04/08/2016 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| SB121 | |
| SB127 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 127 | TELECONFERENCED | |
| + | SB 121 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
April 8, 2016
3:22 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Shelley Hughes, Vice Chair
Representative Jim Colver
Representative Gabrielle LeDoux
Representative Cathy Tilton
Representative Andy Josephson
Representative Sam Kito
MEMBERS ABSENT
Representative Mike Chenault (alternate)
OTHER MEMBERS PRESENT
Senator Kevin Meyer
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 121(JUD)
"An Act relating to a security freeze on the consumer credit
report of a minor, incapacitated person, or protected person."
- MOVED CSSB 121(JUD) OUT OF COMMITTEE
SENATE BILL NO. 127
"An Act relating to actions by insurers based on credit history
or insurance score; and providing for an exception to
consideration by an insurer of credit history or insurance
score."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 121
SHORT TITLE: SECURITY FREEZE ON CERTAIN CREDIT REPORTS
SPONSOR(s): SENATOR(s) MEYER
01/19/16 (S) PREFILE RELEASED 1/8/16
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) L&C, JUD
01/26/16 (S) L&C AT 1:30 PM BELTZ 105 (TSBldg)
01/26/16 (S) Heard & Held
01/26/16 (S) MINUTE (L&C)
01/28/16 (S) L&C AT 1:30 PM BELTZ 105 (TSBldg)
01/28/16 (S) Moved SB 121 Out of Committee
01/28/16 (S) MINUTE (L&C)
01/29/16 (S) L&C RPT 4DP
01/29/16 (S) DP: COSTELLO, GIESSEL, MEYER, ELLIS
02/08/16 (S) JUD AT 1:30 PM BELTZ 105 (TSBldg)
02/08/16 (S) Heard & Held
02/08/16 (S) MINUTE (JUD)
02/17/16 (S) JUD AT 1:30 PM BELTZ 105 (TSBldg)
02/17/16 (S) Moved CSSB 121(JUD) Out of Committee
02/17/16 (S) MINUTE (JUD)
02/19/16 (S) JUD RPT CS 3DP NEW TITLE
02/19/16 (S) DP: MCGUIRE, COGHILL, WIELECHOWSKI
03/02/16 (S) TRANSMITTED TO (H)
03/02/16 (S) VERSION: CSSB 121(JUD)
03/04/16 (H) READ THE FIRST TIME - REFERRALS
03/04/16 (H) L&C, JUD
04/08/16 (H) L&C AT 3:15 PM BARNES 124
BILL: SB 127
SHORT TITLE: INSURER'S USE OF CREDIT HISTORY/SCORES
SPONSOR(s): SENATOR(s) HUGGINS
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) STA, L&C
02/11/16 (S) STA AT 9:00 AM BUTROVICH 205
02/11/16 (S) Heard & Held
02/11/16 (S) MINUTE (STA)
02/16/16 (S) STA AT 9:00 AM BUTROVICH 205
02/16/16 (S) Moved SB 127 Out of Committee
02/16/16 (S) MINUTE (STA)
02/17/16 (S) STA RPT 4DP 1AM
02/17/16 (S) DP: STOLTZE, COGHILL, HUGGINS, MCGUIRE
02/17/16 (S) AM: WIELECHOWSKI
02/25/16 (S) L&C AT 1:30 PM BELTZ 105 (TSBldg)
02/25/16 (S) Heard & Held
02/25/16 (S) MINUTE (L&C)
03/03/16 (S) L&C AT 1:30 PM BELTZ 105 (TSBldg)
03/03/16 (S) Moved SB 127 Out of Committee
03/03/16 (S) MINUTE (L&C)
03/04/16 (S) L&C RPT 3DP
03/04/16 (S) DP: COSTELLO, GIESSEL, MEYER
03/11/16 (S) TRANSMITTED TO (H)
03/11/16 (S) VERSION: SB 127
03/14/16 (H) READ THE FIRST TIME - REFERRALS
03/14/16 (H) L&C
04/08/16 (H) L&C AT 3:15 PM BARNES 124
WITNESS REGISTER
EDRA MORLEDGE, Staff
Senator Kevin Meyer
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Introduced CSSB 121(JUD), on behalf of
Senator Meyer, sponsor.
LAURA HUGHES
Anchorage, Alaska
POSITION STATEMENT: Testified in support of CSSB 121(JUD).
LAUREN RASMUSSEN, Staff
Senator Charlie Huggins
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Introduced SB 127, on behalf of Senator
Huggins, sponsor,
KRISTIE BABCOCK, Independent Agent
State Farm Insurance
Kenai, Alaska
POSITION STATEMENT: Testified in support of SB 127.
CINDA SMITH, Attorney
GEICO [Government Employees Insurance Company]
Washington, District of Columbia
POSITION STATEMENT: Testified in support of HB 127.
JEFF KINSEY, Actuary
State Farm Insurance
Bloomington, Illinois
POSITION STATEMENT: Testified in support of SB 127.
GARY STRANNIGAN, Spokesperson
Liberty Mutual Insurance and Safeco Insurance Companies
Seattle, Washington
POSITION STATEMENT: Answered questions during the hearing on SB
127.
TIMOTHY MAUDSLEY, President
Alaska USA Insurance Brokers
Anchorage, Alaska
POSITION STATEMENT: Testified in support of SB 127.
ARMAND FELICIANO, Lobbyist
Property Casualty Insurers Association of America
Sacramento, California
POSITION STATEMENT: Testified in support of SB 127.
CHIP WAGONER, Regulation Specialist
Division of Insurance
Department of Commerce, Community & Economic Development
Juneau, Alaska
POSITION STATEMENT: Introduced Michael Ricker, during the
hearing on SB 127,
MICHAEL RICKER, Actuary P/C
Division of Insurance
Department of Commerce, Community & Economic Development
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing on SB
127.
MIKE SCHNEIDER, Attorney
Anchorage, Alaska
POSITION STATEMENT: Testified with concern on SB 127.
ACTION NARRATIVE
3:22:34 PM
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:22 p.m. Representatives Olson,
LeDoux, Tilton, Hughes, Colver, and Josephson were present at
the call to order. Representative Kito arrived as the meeting
was in progress.
SB 121-SECURITY FREEZE ON CERTAIN CREDIT REPORTS
3:22:54 PM
CHAIR OLSON announced that the first order of business would be
CS FOR SENATE BILL NO. 121(JUD), "An Act relating to a security
freeze on the consumer credit report of a minor, incapacitated
person, or protected person."
3:23:07 PM
EDRA MORLEDGE, staff, Senator Kevin Meyer, Alaska State
Legislature, advised that SB 121 is a consumer protection bill
allowing a parent, legal guardian, or conservator to place a
security freeze on a dependent's credit file. If a credit
report does not exist because the child is a dependent and has
not established credit of their own, the credit bureaus would be
directed to establish a credit file for the purpose of placing a
freeze on the file. She reminded the committee that identity
theft is a growing concern which local, state, and federal
governments are taking measures to combat. Following testimony
heard in the Senate Judiciary Standing Committee, the bill was
expanded from coverage for minor children to include
incapacitated adults and other protected individuals. Often,
she explained, those individuals have not established credit in
their own names and they may not be able to manage their own
finances or to establish credit. This legislation allows those
tasked with managing another person's finances to place a
security freeze on their credit file.
3:25:06 PM
CHAIR OLSON opened public testimony.
3:25:18 PM
LAURA HUGHES stated support for SB 121, and concurred with Ms.
Morledge's testimony. Ms. Hughes and her husband used a credit
freeze and were looking to do the same for their daughters, but
found that Alaska does not have a law to do so. She contacted
Senator Meyer's office and related that she hopes to see the
bill become law.
REPRESENTATIVE LEDOUX asked whether adults can obtain a freeze
on their credit files.
MS. MORLEDGE answered yes. Currently, the Personal Information
Protection Act (PIPA), contains procedures for individuals to
contact credit bureaus and place a freeze on their own credit
file. In further response to Representative LeDoux, she
explained that a credit freeze means the credit bureau cannot
share your credit score or your credit history with another
company that is inquiring for the purposes of establishing
credit with the inquiring company.
REPRESENTATIVE LEDOUX asked whether a person would put a freeze
on their credit file if they thought someone was trying to steal
their identity. Otherwise, she commented, how would a person
ever obtain credit?
MS. MORLEDGE said if one fears another person has access to
their social security number or other personal information, one
could place a freeze for the purpose of knowing their credit
file is secure and cannot be shared with other companies. There
are also provisions in PIPA which allow a person to unfreeze the
credit file temporarily or permanently, she said.
REPRESENTATIVE LEDOUX surmised that under this bill if the
parents or guardian froze the child's account they would be able
to unfreeze it.
MS. MORLEDGE agreed, and advised the parent could unfreeze it,
or the Alaskan child, who at age 16 years can apply for
financial aid, can unfreeze their credit.
3:29:11 PM
REPRESENTATIVE HUGHES observed that if a minor's parents froze
their child's account, after turning 18 years-of-age he/she
could unfreeze their credit file.
MS. MORLEDGE said correct.
REPRESENTATIVE HUGHES pointed out that young people are
purchasing more products than in prior years, and asked whether
that is the reason this bill is necessary.
MS. MORLEDGE explained how research shows that people have
become aware of increasing identity theft of children. The
national rate is approximately 11 percent for children who have
had their social security numbers used without their consent or
their parents' knowledge. Further, children are about 35 times
more likely than adults to have their identity stolen because
[their records] are a "blank slate." Approximately 16 to 20
states have pending legislation allowing a credit freeze by
parents because people are beginning to recognize the problem.
REPRESENTATIVE HUGHES commented on the worthiness of the
proposed legislation.
CHAIR OLSON, after ascertaining no one wished to testify, closed
public testimony.
3:32:20 PM
REPRESENTATIVE HUGHES moved to report CSSB 121(JUD), Version 29-
LS1129\E, out of committee with individual recommendations and
the accompanying fiscal notes. There being no objection, CSSB
121(JUD) was reported out of the House Labor and Commerce
Standing Committee.
3:32:36 PM
The committee took an at ease from 3:32 p.m. to 3:34 p.m.
SB 127-INSURER'S USE OF CREDIT HISTORY/SCORES
3:34:56 PM
CHAIR OLSON announced that the final order of business would be
SENATE BILL NO. 127, "An Act relating to actions by insurers
based on credit history or insurance score; and providing for an
exception to consideration by an insurer of credit history or
insurance score."
3:35:10 PM
LAUREN RASMUSSEN, staff, Senator Charlie Huggins, Alaska State
Legislature, advised that, when Alaskans apply for a personal
automobile or homeowner's insurance policy, there are several
variables insurance companies take into consideration to assess
risk such as, motor vehicle record, good student discount,
marital status, age, and credit history. Under current law,
credit history is included when underwriting new policies, but
must be removed at the time of the policy renewal; every two
years. Currently, consumers can elect to include their credit
history at the time of renewal, which requires a time consuming
and confusing waiver process, often resulting in consumers
seeing an increase in their rate, which encourages them to
search for lower rates; a practice referred to in the industry
as "churning." The bill also requires insurers to make
exceptions to a consumer's rate at the time of the initial
policy - and at policy renewal - when the consumer's credit is
adversely impacted by extraordinary life circumstances.
Examples of extraordinary life circumstances are serious
illness, injury, military deployment overseas, divorce, and
involuntary unemployment. Ms. Rasmussen stated that SB 127
fixes a discrepancy in the law, as Alaska is the only state to
require insurers to remove credit history when rewriting a
policy. Finally, the bill has a zero fiscal note.
REPRESENTATIVE LEDOUX surmised that "churning" means people are
going to automobile companies looking for cheaper prices, and
questioned why this is not a good idea.
MS. RASMUSSEN deferred to the Division of Insurance.
3:39:25 PM
REPRESENTATIVE JOSEPHSON inquired as to why there is a statutory
requirement to remove credit history, following the policy
period of two years.
MS. RASMUSSEN expressed uncertainty as to why the legislation
was written in that manner approximately 10 years ago, and
offered to provide further information.
REPRESENTATIVE HUGHES returned to the issue of "churning" and
suggested that, after the two-year policy period, the person can
receive a cheaper rate because other companies can access the
credit score [to establish a base rate]. She opined that the
intent is to "help the marketplace" and asked whether her
assumption was correct.
MS. RASMUSSEN answered yes.
REPRESENTATIVE HUGHES asked what is happening in other states in
this regard.
MS. RASMUSSEN said that Alaska is the only state to not allow
credit scoring at the time of policy renewal, thus this
legislation would put Alaska in line with the nation.
REPRESENTATIVE HUGHES asked whether more consumers in Alaska
will save money or pay more, as a result of SB 127. She further
asked whether an analysis is available to determine whether
there would be a savings to consumers overall.
MS. RASMUSSEN concurred with the sponsor's belief that the bill
will benefit the majority of consumers, although she is unaware
of any supporting hard data. In other states, she said, "it
definitely does help the majority of insurance consumers."
3:42:50 PM
CHAIR OLSON recalled that approximately 80-85 percent of the
population received lower rates. He pointed out that the
insurance companies' information is proprietary.
CHAIR OLSON opened public testimony.
3:43:36 PM
KRISTIE BABCOCK, Independent Agent, State Farm Insurance, said
she employs eight individuals and markets insurance and
financial services. She said her testimony will focus on the
impact of current law on her customers, and how SB 127 offers a
solution to the difficult situation State Farm Insurance
customers are facing. Due to the difficulty of the existing
law, she has dedicated one staff member to deal exclusively with
the difficulty created for customers. Even though a customer
may not have had a driving [ticket] or accident, at renewal
their rate will increase by 30-35 percent. Ms. Babcock related
that it is not easy for her customers to understand that the
rate occurs because the company can no longer use the factors
that were used when the policy was initially written. There is
the option of a waiver, which requires contacting the customer
and obtaining the waiver in order to avoid the large rate
increase. She related that she works hard every day to overcome
the volatile rate increase the [law] creates, and sometimes her
office just can't reach the customer prior to their rate
increase. The process is difficult for frustrated customers to
understand. She relayed a situational anecdote to illustrate
the difficulties one of her customers experienced.
MS. BABCOCK referred to "churning." Although she agreed that
competition is a good thing, current law only allows insurance
companies to compete when writing new policies. She again
described how a renewal customer may get a better rate on a new
policy from another company, but misses out on the benefits of a
long term relationship with their insurer. Churning, she
described, is not a positive impact on the economy or her
customers. She reiterated that a staff member has a dedicated,
daily responsibility to check a list and determine pending rate
increases that will effect customers with nothing else on their
record. The customer is then contacted and receives an
explanation of the waiver process, which results in a reduced
premium 98-99 percent of the time.
3:49:49 PM
REPRESENTATIVE LEDOUX asked whether the Division of Insurance
requires insurance companies to look at the customer's credit
score and, if it is not available, to raise their premium.
MS. BABCOCK deferred comment.
MS. BABCOCK concluded that the impact of SB 127 would be to
alleviate the dramatic swings in rates, eliminate the
frustration and cumbersome process of a waiver signed at each
renewal, and allow consumers to shop with confidence knowing
there is stability in the rating factors.
REPRESENTATIVE JOSEPHSON asked about the intent behind the
legislation that established the two-year period and whether it
was to give a period of time to improve their credit history.
MS. BABCOCK opined that in 2003, the legislature addressed
clarifying whether credit should continue to be used in an
insurance rating for personal home and automobile insurance, and
it was decided that credit data would only be used initially [to
establish premiums], but not for renewals. In addition, it was
intended that, after two years, the company's retained, internal
data would be sufficient for rating renewals. Unfortunately,
she pointed out, that hasn't worked, evidenced by the increased
renewal premiums.
REPRESENTATIVE LEDOUX surmised that Ms. Babcock's testimony was
that the compromise was possibly because the insurance companies
would have internal data to rate the policy. However, she
pointed out it appears there is nothing requiring insurance
companies to review credit reports.
3:53:24 PM
REPRESENTATIVE HUGHES pointed out that when a consumer shops
around, their credit score is used, they may be offered a lower
rate, and then are required to hassle with signing a waiver.
She asked for confirmation that the average rate increase is 30-
35 percent.
MS. BABCOCK said that at the time of renewal, her customers may
experience an increase of 20-50 percent.
REPRESENTATIVE HUGHES inquired as to whether Ms. Babcock was
losing customers after two years.
MS. BABCOCK restated that there is a provision to allow for a
manual waiver and one of her employees contacts customers,
explains the situation and obtains waivers all day long.
However, many companies do not provide that service. Generally,
she said she does not lose customers unless they are angry and
don't understand the process.
REPRESENTATIVE KITO posited whether, if the bill passes, State
Farm Insurance would use the original credit information or look
at the customer's current credit score at renewal.
MS. BABCOCK answered that she would look at the current credit
situation.
3:56:58 PM
CINDA SMITH, GEICO [Government Employees Insurance Company],
advised this bill is good for consumers, and noted that GEICO
does not use credit due to the unfairness created when a
customer's rate goes up by the percentage Ms. Babcock mentioned.
GEICO's management does not believe that is fair, when there has
been no change in the accident or traffic conviction history;
therefore, GEICO refrains from offering the lowest rate possible
at initial business so that the rate stays lower which is not
exactly fair to consumers either.
REPRESENTATIVE LEDOUX advised she represents a district in
Anchorage populated with lower-income individuals who may not
have sterling credit ratings. She surmised it is better for her
constituents to not use credit scores at all, and questioned how
this bill would be good for her constituents.
MS. SMITH responded that credit helps the vast majority of
people. In further response to Representative LeDoux, Ms. Smith
advised that income is not a factor in a person's credit rating,
in fact, the rating is based on the quality of the credit.
Thus, if the lower-income constituents have cared for their
credit, this bill will benefit them, she said.
REPRESENTATIVE LEDOUX pointed out that lower-income individuals
may lose their jobs more often and possibly are more transient.
She expressed her belief that when comparing lower-income to
higher-income people, lower-income people would have lower
credit scores.
3:59:19 PM
MS. SMITH explained that this bill has an extraordinary life
change provision which allows that certain circumstances would
not be considered, and people experiencing extraordinary life
changes would be given a neutral rating.
REPRESENTATIVE JOSEPHSON surmised customers would be given a
neutral rating if they experienced one of the life conditions
described in the bill, but not if they have bad credit.
MS. SMITH said correct.
REPRESENTATIVE LEDOUX concluded that GEICO does not use the
credit scores and insurance companies are not required to use
credit scores.
MS. SMITH answered that insurance companies are not required to
use credit scores.
REPRESENTATIVE LEDOUX offered the example of a company using the
credit score of a customer with a perfect driving record. The
company does not have to raise their rates, but it chooses to
because it can't look at the customer's credit score again. She
asked whether she is correct.
MS. SMITH deferred comment to an actuary, but stated that
Representative LeDoux is correct in her understanding that
insurance companies are not required to use a credit score.
Insurance companies want to charge the right rate to each
person, she explained, therefore the determining factors are
based upon the individuals known characteristics that indicate
the likelihood of a loss.
REPRESENTATIVE LEDOUX acknowledged that the process actually
makes sense when a driver purchases a new policy. However, at
the time of renewal, if the insurance company has a client with
a good driving record who pays his/her premiums in a timely
manner, why does the insurance company need to look at their
credit score, she questioned.
4:01:53 PM
MS. SMITH reiterated that use of a credit score helps the vast
majority of consumers.
REPRESENTATIVE HUGHES expressed that she is uncomfortable with
an implication that low-income people tend to have bad credit
more often than people who are not low-income; in fact, her
personal experience is that many people of low income are
working hard and striving to keep good credit, thus this bill
will benefit them. Currently, consumers are faced with
increasing rates, and the fact that some are transient may
impede the ability of the company to track them down in order
for them to sign the waiver. Representative Hughes observed
that GEICO doesn't use credit in Alaska, and asked whether GEICO
uses it in other states.
MS. SMITH answered yes; GEIGO management believes the high rate
at renewal is unfair to the consumer.
4:03:33 PM
JEFF KINSEY, Actuary, State Farm Insurance, offered that for the
many reasons previously articulated, State Farm Insurance
supports the passage of SB 127.
CHAIR OLSON asked for the percentage of people who receive a
lower rate by the use of credit scoring.
MR. KINSEY responded that, with regard to State Farm Insurance
specifically, approximately 60 percent of its policyholders, for
both personal automobile and homeowners, entering their third
year of coverage, receive a rate increase, when their credit
information is stripped out at renewal.
4:05:06 PM
CHAIR OLSON asked about the effect of initially using the credit
score.
MR. KINSEY estimated that of State Farm Insurance automobile and
homeowner new policies written in 2015, approximately 3,500
policyholders could see a rate increase in excess of 50 percent.
MS. BABCOCK offered that when the policies renew, 60 percent
have a rate increase because the credit is stripped out.
Although, for a certain percentage the rate may stay the same,
and some may have their rates go down when the credit is taken
out. She surmised that 80 percent of consumers either benefit
or have no impact based on their credit.
CHAIR OLSON asked to exclude Alaska from the percentages.
MR. KINSEY responded that Alaska is consistent with the rest of
the country, whereby approximately 60 percent of policyholders
benefit by the use of credit, and 40 percent are either not
affected or see a higher premium considering the use of credit.
REPRESENTATIVE LEDOUX asked whether credit score checks tend to
adversely affect premiums of lower income versus higher income
individuals.
MR. KINSEY answered no; in fact, studies by the Federal Trade
Commission (FTC) in 2007, and the Texas Department of Insurance
in 2005, concluded there is no relationship with income and
credit.
CHAIR OLSON asked whether Liberty Mutual Insurance and Safeco
Insurance Companies are currently using credit scoring in
Alaska.
4:08:20 PM
GARY STRANNIGAN, spokesperson, Liberty Mutual Insurance and
Safeco Insurance Companies, answered that his companies are
using credit scoring in the same manner as State Farm Insurance.
4:016 PM
TIMOTHY MAUDSLEY, President, Alaska USA Insurance Brokers,
informed the committee that Alaska USA Insurance Brokers
provides customers with property, casualty, and other types of
insurance. The brokerage fully supports the passage of SB 127
because the bill will remove the requirement for insurers to
eliminate the credit-based insurance score from the rating
process after two years. This change will provide consumers
with a fair and accurate rate on insurance renewals, and
eliminate confusion due to policy cancellations and the burden
of changing carriers to maintain preferred insurance rate
discounts. He opined that passage of the bill will open the
Alaska insurance market to additional insurance companies which
will increase competition to great benefit. Mr. Maudsley
strongly urged passage of SB 127.
4:10:46 PM
ARMAND FELICIANO, Lobbyist, Property Casualty Insurers
Association of America, informed the committee that Property
Casualty Insurers Association of America is a national trade
organization representing insurers in Alaska. For reasons
previously stated, the association supports SB 127. He
predicted that it will fix the market disruption, and said that
the bill includes "safeguard provisions." Addressing previous
questions, he said, regarding the national perspective,
approximately 28 states have similar laws as Alaska with the
exception of "stripping the credit after two years," and some
states implement a variation. In response to whether credit
scoring increases or decreases premiums, he said the State of
Arkansas has similar credit scoring as Alaska, with the
exception of the two year stipulation. Since 2005, due to
credit use, 3.1 million policyholders saw the following results:
approximately 40 percent received a lower premium, 14 percent
receive a higher premium, and another 42-45 percent were
unaffected.
4:13:08 PM
CHIP WAGONER, Regulation Specialist, Division of Insurance,
Department of Commerce, Community & Economic Development,
advised that Michael Ricker is an actuary for property and
casualty insurance matters for the Division of Insurance.
REPRESENTATIVE LEDOUX restated her question as to whether
insurance companies are required to rely on credit, or if it is
due to internal policies that causes a raise in premiums.
4:14:02 PM
MICHAEL RICKER, Actuary P/C, Division of Insurance, Department
of Commerce, Community & Economic Development (DCCED), answered
that an insurer is not required to consider credit, but the
insurers are required to file company rates and rules with the
Division of Insurance. Once filed, the rates and rules are
approved. The credit can initially be used as a variable, but,
in accordance with rules, cannot be considered at renewal.
Further, insurance companies must have one set of rates and
rules applying to those customers not signing a waiver, and one
set of rates and rules for those who do. When the policyholder
either signs or does not sign the waiver, insurers must adhere
to the appropriate set of rates and rules; one set includes the
use of credit and one set does not.
REPRESENTATIVE LEDOUX suggested that insurers could state an
intent to use the credit score, with respect to initial
policies, and not use it for renewal purposes. She concluded
there is nothing that is making insurers raise the premium as
long as they file with the division.
MR. RICKER added that there are insurers who do not deal with
the waiver process, and at renewal they simply take credit out
for everyone and do not solicit the waiver. He pointed out that
the issue is not that companies are choosing to raise rates at
renewal, the issue is that consumers with good credit receive an
initial discount. Once credit is taken out of consideration for
determining renewal rates, a neutral rate is assigned.
Therefore, at renewal, the consumer sees what appears to be an
increase in premium; without the benefit of the credit discount
they pay the average rate.
REPRESENTATIVE KITO asked whether there are general things
individuals can do to increase their credit score and decrease
their premiums.
MR. RICKER noted that policies are different for every company;
he advised that when insurers use credit history they do not use
a Fair Isaac Corporation (FICO) score, but use few or many
individual risk characteristics that the insurer finds to be
predictive. Mr. Ricker was unsure of a common risk
characteristic that, if improved, would reduce someone's rate.
Further, due to previous legislation, credit scoring models are
confidential and the component where companies support and show
their credit-based rating is confidential. However, there is a
provision within AS 21.36.460 dealing with adverse actions. The
provision provides that when a policyholder gets any, other than
the very best, rate the insurer is required to reveal the 3-4
most significant credit attributes that contributed to the
higher rate. He suggested that this information may be helpful
to the insured.
4:20:52 PM
REPRESENTATIVE KITO concluded that insureds are being informed
of characteristics that might have impacted their rate.
MR. RICKER agreed and paraphrased from AS 21.36.460(b) as
follows:
... notice must clearly state the significant factors
of the credit history on an insurance score that
resulted in the adverse action in a manner that allows
the consumer to identify the basis for the adverse
action.
REPRESENTATIVE JOSEPHSON surmised there is no way to improve the
credit score because the insured doesn't know the merits or
demerits [to raise or lower their score]; however, under the
adverse action provision, an insured could figure out what
caused the lower score.
MR. RICKER agreed that the insured could use the adverse action
provision, but they cannot figure out all of the risk
characteristics that went into that, or the degree to which they
may improve the rate. Under current law, he reiterated insurers
are required to notify insureds of the significant factors that
would have increased their rate.
REPRESENTATIVE JOSEPHSON related that the lowest standard in the
law for the passing of any laws is called a "rational basis
test." He asked Mr. Ricker to comment on the wisdom of, and the
basis for, the current law.
MR. RICKER declined comment, but pointed out that testimony
suggests that, after some initial period, there would be other
measurable characteristics to employ that would possibly be a
good or better predictor.
4:24:11 PM
REPRESENTATIVE LEDOUX questioned why credit card companies
verify an applicant's income, if income does not affect credit
worthiness.
MR. RICKER related that an insurance score is different from a
FICO score, and he was unsure as to whether a FICO score may be
correlated with income. In further response to Representative
LeDoux, he explained that a FICO score is the credit score that
is quoted by the three credit bureaus which are: Equifax,
TransUnion and [Experian]. Each FICO score is based upon
information the credit bureau keeps on file about a person.
With regard to the insurance scores, he explained that each
insurer files, with the division, the credit characteristics it
uses in determining its proprietary score; all insurers use
different characteristics.
REPRESENTATIVE LEDOUX asked whether any of the insurance
companies use income as one of their characteristics.
MR. RICKER opined that they do not and may be prohibited from
doing so. He continued that he doesn't believe the division
would allow the use of income without scrutiny.
REPRESENTATIVE LEDOUX acknowledged that each company uses
specific characteristics that are proprietary information, and
asked whether the general characteristics are public knowledge.
MR. RICKER clarified that Representative LeDoux was asking for
the credit history-based rate characteristics that all insurers
use, and offered to provide that information to the committee.
4:27:52 PM
REPRESENTATIVE HUGHES asked whether, if the state statute
directed that insurance companies couldn't use credit history at
all, insurance would then be more expensive in Alaska.
MR. RICKER said he could not answer in any certainty.
REPRESENTATIVE HUGHES surmised that having poor credit crosses
all income levels. She offered the scenario of a customer
filling out their initial insurance application and, based on
poor credit, they don't receive a good rate. On renewal their
rates is lowered because credit isn't being considered. Thus,
the person with a poor credit history at renewal will receive a
lowered rate while the person with a good credit history who
received a discount rate initially, experiences a 30-35 percent
increase. She asked whether her assumption was correct.
MR. RICKER responded that each insurer scores a little
differently but, more or less, the benefits cost what they cost.
There are some savings in being able to "price" people
accurately, which is removed if the credit is not used. For all
of the customers who see an increase, there will be some that
see a decrease by stripping out the credit.
REPRESENTATIVE HUGHES concluded that currently, at renewal,
customers with poor credit history are rewarded, and those with
good history are not. She asked whether people with a good
[credit] history [receiving an initial discount bonus] and
increased rates at renewal, are subsidizing people who are
initially enrolled with a poor credit history.
MR. RICKER said he would refrain from using the term subsidy.
When the division tells insurers they can't use credit, which is
a variable risk characteristic predictive of future loss, there
is no alternative ability to predict future losses with
precision. Unlike a subsidy, the insurance companies are
charging everyone average rates [and are unable to use discount
rates for good credit].
REPRESENTATIVE JOSEPHSON expressed his interest in knowing the
basis for similar legislation in Hawaii and California in order
to better understand the opposing perspective.
REPRESENTATIVE LEDOUX requested assurance that constituents
residing in the district she represents will not be negatively
impacted by SB 127.
CHAIR OLSON offered that "red lining" has been illegal in Alaska
for a number of years, either by zip code, House districts, or
other means.
REPRESENTATIVE LEDOUX interjected that Chair Olson was saying
"there is none."
CHAIR OLSON reiterated that red lining has been illegal in
Alaska for years, which can be confirmed.
4:35:59 PM
MIKE SCHNEIDER, Attorney, practicing in Anchorage since 1975,
and dealing daily with the insurance industry, observed that the
insurance industry doesn't rally its forces to get legislatures
to adopt laws so it can lose money; however, during testimony
today, it sounds as though by adopting this legislation many
people will save money, which may not be true. Mr. Schneider
said he deals with many estates of people who have been killed,
or people seriously injured by automobile misbehavior, and
Alaska has many uninsured citizens. He predicted that if this
legislation passes, he will probably receive a break in his
insurance rates, but the trouble is that there are many folks
who have a bad credit score and will not be able to afford
insurance, resulting in more uninsured drivers, thus every
constituent is at risk for a serious injury from an uninsured or
underinsured driver. He remarked that he endorses the idea of
looking at Hawaii and California legislation to determine why
those states have not elected to make changes in response to
insurance industry demands.
CHAIR OLSON, after ascertaining no one further wished to
testify, closed public testimony on SB 127.
REPRESENTATIVE COLVER, regarding the burden of paperwork
insureds face and the amount of paperwork involved for insurance
of all types, related a story of the requirements to renew his
personal insurance. He questioned that the industry appears to
be in support of the proposed legislation simply to reduce
paperwork, and urged argument on the merits of the legislation,
as well as how to make it easier for the consumer to respond to
renewal paperwork and deadlines. He described a method that
could simplify the renewal and waiver process.
4:42:44 PM
REPRESENTATIVE LEDOUX commented that while the testimony has
been that this is consumer-oriented legislation, she has yet to
hear any consumers testify in support.
CHAIR OLSON offered his reluctant support for credit scoring,
because "it works." Testimony revealed there are two states
that do not allow credit scoring, and Alaska adopted legislation
in 2003-2004 allowing, "first renewal after the initial use of
credit scoring." He asked Ms. Babcock for further
clarification.
4:44:19 PM
MS. BABCOCK said insurance companies charge overall what is
needed to pay claims, and hire employees, and other costs. The
purpose of using credit is to try to "segment the rate" as much
as possible, and credit scores have been shown to be one of the
most accurate indicators of the risk a person presents. Under
current law, those characteristics of credit cannot be used. In
response to Chair Olson's question about the first renewal, she
said that Alaska's law [that removes credit score
characteristics at renewal] affects 300,000-400,000 drivers, and
prevents giving the best rate for each insured driver. Ms.
Babcock questioned why the state would prevent [the
consideration of] credit score characteristics at renewal. She
said her customers are not wealthy people, and they are
frustrated because of what is required for them to obtain a
product they want and are required to retain. State law reads
that at the first renewal [credit characteristics] must be
stripped out.
REPRESENTATIVE LEDOUX inquired as to why the insurance companies
don't give consumers who have not had accidents and pay their
premiums on time the lowest rates.
[There followed a brief discussion on the value of credit
scoring to insurance pricing.]
4:49:29 PM
REPRESENTATIVE KITO expressed his understanding that an
actuarial correlation doesn't imply a direct relationship
between an activity and the result. Actuaries use related
factors to lower risk and make sure everyone is paying the
appropriate premium. He advised that actuarial [factors] will
not reveal a causal relationship.
REPRESENTATIVE JOSEPHSON asked Ms. Babcock whether credit scores
are obtained from an institution or her home office.
MS. BABCOCK said her office does not have a credit bureau and
vendors provide credit information.
REPRESENTATIVE JOSEPHSON asked if the vendors alluded to are
located in-state, and expressed his interest in knowing whether
the use of credit is a directive from the State Farm Insurance
national home office.
MS. BABCOCK opined that the majority of insurance companies, as
allowed under state statute, utilize credit as one of the many
characteristics for determining rates. State Farm Insurance
rates are developed in Bloomington, Illinois, and every rate
change, discount, and iteration of rate must be approved, when
filed with the division, which can take up to a year. Support
for any type of discount is required, such as having a second
policy, and the company is required to show the division that
the qualifier represents a different risk to the company.
However, the rates are initially developed by corporate [State
Farm Insurance].
4:52:41 PM
REPRESENTATIVE HUGHES expressed her understanding that the use
of a credit score allows for a more appropriate and fair price
rate. Not using a credit score may result in a less fair and
less appropriate rate, she determined. The proposed legislation
appears to be an effort to "even things out," she noted and
asked whether it is correct to say that customers with good
credit histories are helping to cover the lower rates for people
who initiate a policy with a "not-so-great credit history."
MS. BABCOCK said yes.
REPRESENTATIVE HUGHES concluded that currently, the law is
punishing people with a good credit history and rewarding people
without a good history, and that is a problem.
[SB 127 was held over.]
4:54:24 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
4:54 p.m.