withdrew them or because they withdrew
the credit-scoring piece of the filing. Two of the
filings were approved. The remaining auto filings are
either still under review or disapproved. Of the four
homeowners' filings, three of those also removed the
credit scoring information. The remaining homeowners'
filing is still under review. In addition to the rating
process, an insurer can use credit scoring as an
underwriting tool.
Unlike grading of insurance applicants based on risk
factors, the Division of Insurance does not have prior
approval authority over an insurer's use of credit
information in the underwriting process. The
underwriting process is where the insurer will look at
the applicant and decide whether or not they want to
provide coverage to the insured.
As the use of credit scoring has increased, the
division has received consumer complaints regarding its
use. Most of these calls were from consumers who just
wanted to know whether this was something that insurers
were legally entitled to do in Alaska. They claimed
that their premiums doubled or tripled because of the
use of credit information. When we explained to them
that, yes, it was something insurers could do in
Alaska, that didn't make them happy, but they went off
and found other insurers that were willing to provide
them coverage at lower rates.
In particular, one consumer who did file a formal
complaint with the division had a premium increase from
$1,500 to $4,300 and were told this was based on their
credit information. They checked their credit
information with the credit agency and it appeared to
be good. They went back to the insurer and the insurer
told them that their credit score was poor, because
they had too many requests for credit ratings, one
outstanding bad debt, which the insured was in the
process of disputing and too much credit card activity.
The consumer said that they paid all of their credit
cards in full each month and they also went and found
another insurer that would provide them coverage.
We recently have attended National Association of
Insurance Commissioners meetings and there were several
discussions on the use of credit information at these
meetings. There are some trickle down affects and some
unintended consequences of the use of credit
information in insurance rates. One producer related
several problems dealing with real estate purchases
where the insured qualifies to buy a half million
dollar home, but the insurance credit score wasn't good
enough for them to get coverage with an A-rated or a
financially sound company. Their insurance would be
provided by a B-rated company. The lender was unhappy
with that and they were unable to close. So, then
you've got the consumer unhappy, because they can't
close on the loan; the real estate companies can't
close the deal and the lenders aren't providing money.
So these are the unintended consequences of its use.
Another consumer from Michigan said that they had
followed their insurance commissioner's advice to shop
around and get additional quotes and find the best
deal. After they did this, they called the commissioner
back and said, "I followed your advice, but now I can't
get any coverage because I've been told there's been
too many hits on my credit information. This has been a
question that we have asked insurers when we have
looked at these filings - do you count these kinds of
hits and we have been told no. So, there's anecdotal
evidence that at least in theory and practice if this
consumer is correct and that's the reason why he
couldn't get insurance, but there may be some mismatch
between those items.
SENATOR TORGERSON asked how many auto companies had they approved
use of credit information for.
MS. GROVE replied that they have currently approved filings for
seven insurance companies to use credit information in their rate
making process. "There are other insurers that use it as an
underwriting tool, which we don't have prior approval for."
CHAIRMAN STEVENS asked if they had approved of seven - one
homeowners.
MS. GROVE replied she thought it was one homeowner's filing. They
have received four filings since 2000 and three of those withdrew
credit information and she is still looking at one.
CHAIRMAN STEVENS asked if the three voluntarily withdrew the
credit information.
MS. GROVE indicated that was correct.
CHAIRMAN STEVENS thanked everyone for their comments and
adjourned the meeting at 2:45 p.m.
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