03/29/2003 09:35 AM House STA
| Audio | Topic |
|---|
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE STATE AFFAIRS STANDING COMMITTEE
March 29, 2003
9:35 a.m.
MEMBERS PRESENT
Representative Bruce Weyhrauch, Chair
Representative Nancy Dahlstrom
Representative Bob Lynn
Representative Paul Seaton
Representative Ethan Berkowitz
Representative Max Gruenberg
MEMBERS ABSENT
Representative Jim Holm, Vice Chair
OTHER LEGISLATORS PRESENT
Senator Gary Stevens
COMMITTEE CALENDAR
HOUSE BILL NO. 47
"An Act prohibiting discrimination by credit rating or credit
scoring in certain insurance rates; and providing for an
effective date."
- HEARD AND HELD
HOUSE BILL NO. 5
"An Act prohibiting discrimination by credit rating or credit
scoring in insurance rates; and providing for an effective
date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 47
SHORT TITLE:INSURANCE DISCRIMINATION BY CREDIT RATING
SPONSOR(S): REPRESENTATIVE(S)CHENAULT
Jrn-Date Jrn-Page Action
01/21/03 0043 (H) PREFILE RELEASED (1/10/03)
01/21/03 0043 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0043 (H) STA, L&C
02/05/03 0135 (H) COSPONSOR(S): STEVENS
02/06/03 (H) STA AT 8:00 AM CAPITOL 102
02/06/03 (H) Heard & Held
02/06/03 (H) MINUTE(STA)
02/10/03 0173 (H) COSPONSOR(S): CRAWFORD
03/29/03 (H) STA AT 9:30 AM FAHRENKAMP 203
BILL: HB 5
SHORT TITLE:INSURANCE DISCRIMINATION BY CREDIT RATING
SPONSOR(S): REPRESENTATIVE(S)CRAWFORD
Jrn-Date Jrn-Page Action
01/21/03 0031 (H) PREFILE RELEASED (1/10/03)
01/21/03 0031 (H) READ THE FIRST TIME -
REFERRALS
01/21/03 0031 (H) STA, L&C
03/06/03 (H) STA AT 8:00 AM CAPITOL 102
03/06/03 (H) Heard & Held
03/06/03 (H) MINUTE(STA)
03/17/03 0566 (H) COSPONSOR(S): CROFT
03/29/03 (H) STA AT 9:30 AM FAHRENKAMP 203
WITNESS REGISTER
SAM SORICH, Vice-President
Western Regional Manager
National Association of Independent Insurers (NAII)
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
explained the use of credit information and said the absolute
prohibition in the bills should be rejected.
EDDIE LO, Insurance Manager
Fair Isaac
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
showed data regarding premium and loss information from insurers
and credit information from credit bureaus; answered questions.
SARAH McNAIR-GROVE, Property/Casualty Actuary
Division of Insurance
Department of Community & Economic Development (DCED)
Juneau, Alaska
POSITION STATEMENT: Testified to review the division's report
on credit scoring during the hearing on HB 47 and HB 5; answered
questions.
LINDA HALL, Director
Division of Insurance
Department of Community & Economic Development (DCED)
Anchorage, Alaska
POSITION STATEMENT: Reviewed handouts from the division and
answered questions during the hearing on HB 47 and HB 5.
OLIVIA POWELL, Staff
to Representative Mike Chenault
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 47 on behalf of Representative
Chenault, sponsor.
REPRESENTATIVE HARRY CRAWFORD
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Testified as sponsor of HB 5.
BIRNY BIRNBAUM, Executive Director
The Center for Economic Justice
Austin, Texas
POSITION STATEMENT: Testified with regard to credit scoring
during the hearing on HB 47 and HB 5.
DEE HUBBARD
Sterling, Alaska
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
thanked Representative Crawford for his diligence regarding the
issue of credit scoring and questioned whom credit scoring
serves.
HOWARD DORSEY
Kenai, Alaska
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
testified regarding his experience with insurance rate
increases.
MARIE DARLIN
AARP Capital City Task Force
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
expressed concern about both bills; said age seems to play a
part, and recommended studying credit scoring to find out how
it's really done.
MARK NIEHAUS, General Manager
Progressive Insurance
(No address provided)
POSITION STATEMENT: Testified in opposition to HB 47 and HB 5;
commented regarding the report by the Division of Insurance and
explained effects of the proposed legislation.
JOHN GEORGE, Lobbyist
for National Association of Independent Insurers (NAII)
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
emphasized the importance of encouraging more companies to write
insurance, explained rate filing and niche markets, and answered
questions.
ROBERT CEDERHOLM, Independent Insurance Agent
Wasilla, Alaska
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
testified in support of the ability of companies to use
different criteria for underwriting.
ARTHUR PARKS, Underwriter Administrator
State Farm Insurance Company ("State Farm")
for the Pacific Northwest Dome
(No address provided)
POSITION STATEMENT: During the hearing on HB 47 and HB 5,
described State Farm's underwriting model and explained that
State Farm only uses this model at the time of initial
application, for new business only.
MICHAEL LESSMEIER, Attorney at Law
Lessmeier & Winters
Lobbyist for State Farm Insurance Company
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 47 and HB 5, asked
the committee not to ban credit [scoring] altogether and to
consider a committee substitute for SB 320 proposed last year.
ELIZABETH MOCERI, Regional Counsel
Allstate Insurance Company
Bothell, Washington
POSITION STATEMENT: Testified on HB 47 and HB 5 and answered
questions.
ACTION NARRATIVE
TAPE 03-32, SIDE A
Number 0001
CHAIR BRUCE WEYHRAUCH called the House State Affairs Standing
Committee meeting to order at 9:35 a.m. Representatives Seaton,
Dahlstrom, Lynn, Gruenberg, and Weyhrauch were present at the
call to order. Representative Berkowitz arrived as the meeting
was in progress. Also in attendance was Senator Gary Stevens.
HB 47-INSURANCE DISCRIMINATION BY CREDIT RATING
HB 5-INSURANCE DISCRIMINATION BY CREDIT RATING
Number 0040
CHAIR WEYHRAUCH brought before the committee the following two
bills: HOUSE BILL NO. 47, "An Act prohibiting discrimination by
credit rating or credit scoring in certain insurance rates; and
providing for an effective date"; and HOUSE BILL NO. 5, "An Act
prohibiting discrimination by credit rating or credit scoring in
insurance rates; and providing for an effective date."
Number 0350
SAM SORICH, Vice-President, Western Regional Manager, National
Association of Independent Insurers (NAII), told the committee
NAII has about 100 of its member companies doing business in
Alaska; they account for 59 percent of all auto and homeowner's
insurance written in the state. He continued as follows:
The business of insurance is unlike other businesses,
and the pricing of insurance is different than the
pricing of a manufactured product. When a store sells
a television set, the store know how much ... labor it
took to build a TV set, and it knows what the cost of
the parts are. When an insurance company sells an
insurance policy, we don't know ... the ultimate cost
that we will incur. We don't know whether the
homeowner and driver will have a loss and, if the loss
occurs, what the cost of that loss will be.
Now, I guess an easy answer to that is, "Just estimate
the cost and charge everybody the same rate." But
that would be unfair. ... Good public policy demands
that the rate a person pays should be commensurate
with ... the person's risk of loss. And people with a
low risk of loss should not be forced to pay more than
they should to subsidize people with a higher risk of
loss.
Number 0486
MR. SORICH continued:
Insurance companies determine loss by looking at
factual data, and the facts show us that a driver with
past accidents is more likely to have future accidents
than a person with a clean driving record. And the
facts show that older homes generally are more likely
to have a loss than newer homes.
But if we stop there, we wouldn't be doing our best to
make sure that the rates we charge are equal to the
risk of loss. So, over the years, insurance companies
have introduced various characteristics that [try] to
get us closer to the goal of linking the risk of loss
with the premiums we charge: the age of the driver,
the driver's gender, where a car is driven, what type
of car, the construction of the home, how close a home
is to a fire station. Those are all characteristics
that insurance companies use to get closer to the goal
of predicting risk.
Some insurance companies are now using credit
information along with these other characteristics.
These companies are convinced that the use of credit
gets them closer to achieving a higher level of
fairness for their customers.
MR. SORICH said Mr. Lo would be talking about the statistical
research that shows the strong relationship between credit
information and risk of loss. He noted that his own e-mailed
statement shows a strong correlation between credit-based
insurance scores and risk of loss; also in his statement is a
study issued by the University of Texas three weeks ago, a study
that the insurance industry had nothing to do with and didn't
pay for. He related the conclusion of the study as follows:
The research team ... tested whether the credit score
for the named insured on a policy was significantly
[related] to incurred losses for that policy. It was
determined that there was a significant relationship.
In general, lower credit scores were associated with
larger incurred losses.
A regression analysis of the relative loss ratio on
credit score was highly significant. This indicates
there was less than a 1-in-10,000 chance that the
relationship observed between credit score and
relative loss ratio could be due to chance alone.
MR. SORICH said insurance companies have an obligation to their
customers to consider this evidence; forcing insurance companies
to disregard this evidence would lead to pricing inequity, which
wouldn't be fair.
Number 0683
MR. SORICH brought up two issues he'd focus on: the legal basis
for insurance companies' use of credit information, and why
insurance companies use credit information. He noted that
Congress passed the Fair Credit Reporting Act in 1970, which
specifically states that insurance companies may use credit
reports for underwriting and rating. The federal law does allow
states to enact laws that regulate insurers' use of credit
information, he said; however, no state has enacted a law that
would go as far as HB 5 or HB 47. He emphasized that no law
enacted by the states completely prohibits the use of credit
information. He noted that there is a question as to whether
federal law would preempt a state from absolutely prohibiting
the use of credit information because it's inconsistent with
federal law.
MR. SORICH offered the following five reasons that insurance
companies use credit information. First, credit-based insurance
scores help insurance companies reach a higher level of
objectivity. Subjectivity and bias are removed by the use of
insurance scores, which don't consider a person's race,
ethnicity, gender, income, home, or religion, for example.
Second, insurance companies provide another source of
information. Insurance companies are data-driven and only as
good as the data they use to make decisions. He said insurance
companies use motor vehicle records and past claims history, for
example. The availability of credit reports provides insurance
companies with another source of information that allows them to
make fairer underwriting and rating decisions.
MR. SORICH said third, the availability of insurance scores
helps insurance companies to become more efficient; rating and
underwriting decisions can be made more quickly, which is good
for consumers who are shopping for insurance and helps insurance
companies keep their costs down. Fourth, the use of credit-
based insurance scores allows insurance companies to reach a
higher level of fairness. Mr. Sorich said there is a strong
relationship between credit information and risk of loss;
certain aspects in a person's credit report are predictive of
whether that person will have a loss under his/her homeowner's
or car insurance policy. If insurance companies are forced to
ignore that, he warned, many consumers who would be paying lower
premiums because they have good credit history - and most
consumers have good credit history - will be forced to pay
higher rates than they should be paying.
MR. SORICH said fifth, insurance scores help insurance companies
to make insurance more available. The availability of this
information can convince a company to write a policy for
somebody with one claim on a policy, for example; the company
would have the assurance of knowing that the person has a good
score and is less likely to have a loss.
Number 0920
MR. SORICH surmised that the committee will hear criticisms of
insurers' practices as they relate to use of credit information;
some will be valid. Mr. Sorich suggested looking at the model
Act developed by the National Conference of Insurance
Legislators (NCOIL), which is a group of state legislators, not
insurance companies. He noted that NCOIL's model Act, adopted
in November 2002, addresses many of the criticisms leveled at
insurers' practices as they relate to insurance scores.
MR. SORICH opined that the absolute prohibition proposed in HB 5
and HB 47 should be rejected. He said insurers' use of
insurance scores today is providing benefits to thousands of
consumers; prohibiting the use of credit information would
deprive those consumers of the benefits they're getting today.
Number 1059
EDDIE LO, Insurance Manager, Fair Isaac, offered a visual
presentation accompanied by handouts. He explained that Fair
Isaac, as a pioneer and modeler that has served over 350
insurers in the United States, has put together premium and loss
information from insurers and credit information from credit
bureaus or consumer reporting agencies on an individual policy
basis. In response to a question by Chair Weyhrauch, he
clarified that Fair Isaac is not a clearinghouse for insurance
companies to use, but is a modeler and software developer.
MR. LO explained that Fair Isaac looks at data, builds a model,
and then puts forward the model in partnership with three major
credit bureaus. Those bureaus pull credit data and run Fair
Isaac's model, as well as work with insurers on a daily basis.
The insurers provide a name and pull the credit report so that
the Fair Isaac score can be calculated by its partners and any
questions about the credit report can be answered. Fair Isaac
is there in the background, but can answer how the model was
built and how credit information was used.
MR. LO explained that there are two predictors. The first is
the credit score, primarily developed to predict the likelihood
on loan repayment for banking and financial services; that isn't
what is being discussed today. The second is the insurance
score; for that, still using credit information, there is a
"whole family of predictors" for personal, auto, and homeowner
insurance. That is what is being talked about now.
Number 1278
MR. LO discussed charts on page five of the handout. He
referred to a chart that shows the number of adverse public
records, including foreclosures, judgments, and liens, for
example, relating to losses that happened in the past. It shows
96 percent of the people have no adverse record. For the
remaining 4 percent, an underwriter can rely on credit and see
that expected losses are 54 percent higher than for the rest of
the group; thus for those 4 percent there's a very clear
distinction based on credit information.
MR. LO referred to the next chart, which shows the months since
the most recent adverse public record. He said, "Within the
last four years, the loss ratio relative to the rest of the
group that does not have such adverse public record ... is 68
percent." He explained that loss ratio is the ratio of the
losses in relation to the premium collected; when there are more
losses, the loss ratio will be higher. He noted that 96 percent
of people have zero losses; however, if a person does have "one
reason" within the last four years, the loss ratio is very
clearly [looked] at from the past, using actual losses and data.
Mr. Lo said after four years, a person's loss ratio will
improve; for example, it could drop down to 23 percent higher
than average, which is still worse than average but is an
observable difference. He said adverse public record is a
strong predictor, based on data and observation.
Number 1416
MR. LO referred to another chart showing trade lines that are 60
or more days delinquent in the last [24 months]. He said it has
been shown that the more delinquent a person is, the worse the
actual losses have been and thus are expected to be in the
future. He noted that 89 percent of people have no such
delinquencies in their accounts. In this example, he said,
there is a clear trend that if a person has one [delinquency],
the expected loss ratio is 29 percent higher; if a person has
two or more, it is 80 percent. Mr. Lo highlighted a handout
[The Trans Union credit report] that has a sample credit report.
MR. LO referred to another chart that shows a graph regarding
collections, which are shown in the [Trans Union credit report].
He explained that when an account is seriously in arrears, it is
turned over to a collection agency that then puts forward a
record on the credit report. Mr. Lo said 97 percent of people
have no collections; however, for the 3 percent who do, their
loss ratio is a significant 69 percent higher.
Number 1488
MR. LO referred to a chart that shows the number of trade lines
opened in the last 12 months. He noted that 60 percent of
people have not opened up new accounts in the last year;
however, for the percentage who have, there is an indication
that actual losses were higher and thus future losses will be
higher as well.
MR. LO said [the charts] show that individual credit
characteristics can predict future losses, and can help an
underwriter to use credit information hand in hand with
traditional underwriting practices. He emphasized that credit
[information] should not be used on a sole basis to make
underwriting decisions. Noting that the report can show
[scores] ranging from 70 percent worse to 50 percent better,
Mr. Lo characterized that range as a very helpful hint to the
underwriters. He said credit information is also helpful
regarding auto insurance, for example. He concluded by saying
credit information is predictive of future losses and can be
verified independently.
Number 1662
SARAH McNAIR-GROVE, Property/Casualty Actuary, Division of
Insurance, Department of Community & Economic Development
(DCED), informed members that approximately a year ago the
division was asked to undertake a review of the insurance
industry's use of consumer credit history for rating and
underwriting purposes in "personal lines." Based on time and
resources, the division did two things. First, it sent out a
survey to all insurers in Alaska that wrote personal lines:
personal, auto, and homeowner's [insurance]; the survey would
provide a broad overview of how those insurers were using credit
information. Second, it selected three individual insurance
companies to be studied by a team of analysts that would gather
more information than was garnered by the survey; those studies,
called "market conduct" examinations, are not yet complete.
Thus the handout before the committee is just based upon the
results of the survey.
MS. McNAIR-GROVE noted that one of the most significant issues
is whether the use of credit information is unfairly
discriminatory. She said providing a definitive answer based
upon insurance company data is difficult, if not impossible,
because insurers don't collect the type of demographic data
needed to answer the question; they don't collect information of
income, ethnicity, divorce status, or, in some [personal] lines,
age and sex data. Therefore, the division tried to come up with
a proxy that could be used; the best proxy it found was zip code
data. She said although there are a lot of pros and cons
regarding zip code data, it was what was available to the
division.
MS. McNAIR-GROVE explained that because insurers use credit
history in different ways, the division had to find some way to
aggregate all the insurers' data in order to make it public.
However, the division didn't want to make public the marketing
practices of individual insurance companies, and had made an
agreement with the companies to that effect. The division also
had to find a proxy for what it could use as credit history in
order to combine "all these different ways of using it." The
decision was made to look at data by market or by tier - terms
she said she'd explain shortly.
MS. McNAIR-GROVE discussed strengths and weaknesses of the
survey approach. She listed the strengths as follows: it
allows the division to obtain data from the entire market;
provides the division a way by which the data can be combined
and made public; and provides a limited means by which the
division can begin to address how credit impacts individual
policyholders. The weaknesses she noted as follows: it doesn't
look at credit history directly; doesn't use the issues that
people raise, for example, income and race; and doesn't include
other rating factors that might impact some of the results.
Number 1862
MS. McNAIR-GROVE turned to some of the results that the division
found. First, she defined a credit score as a number that is
calculated from a mathematical algorithm or a computer model
that's based upon credit information taken from a consumer's
credit report. A credit score was first used in Alaska in 1994
for underwriting purposes and in 1998 for rating policies, she
noted. She explained that underwriting is the process by which
an insurer decides whether or not to offer an individual a
policy. Rating is the process by which the insurer decides to
offer a policy and then determines what to charge for it.
MS. McNAIR-GROVE explained that the division looked at [U.S.]
census data and asked, "With these zip codes, what is the income
and what is the ethnic composition of those zip codes?" The
best available proxy for credit information was "market tier."
The division had to make some assumptions, based upon the
information that the insurers provided and their own
characterization of the type of business they did, whether it
was a preferred, standard, or nonstandard business.
MS. McNAIR-GROVE defined preferred business as consumers who
present the lowest risk to an insurer; it generally includes
policyholders with good credit history. Standard business is
consumers who present an average risk to an insurer; it
generally includes policyholders with average credit history.
Nonstandard business is consumers who provide the highest level
of risk to the insurer; it generally includes policyholders with
poor credit history. She emphasized that market determination
is not made entirely by a consumer's credit history; most
insurers also use loss history or prior insurance, for example,
and a consumer might be in the nonstandard market for reasons
other than credit history.
Number 1962
MS. McNAIR-GROVE said with the information gleaned from the
census and zip code data [shown on graphs in a handout labeled
"Insurance Credit Scoring in Alaska"], the division found the
following: zip codes that are "predominately Caucasian," with
the highest income, tend to have the highest percentages of
preferred policyholders and the lowest percentages of
nonstandard policyholders. Zip codes with larger percentages of
non-Caucasians and lower incomes tend to have smaller
percentages of preferred business and larger percentages of
nonstandard business. The question that arises when looking at
this information is whether this is caused by credit history.
MS. McNAIR-GROVE said, in an effort to answer that question,
each insurer in the survey was also asked to provide data for
the year prior to when the credit history was used so that the
division would have a means of comparison. Because insurers
began using credit history at different points in time, the
comparisons aren't "100 percent good," but she offered her
belief that there is some validity to the information. She
noted that there were some data limitations, because some of the
years in which insurers first starting using [credit history]
were fairly [long ago] and it was difficult for those insurers
to retrieve the data; other insurers didn't segment their
business by preferred, standard, and nonstandard before they
used credit [as a predictor].
MS. McNAIR-GROVE reiterated the information regarding the
findings based upon zip codes, ethnicity, and income levels.
Notwithstanding that, she said, there are differences, the
largest appearing to be in the nonstandard market, where a
smaller percentage of businesses are classified as nonstandard
after insurers have used credit information.
MS. McNAIR-GROVE said a person can't jump to the conclusion that
credit information isn't a good thing for consumers, based on
that information. She explained that all of the other factors
are not static. When insurers included credit information in
their underwriting or rating practices, they also changed a lot
of other factors. For example, they may have changed the number
of claims it took to be in the preferred market versus a
standard one. Credit, she clarified, is not the only thing that
changed over this period of time. She said there is also some
evidence that policyholders aren't even getting into the system.
She noted that the assigned risk market has been growing
significantly since 1999, which was about the time that credit
became a predominant tool in the Alaskan market.
MS. McNAIR-GROVE said, in spite of these limitations, the data
appears to indicate that the use of a consumer's credit is
causing some shifts in the marketplace. She said, "In the
aggregate, consumers that reside in high-income, high-percentage
Caucasian zip codes are less impacted by the use of credit. The
limited data does suggest that unequal effects exist on
consumers with varying income and ethnic characteristics."
Number 2120
MS. McNAIR-GROVE addressed questions posed to [the division]
when it was asked to undertake the credit-scoring exam; those
questions began on page 11 of the report. The first question
read, "Is the correlation between credit history and loss
potential sufficient support for the industry to be able to use
a consumer's credit history or should the industry be required
to also demonstrate causality?" Ms. McNair-Grove answered that
correlation alone isn't sufficient for an insurance credit score
to be used in an insurer's underwriting and rating practices;
that is why, when an insurer proposes to use credit information
in its rating plans, the division spends a significant amount of
time reviewing those rating plans and the underlying
assumptions. The division looks at the statistical correlations
and at how credit information is integrated into the entire
rating plan, in an effort to understand its effect.
MS. McNAIR-GROVE said the division has asked insurers to justify
that [the use of credit information] doesn't have a disparate
impact on rural versus urban consumers. The statute by which
the division reviews insurers' rating plans is very broad. The
standards are that a rate must not be inadequate, excessive, or
unfairly discriminatory. In addition, a statute requires that
when insurers segment the risks - which they are allowed to do -
the way in which they segment those risks [must] demonstrate a
probable effect upon losses or expenses.
MS. McNAIR-GROVE turned to the issue of causality. She noted
that the American Academy of Actuaries has a standard of
practice called "concerning risk classification." One of the
things suggested in the standard of practice is that causality
might be appropriate if it's used in a less rigorous sense than
a direct cause-and-effect relationship. It also says that risk
characteristics should be neither obscure nor irrelevant to the
protection provided by the insurance. Mentioning a report from
a case called Hartford Accident and Indemnity Co. v. Insurance
Commissioner, which referred to causality, she read, "The longer
a vehicle is on the road, for example, the more likely it is
that the vehicle may be involved in a random traffic accident;
thus daily and annual total mileage may be viewed a causal
rating factor."
Number 2260
MS. McNAIR-GROVE turned to the second question, "Are victims of
identity theft further victimized by credit scoring?" She said
if that identity theft causes a less favorable credit score
[than the consumer would have received otherwise], then the
answer is yes, the consumer is adversely impacted by that
identity theft. One solution would be to not use the
information until it has been corrected and the identity theft
problem has [been resolved].
MS. McNAIR-GROVE addressed the third question, "Does it make
sense for a consumer to be able to qualify for a home loan but
not be able to qualify for homeowner's insurance coverage?" She
proffered that it seems counterintuitive that that should
happen. However, a financial institution and an insurance
company are looking at two different things; the former is
looking to see if the consumer will repay the loan, while the
latter is looking to see if there will be a loss.
MS. McNAIR-GROVE discussed the fourth question, "Why do
otherwise similarly situated consumers sometimes pay
dramatically different premiums?" She said Alaska has a statute
that says rates shouldn't be unfairly discriminatory and that
[consumers] with like risk characteristics should be treated
similarly; however, Alaska law doesn't require that all insurers
charge the same rates. There may be significant differences
between one insurer and the next. Differences can also occur
based upon the type of business that the insurer chooses to
write. For example, she noted, a preferred market generally
will have lower rates than a nonstandard market.
MS. McNAIR-GROVE addressed the fifth question, "If consumers and
regulators do not know the rules of the credit scoring game, how
can the interests of Alaskans be protected?" She opined, "You
protect yourself if you don't know what's going on." She said
some insurers do better than others in making a real effort to
learn how credit scoring works and why it works, and to answer
why they want to use it.
MS. McNAIR-GROVE turned to the sixth question, "Are there Fair
Credit Reporting Act conflicts?" She said the Act requires
insurers to notify consumers if they have been adversely
impacted when action is based upon the consumer's history. She
noted that the Federal Trade Commission (FTC) - the agency that
oversees the Fair Credit Reporting Act - had spoken to the
National Association of Insurance Commissioners and said the
following:
Simply because an insurer is giving a discount to an
insured, based upon the insured's credit history, does
not mean the insurer is not taking adverse action
against the consumer. If that discount does not
result in the consumer receiving the best possible
rate available from the insurer, the insurer may
[still be] taking adverse action if the consumer would
have received the best discount had the consumer's
credit history been more favorable.
MS. McNAIR-GROVE added that frequently insurers don't give
proper notice when they are supposed to; hence there are
potential Fair Credit Act violations.
TAPE 03-32, SIDE B
Number 2392
MS. McNAIR-GROVE pointed out that answers to the remaining
questions can be found in the report.
Number 2380
LINDA HALL, Director, Division of Insurance, Department of
Community & Economic Development (DCED), highlighted the
importance of studying what is occurring in general in the
Alaska market before addressing specific issues such as credit
history. Turning to pages 40 and 41 of the previously mentioned
report from the division, she pointed out that although there
are 58 [companies] listed as writing automobile insurance and 30
writing homeowner's insurance, many are multiples of the same
name; therefore, the impact is dramatically reduced [when the
names are listed just one per company].
MS. HALL referred to a handout entitled "2001 Alaska Property
And Casualty Market Share." She explained that this information
was taken directly out of the division's annual report. She
said it concerns her that while there may be 58 companies active
in the marketplace, the level of activity is dramatically
different. Pointing to [the first page of the handout], she
noted that in the homeowner's market, approximately 65 percent
of the business is written by two companies. The [second
company listed] holds about 29 percent of the market share,
while the next lowest drops to approximately 6 percent. Eight
of the top twenty companies have less than 1 percent of the
market share, she said.
MS. HALL noted that the same is true on the next page of the
report in terms of private passenger autos, for which
approximately 42 percent of the market share is written by two
carriers, while ten of the top twenty companies write less than
5 percent market share per company, and seven write less than 2
percent. Ms. Hall emphasized that there is a limited market,
that this issue needs to be looked at, and that the numbers of
companies listed can be misleading.
Number 2291
MS. HALL referred to a letter addressed to Chair Weyhrauch
[dated March 25, 2003, in committee packets]. She noted that
the division has a four-person consumer services section that
handles phone calls. She said the division has only received
five formal complaints regarding the use of credit scoring,
which are detailed in the letter. She offered the following
perspective: "In 2001, we received a total of 492 written
complaints; in 2000, a total of 456."
CHAIR WEYHRAUCH asked that Ms. Hall again address the letter
when she is called back before the committee.
Number 2227
OLIVIA POWELL, Staff to Representative Mike Chenault, Alaska
State Legislature, testified on behalf of Representative
Chenault, sponsor of HB 47. She said the bill addresses the
more and more commonplace practice of insurance companies'
invading the privacy of individuals' personal credit scores to
determine insurance premium rates where no statistical or
reasonable correlation can be made between a person's credit
history and his/her likelihood of needing to file a claim with
an insurance provider. In a time when personal bankruptcies,
excessive debt loads, and a troubled economy are causing
negative credit scoring among more Americans than any other time
in history, insurance companies are exploiting this situation to
boost their falling profit margins, she said. She continued:
Insurance companies will tell you credit scores are
one of the factors that assist an insurance company in
determining whether to provide or renew coverage to an
applicant and in deciding what premium an applicant
should pay. Insurers use credit scores because they
believe there is a correlation between financial
responsibility and risk of loss. We believe there is
no such correlation and that, at times, the practice
is discriminatory.
MS. POWELL read from a portion of [the "Summary of Conclusions"]
from the Division of Insurance's report as follows:
Based on the limited data received and evaluated so
far, the use of insurance credit scoring in Alaska
appears to have different effects on different groups
of Alaskan insurance consumers. The survey data
indicates that rural Alaska policyholders are more
likely to be placed in the nonstandard markets than
are urban policyholders. The survey data also
suggests that there is a trend for older consumers to
move from preferred to standard and even nonstandard
with increasing age.
MS. POWELL added that the data also suggests "unequal effects
exist on consumers with varying income and ethnic
characteristics." She said, "The only correlation we see is one
of discrimination and bias." She continued as follows:
Is it fair that [a] fisherman in rural Alaska pay more
for his car insurance because it was a bad fishing
year? And is it fair that an elderly Alaskan who
doesn't have a large need for credit pay more for his
homeowner's insurance? We don't feel that it is
right. And we are not alone in thinking this.
Number 2134
MS. POWELL continued:
Each year, more states are passing legislation
regulating and restricting how credit scores may be
used to [establish] rating plans. Currently, there
are 18 states with laws restricting the use of credit
scoring.
For example, ... Hawaii Statute 432.10C-207 reads, "No
insurer shall base any standard or rating plan, in
whole or in part, directly or indirectly, upon a
person's race, creed, ethic extraction, age, sex,
length of driving experience, credit bureau rating,
marital status, or physical handicap." Hawaii
obviously felt that the insurance companies were using
the credit bureau rating in an unfair way, and they
did the right thing by controlling the use of it.
Last year alone, over 70 pieces of legislation were
introduced nationwide to control the use of credit
scoring. Another example is Kansas. Studies there
found examples of how credit scoring doesn't always
work. According to the Wichita Business Journal, the
Kansas Insurance Department did an online survey
asking people about their insurance rates. Out of
[520] people who participated in the survey, 454 said
their insurance rates had increased in the past 12
months, and [267] of those were told by their
insurance companies that credit scoring was a factor
in that increase.
Credit scores can only be effective if they are
accurate. Inaccuracies in credit reports are
unfortunately more common than one may think. In some
studies, as many as one out of every [five] credit
reports has some inaccurate data. If this is true,
how can credit scores possibly [be] an accurate gauge?
And the answer is, they're not.
MS. POWELL said, "You've all seen the reports and heard the
stories of how people are qualifying for home loans but can't
get ... homeowner's insurance." Saying she wouldn't offer
further statistics, she closed as follows: "We know that we
need to put guidelines on the insurance companies so they can't
charge anyone whatever they feel like. And moving House Bill 47
will do that."
Number 2056
REPRESENTATIVE HARRY CRAWFORD, Alaska State Legislature, sponsor
of HB 5, expressed frustration that the bill has been
mischaracterized. He clarified that [the intent] is not to ban
the use of credit history or credit information in the setting
of insurance rates. Rather, it would ban the use of the credit
score, which is totally different.
REPRESENTATIVE CRAWFORD listed the determining factors used to
derive a credit score along with the general percentages given
to each factor: payment history, 35 percent; amount of
outstanding debt, 30 percent; length of credit history, 15
percent; recent new applications or opened accounts, 10 percent;
and mix of credit and types of accounts and loans, 10 percent.
Number 1979
REPRESENTATIVE CRAWFORD said what [the industry] has been able
to do with the credit score that differs from a person's
personal credit history relates to the length of credit history.
For example, he said, it has been proven that those between the
ages of 16-25, especially males, have more accidents; [the
industry] combines that group with people with a history of
missing a payment or two, for example, and thereby ropes in a
much larger group. He cited examples. Saying the intent of
[HB 5] is to "keep this to a person's personal credit history"
Saying credit history can be a good predictor, he added, "What
we want to do is ban these secret algorithms that the industry
uses."
Number 1899
BIRNY BIRNBAUM, Executive Director, The Center for Economic
Justice, referred to the following handouts in the committee
packet: his testimony; a study ["Insurers' Use of Credit
Scoring for Homeowners Insurance in Ohio - A Report to the Ohio
Civil Rights Commission," dated January 2003]; charts [the U.S.
Census regarding assets, liabilities, and debts of households
and families]; some preliminary comments on a University of
Texas study ["Preliminary Comments on the BBR Study"]; and
["Comments of Birny Birnbaum on Behalf of the Center for
Economic Justice Before the National Conference of Insurance
Legislators [NCOIL]", dated November 21, 2002].
MR. BIRNBAUM referred to page 8 of his written testimony, where
he'd provided a summary of his education and experience, and
said the main point relates to the definition of "fairness." He
said the industry's definition of fairness is "the existence of
a correlation between a rating factor and risk of loss." If
that correlation is there, he posited, then its use is fair.
However, by this logic, it would be fair to charge consumers
more for auto or homeowner's insurance because they've been laid
off, lost their health insurance, or gotten a divorce. He
opined that it's important to distinguish between what society
or the public thinks is fair and what the insurance industry
thinks is fair. Furthermore, he said, he thinks the insurance
industry's definition of fairness is quite limited.
MR. BIRNBAUM stated his belief that it is both reasonable and
necessary to prohibit insurers' use of credit scoring in
underwriting and rating personal lines, as well as in
determining payment plan eligibility, for the following reasons:
it is inherently unfair; it undermines the basic insurance
mechanism; it undermines regulatory oversight of rates; and it
discriminates against consumers because of income, for example.
He opined that [the use of credit scoring] is inherently unfair
because it penalizes victims; the vast majority of people who
file for bankruptcy have had an economic or medical catastrophe
or a divorce, for example, and it's not merely because they
can't control their credit-card spending.
MR. BIRNBAUM offered his belief that credit scoring penalizes
consumers because of decisions made by lenders. From 1990 to
1998, the number of credit card solicitations increased from one
billion to four billion, and credit card debt increased
fourfold. He said it's clearly a result of lenders' decisions
to make credit more available. He cited an example and asked,
"Why should consumers be penalized because of decisions that
lenders make to enter into more risky lending?" He said the
problems are significant and admitted by the industry itself
when it supports the NCOIL bill, which contains numerous
prohibitions and proscriptions on credit. He continued:
So, one would think that there would be some great
benefit to consumers to require all this legislative
and regulatory oversight, and yet, ultimately, the
only rationale offered by the industry is the
correlation between credit and risk of loss. But
clearly, the near distance of a correlation is not
sufficient justification for use of a factor.
MR. BIRNBAUM posed another question to think about: "What other
risk factor punishes consumers for acting in a legal, rational,
and positive manner?" He asked why consumers should be charged
a higher auto or homeowner's rate for shopping around for a loan
or insurance; for getting a zero-interest credit card to lower
their debt payments; for paying cash instead of credit; or for
getting a credit card for a first-time 10-percent discount at a
department or electronics store, for example.
MR. BIRNBAUM remarked, "The big lie here is that the industry
wants you to believe that ... a good credit report equates to a
good score. That's simply not the case." He said the credit
score is based just as much on the presence of so-called
positive attributes as it is on the presence of negative
attributes. Referring to Mr. Lo's testimony about the small
number of consumers who have bankruptcies and delinquencies, he
said many times those consumers pay higher rates not just
because they've had a bankruptcy or delinquency, but also
because they don't have the attributes that the [industry]
thinks are good.
MR. BIRNBAUM opined that many or all of the industry's claims
are unsubstantiated. Responding to the claim that [the
industry] will write more business, he referred to page nine of
his written testimony, where there are statements by two
national agents' associations that have come out against credit
scoring. "If credit scoring allowed agents to write more
business," he said, "I doubt that they would be against the use
of this." As to the claim that most consumers would benefit, he
said his research says this isn't true; even if it were true
today, there's no guarantee it will be true in the future; and
even if most consumers would benefit from something, that
doesn't justify the use of an unfair practice. Mr. Birnbaum
said the bottom line is that there's no free lunch; credit
scoring doesn't reduce claim costs, but shifts premiums from one
group of consumers to another. He disagreed with the premise
that a company only uses credit [scoring] to offer discounts.
Number 1506
DEE HUBBARD, testifying on her own behalf, thanked
Representative Crawford for "sticking with this problem that I
brought to him back in 2001." She said the issue is whether
[credit scoring] is good for insurance companies or consumers.
She offered her feeling that if this is so good for consumers,
it would have been public knowledge a long time ago. Therefore,
she said there isn't much good in it for consumers, and
questioned the effects at some later point. She said her family
pays cash in order to avoid raising its credit card limit, for
example. Saying this issue is all about big money, she gave
some examples of what certain chief executive officers (CEOs)
are paid and what the companies' one-year targets are in the
stock market.
CHAIR WEYHRAUCH asked Ms. Hubbard if she had ever learned that a
company's use of credit scoring had adversely affected her.
MS. HUBBARD said no. She revealed that her insurance [agent]
told her in 1999, "Oh, your rate came in really good, you must
have good credit." She explained that this is what prompted her
to begin asking questions.
Number 1295
HOWARD DORSEY testified that his relationship to this bill is on
a business level. He explained that before 1999, he was working
from 9 to 5 and getting a paycheck, and auto insurance was
essentially the only insurance he carried. He said he'd noticed
that his auto insurance [rate] decreased as he aged, which made
sense because he was more experienced. However, in 1999, when
he started his own company, he needed to buy additional
insurance for company liability, commercial auto, and general
liability and bonding. Over the last four years, the rates have
continually increased, even though no claims have been made
either on behalf of the company or because of an auto accident.
He said his clean driving record dates back 15 years.
MR. DORSEY said, regarding credit scoring as his company grows,
at times he may be delinquent by 30 to 90 days on a bill, or may
have a bill that slips into the trash and ends up in
collections. And new companies don't always have sufficient
cash flow. He said when he looks for an insurance policy at the
end of the term, often, over the last three years, the first
quote he receives is the lowest one; after that, the rates are
higher, all for the same type of policy for the same term. What
has changed is that a credit inquiry has taken place on his
credit scoring. He said he went through that in 1996 when he
bought his house. The mortgage company told him that while the
process was in motion and until it closed, he shouldn't apply
for a credit card because every time there was an inquiry, it
would show on his credit report and wouldn't look favorable to
those that would be underwriting his loan or insurance.
MR. DORSEY remarked, "We all know that statistics can be twisted
to however we'd like them to be. They offer no justification of
the statistics. And when one asks for a copy of the statistics,
one is refused a copy, because that is confidential information.
It would give ... unfair ... information to competitors."
Noting that he has opened two new accounts since last year, he
questioned why that should make him a higher risk, because it
was due to a business change. Mr. Dorsey thanked Representative
Crawford and [Mr. Birnbaum] for their comments.
Number 1080
MARIE DARLIN, AARP Capital City Task Force, said AARP has been
working with everyone involved with this legislation for the
last two years because of the numerous comments received from
its members saying their insurance [rates] were increasing, they
didn't know why, and they couldn't get any answers from
insurance companies when they asked what was meant by credit
scoring. Ms. Darlin said AARP has found this issue to be a
concern in many states.
MS. DARLIN said AARP's main concern is that age seems to play a
part. She related her experience that when her insurance bill
arrived last July, it was approximately $90 higher than the year
before. However, her situation hadn't changed except that she
had a newer car. She said she'd researched and found another
insurance company, which saved her perhaps $15.
MS. DARLIN said she feels this issue needs to be looked at from
the viewpoint of how it affects elderly people who are still
driving and have no record against them. She said she thinks
credit scoring should be studied to find out how it is really
done. She said she doesn't feel it's beneficial to anybody as
far as providing better coverage or better insurance, for
example. She questioned how [insurance companies] can continue
to do the credit scoring without providing consumers with the
outcome and without explaining what it means. In response to a
question by Chair Weyhrauch, she confirmed that her testimony
relates more to the legislation that would affect people, rather
than the one that would affect businesses; however, she said
AARP is hearing more from seniors and retirees who have
businesses and are having problems with their insurance. She
concluded by expressing concern about both bills.
Number 0826
MARK NIEHAUS, General Manager, Progressive Insurance, told the
committee that Progressive Insurance is the largest writer of
[private passenger] auto insurance through independent agents in
Alaska; has been using credit [scoring] for ten years [in the
Lower 48], and six years in Alaska; and has filed its credit
rating program with the Division of Insurance. He offered his
belief that the division does a thorough job in examining the
actuarial justification and looking at the disparate impact
issue, and did so when reviewing and ultimately approving
Progressive Insurance's filings. He said he thinks a good
process is currently in place to ensure that the data is there
to support what companies are trying to do and that consumers
are treated fairly.
MR. NIEHAUS paraphrased a portion of his written testimony that
read as follows [with some technical changes]:
We have filed our current credit scoring methodology
and detailed actuarial support with the Alaska
Division of Insurance. Our model is public
information; there is no "black box." Progressive
does not use credit information to refuse to insure a
consumer, [or to] non-renew or cancel an existing
customer.
Credit information that is disputed by the consumer
with the credit-reporting agency is not considered in
our insurance scoring algorithm. All identified
medical and business/commercial debt and liens are
excluded from all Progressive credit scoring methods.
An applicant or insured who experiences an adverse
action as a result of the use of credit information is
advised how he or she can obtain a free copy of their
credit report. We provide a list of the reasons for
an adverse action due to the use of credit to
consumers upon request.
Progressive is committed to sharing information about
how we use credit with regulators, the media, and
consumers. We want consumers to understand how credit
affects their insurance premiums and we want to help
them in developing a plan to improve their credit
scores.
We have pioneered the use of a new Credit Assistance
team for our customers and agents in Michigan and
Texas, and we are in the process of rolling that out
to more states. The Credit Assistance team can be
reached through a toll-free number and it provides:
personalized reports to applicants describing how
their score on each of the variables considered in the
credit-scoring algorithm compares to the average;
[and] reasonable credit exceptions based upon prior
credit history for persons whose credit information is
unduly influenced by extraordinary life events, [for
example], catastrophic injury, death of a spouse, [or]
business loss
Number 0650
MR. NIEHAUS referred to the Division of Insurance's credit
scoring report and paraphrased another selection from his
written testimony, which read as follows [with some technical
changes]:
The study found that a disproportionately smaller
number of policyholders in lower-income zip codes with
higher minority populations qualified for preferred
markets, regardless of whether or not credit was used
to help determine final market. Furthermore, when
credit was used, not fewer but more of these
policyholders actually qualified for the preferred
market. ... With regard to access to preferred markets
by age, the study found that the proportion of
policyholders in preferred markets actually peaks for
Alaskans aged 61 to 70 years old.
MR. NIEHAUS referred to a chart in his written testimony which
shows that based on over 23,000 policies quoted [in Alaska
during the first half of 2002], the average credit score
improves with age. He reported, in regard to the rural-versus-
urban issue, that Progressive Insurance separated its data by
population density, and it shows that [while the average credit
score] changed little, rural areas had slightly better average
scores than urban areas.
MR. NIEHAUS said Progressive Insurance is opposed to [HB 47 and
HB 5]. If they pass, the company would be forced to raise rates
on approximately two-thirds of its 17,000 policyholders.
Seniors would be especially disadvantaged. Good drivers would
be forced to subsidize bad drivers. An unlevel playing field
would exist, because direct writers who use mail as a way of
attracting customers would be able to pre-screen using credit,
since that is specifically allowed under the Fair Credit
Reporting Act, whereas companies such as Progressive Insurance
that market through independent agents would be unable to use
that tool; therefore, agents would be disadvantaged.
Number 0578
CHAIR WEYHRAUCH asked if any legal analysis or opinion indicates
credit scoring doesn't run afoul of the Fair Credit Reporting
Act.
MR. NIEHAUS answered that Progressive Insurance has provided
that opinion to Representative Crawford and that he'd be happy
to provide it to the committee.
Number 0375
MR. NIEHAUS continued to explain why Progressive Insurance is
opposed to the proposed legislation. If one or both bills were
to pass, Alaska would be the only state to ban credit in recent
times, which would be damaging both to consumers and to the
market. He said the Alaskan auto insurance market is in very
bad shape; the NAIC [National Association of Insurance
Commissioners] released data on 2001 results that ranked states
on the basis of profit margin as a percentage of premium earned,
and Alaska was rated 47th out 50 states and the District of
Columbia. He said Alaska is one of two states in which insurers
have lost money in three of the last four years.
MR. NIEHAUS said Progressive Insurance is committed to working
with legislators and regulators to find common ground on this
issue, and supports a reasonable regulation on the use of
credit. He noted that there are two potential avenues in this
regard. He mentioned negotiations and discussions last year
that resulted in a compromise committee substitute (CS) and that
would have addressed many of the concerns; to his understanding,
however, it was derailed. He said, "That's something that we
would support as being advanced as a possible alternative to an
outright ban." In response to a request by Chair Weyhrauch, he
said he'd provide a copy of that CS. He added that NCOIL, which
is composed of legislators and regulators and gets input from
insurance companies and consumers, spent a lot of time
developing a model Act [included in the committee packet] that
he opined could be used as a basis for a bill to address areas
of specific concerns.
Number 0238
REPRESENTATIVE SEATON, referring to the previously mentioned
model Act and CS, asked Mr. Niehaus whether he offers more
support for one of those two alternatives.
MR. NIEHAUS responded that the CS from last year addressed the
issues that were specifically of concern to Alaskans, whereas
the model Act is a broader, nationwide approach. He added, "We
could work with either version."
Number 0177
REPRESENTATIVE CRAWFORD remarked that Progressive Insurance's
usage of credit scoring appears to be a little better than the
rest. He asked Mr. Niehaus whether Progressive Insurance's use
of credit scoring is representative of the industry. Referring
to Mr. Niehaus's previous mention of "the medically coded
information," he revealed that two years ago he had an accident,
snapped his Achilles' tendon in two, and had to have an
operation in Virginia; at that time, he was fully covered by two
different insurance companies. After two years, he said, [the
insurance company] is continuing to not pay some of the bills,
which have been turned over to collections; thus no medical code
shows up on the credit report. He asked, "So, how do you get to
exclude anything that's been turned over to collections when
there's no code there for it?" He continued:
Also, you mentioned that no other state has a law this
restrictive, but Hawaii has an outright ban on the use
of credit scoring, and it's also the most profitable
state in the nation, according to the information that
you gave me a couple of days ago. And they also have
lower insurance rates than Alaska. And I was just
wondering, how could they do that without the use of
credit scoring? You're saying that to bring Alaska up
to more like the national average, but Hawaii makes it
without the use of it somehow.
[Due to technical difficulties during the tape change, the
answer provided by Mr. Niehaus was not recorded.]
TAPE 03-33, SIDE A
Number 0001
REPRESENTATIVE GRUENBERG referred to Hawaii's Statute 431:10C-
0207, which read as follows:
Discriminatory practices prohibited. No insurer shall
base any standard or rating plan, in whole or in part,
directly or indirectly, upon a person's race, creed,
ethnic extraction, age, sex, length of driving
experience, credit bureau rating, marital status, or
physical handicap.
REPRESENTATIVE GRUENBERG asked Mr. Niehaus what cost-savings
measures Hawaii had enacted.
Number 0065
MR. NIEHAUS recalled that Hawaii had implemented medical fee
schedules, for example. Noting that its system is different
from Alaska's, he explained, "Their minimum limits are a lot
lower. I believe it's $20,000 per person, $40,000 per accident.
Hawaii's minimum limits are 50-100." He also noted that
[Hawaii] put in limitations on chiropractic visits, for example.
REPRESENTATIVE GRUENBERG asked Mr. Niehaus if the prohibitions
listed in the previously read Hawaii statute - with the
exception of credit bureau rating - are already prohibited under
either federal or Alaska law.
MR. NIEHAUS replied that Alaska doesn't prohibit the use of age,
sex, length of driving experience, or marital status as elements
of rating.
Number 0221
REPRESENTATIVE GRUENBERG noted that Ms. McNair-Grove had
mentioned that the use of credit scoring is a proxy for some
factors. He asked, "If it's a proxy for something that's
illegal, then why shouldn't we make that illegal too? It's like
taking the hood off the Ku Klux Klan."
MR. NIEHAUS recalled that Ms. McNair-Grove had testified that
the division looks at those issues as part of its review. He
said, "We don't gather data on all of those things that were
mentioned earlier, in terms of income, in terms of race,
ethnicity, religion," for example. He added, "We gave the data
to the division by zip code." In response to a question by
Representative Gruenberg, he surmised that the zip codes were 5-
digit ones, rather than 9-digit.
REPRESENTATIVE GRUENBERG explained that in Anchorage, for
example, one 5-digit zip code encompasses a very large part of
the city and includes wealthy areas as well as poor areas. He
suggested that breaking the areas down into 9-digit zip codes,
or perhaps [U.S.] census tracts, may provide more information.
Number 0303
JOHN GEORGE, Lobbyist for National Association of Independent
Insurers (NAII), told the committee he'd served as the director
of insurance from 1984-1988. Many problems back then still
exist, including that there were only a couple of major
companies writing insurance. One of the biggest tasks was
developing more insurance companies, he recalled. He emphasized
the importance of encouraging more companies to write insurance
[for the sake of competition.] He urged the committee to ask
Ms. McNair-Grove how the division actually reviews a rate
filing, what's in it, and what profit margin it allows.
Disagreeing that insurance companies are doing this to boost
profits, he said it's a redistribution of profits and an equity
issue. He added, "'The right people pay the right premium' is
really what this is about."
Number 0465
MR. GEORGE continued as follows:
A typical rate filing, if you were starting from
scratch - an they often put in a filing that modifies
a prior one - but if you started from scratch you'd
have a file that was three inches thick, probably.
And those are public information; you could go over
and pull Allstate or Progressive's filing. Nobody
ever does, other than the other insurance companies.
And I actually have a contract with a couple of
outfits that hire me to go over and photocopy those to
send to them so that they can see what the other guy
is doing.
The information that we've heard is secret and all
that: it's the recipe. If you were making the best
chocolate chip cookies in the world and you had the
recipe and it was public information, gee, Nabisco
would like that, and they'd start making your cookies.
... And that's really the thing. But those are
available to the Division of Insurance to look at.
The question is, "Can they keep them proprietary?"
And on a "market conducts" examination, they got them
all. Look at them - there they are. The question is,
"Should they be available for the competing
companies?"
And if you're going to encourage companies to come in
and write, you might say, "Yeah, give them the other
guys and they'll compete." But what we're really
looking at is a very diverse market - niche markets.
One company may prefer to write military or "SR22"
business - people that have five drunk driving
tickets. You can charge a lot of money. And if you
can charge them the right amount of money, you can
profit from writing what you consider really bad
business. Some would prefer to write only the very
cream of the crop. That's their niche, and they
really don't want to write the drunk driver, but they
charge significantly less. So, they're very
competitive.
If you look at the end of the Division of Insurance
report, you'll see that some companies are using
credit for underwriting only. Some are using it for
underwriting and rating. Some companies aren't using
it at all. So what you find is that there's a lot of
different places to shop, and if you don't like
someone using your credit information, there's
companies that don't. Admittedly, they're not writing
a lot of business. But it's a wide market, and you
ought to be able to find someone [whose] writing ...
works for you.
Number 0621
MR. GEORGE said the law allows for fair discrimination. For
example, an individual 16-year-old driver may not have a poor
driving record and therefore may be discriminated against, but,
as a class, 16-year-olds will have poor driving records.
Mr. George explained that by using credit or insurance scoring,
refinement can be made within a class. One person in a class
may be acknowledged for having a better record than someone else
in the same class, and therefore could receive a better rate.
MR. GEORGE recalled that the Division of Insurance testified
last year that [credit scoring] is a strong predictor of loss,
and he said he thinks everyone agrees with that. He referred to
the previous testimony of Mr. Niehaus that the majority of
policyholders in his company benefit [from credit reporting].
He recalled that the Division of Insurance report indicates
perhaps seniors would be hurt by [credit] scoring; however, he
noted that the [State of] Washington report, which used what he
called real people and data rather than census data and zip
codes, found that seniors actually did better. He said
Mr. Niehaus had testified that seniors do better with
Progressive Insurance on their insurance scoring.
MR. GEORGE recalled that it had also been previously mentioned
that in every zip code that the Division of Insurance report
tested - whether urban or rural - the percentage of people in
the preferred market increased after [credit] scoring.
Highlighting the reverse argument that there wasn't enough data
to show this was due to [credit] scoring, he countered that by
saying, "They always say, 'We just don't have enough data; we
can't say ... for sure what caused that.'"
Number 0712
MR. GEORGE said he thinks it is apparent that the insurance
industry wants to find things that work; therefore, if an
indicator doesn't work, it would be thrown out. They do that in
order to have people pay what they should pay. If they failed
to do that, he added, it could be said [the insurance companies]
were actually discriminating against people by not giving them
an appropriate rate by not using credit scoring.
Number 0775
REPRESENTATIVE SEATON referred to the previous comparisons with
Hawaii. He asked Mr. George to presume that Hawaii has made a
distinction that no factors can be used to discriminate between
people; rather, a flat rate must be offered to everyone. He
asked, "If the insurance companies are going to come out with
the same profit margin, no matter what we let them do, why does
it matter to the insurance companies themselves whether [they]
use this tool or not?"
MR. GEORGE replied that, unfortunately, insurance is not like a
public utility that is guaranteed a profit. An insurance
company puts in a rate and hopes to get it, but in the last two
years the insurance companies have had substantial losses, he
said. If the insurance companies said they would like to make a
10 percent profit, the division would probably reject that. He
asked [Ms. McNair-Grove] to confirm that the amount the
insurance companies "put in" is about 5 percent.
MS. McNAIR-GROVE replied, "More or less. I can explain that
further."
Number 0915
MR. GEORGE said it's a matter of competition, and the insurance
companies compete fiercely. He compared it to the long-distance
companies that come up with all sorts of ways to get people's
business. Insurance companies with a niche can get business
from somebody else because they have the best rate for that
niche. Competition is healthy and provides an appropriate rate
to people, he opined. He concluded, "The public really
understands that they want to pay their rate, and not the
average rate."
Number 0933
REPRESENTATIVE CRAWFORD highlighted estimates that up to 75
percent of all credit reports contain erroneous information. He
asked Mr. George how he could say the right rate is being
charged the right person, if the information being used is based
on erroneous information.
MR. GEORGE answered that the material corrections that are made
make up a miniscule percentage of all corrections, because the
report may spell someone's name wrong or get an address wrong,
for example. On the other hand, some studies show that up to 40
percent of motor vehicle records are inaccurate. He remarked,
"That's even just the ones you get caught on. How many people
have actually gone 60 miles an hour in a 55 [mile-per-hour zone]
and got away with it, day after day? ... If you just happened
to be the guy that got caught, you got a ticket." But credit,
he said, is sort of inescapable. Therefore, he concluded that
credit is much more credible than maybe someone's driving
record. He recommended that Representative Crawford's question
also be asked of Mr. Sorich and Mr. Lo.
CHAIR WEYHRAUCH invited some of the previous testifiers to
return to the witness table to complete their testimony.
Number 1074
MR. LO referred to the issue of inaccuracy. For the purpose of
discussion, he offered the assumption that there are errors in
credit reports. He continued as follows:
That ... credit data has all those errors in there.
And, in my earlier testimony, I showed you how the
data with the error in them on the credit side and the
premium and losses were matched together so that we
can study the credit versus the ... future loss
phenomena.
All the credit errors have not been removed. Fair
Isaac has no means to remove any errors. And all of
those are included in the data. And the results that
you have seen are extremely predictive of future
losses. So, if the error exists, it did not lower the
"predictiveness." So that's point number one [that] I
want to clarify.
Point number two is: there are errors in there. And
there are very stringent Federal Credit Reporting Act
dispute resolutions. I'm not the expert on that
subject. But there are lawyers, and there [is a]
credit consumer reporting agency association that ...
can speak to you and answer your questions. They
[have] very stringent requirements: 30 days -
complaint filed, resolved. Otherwise, that record,
that particular trade line, is deleted. So I just
wanted to at least leave you with that understanding.
The errors are there; nobody denies that. It does not
distort the predictiveness, and there are significant
regulations already in place addressing the errors.
MR. LO referred to a previous point made by Mr. George regarding
secret recipes. He said Fair Isaac wants to compete through its
insurers. He reminded the committee that Fair Isaac is a
modeler only and cannot write insurance. He said there are many
insurers that want to come to Alaska and use Fair Isaac tools as
an efficiency tool and a predictive tool; however, currently
they are prohibited "pretty much" from using Fair Isaac, because
Fair Isaac models [would] have to be disclosed to the public.
Once disclosed, Fair Isaac would lose its 30 to 40 years of
research and investment in producing [models for] predictive
results. Therefore, Fair Isaac needs to protect its investment
by asking for trade secret protections. He noted that it has
done that in at least 12 other states under protection already.
He continued:
This is not Fair Isaac trying to hide the formula from
the consumer. This is our effort to helping [the]
insurance department to understand how the model is
built, so that [it] can be satisfied that this would
not lead to excessive rates, nonfair discrimination,
and inadequate rates. This is trying to help the
insurance department to form the proper regulations so
that [it] can regulate to the best of [its] ability.
That's [what] we want to provide; however, we do not
want to confuse [consumers]. We do not want them to
have to understand what is a credit report, what is a
formula, what it means to, basically, calculate his or
her own score, in a sense that it will raise more
questions to the insurance department, if not to you
... from your constituents. So, we want to address
that through education.
MR. LO noted that there are a lot of educational efforts
currently being made. He referred to the one-page handout
entitled "Answers to Your Questions About Insurance Bureau
Scores" [available in the committee packet]. He said NAII and
all the major trade associations have literature, including the
National Association of Insurance Commissioners, which has just
released a brochure regarding consumer education on this issue.
He summarized that Fair Isaac needs protection, but not to hide
from consumers. Fair Isaac doesn't want to generate more
questions, but would like the public's questions addressed
through education.
Number 1300
REPRESENTATIVE GRUENBERG requested copies of the laws of the
other 12 states that presently are under protection. He
surmised that under those laws, the information is not public,
but the division of insurance has access to the Fair Isaac
information.
MR. LO said, "Correct."
Number 1324
REPRESENTATIVE CRAWFORD informed members that he'd requested
that his own credit scores be done by three different major
credit reporting agencies. He commented, "My credit scores are
all over the map; they vary by 100 points." He asked Mr. Lo how
it is possible to say that [credit scoring] is a good predictor,
when the results of the three companies show that they cannot
decide among themselves whether he is a good credit risk. He
added that [the scores] don't have anything to do with his
driving record or his rental properties, because he hasn't had
any claims on his driving record and out of a number of rental
properties over the last 25 years, he said he thinks he has had
two claims on his homeowner's insurance. He added, "I have a
good credit history, but I have a couple of poor credit scores."
MR. LO responded that Representative Crawford should be confused
about those credit scores because the information [explaining
the discrepancy between them] was probably not provided to him
or made easily understandable. He confirmed that there are
three major credit bureaus, each with its own credit data base.
Fair Isaac has built specific models for each. The models have
not been made to produce the same score results from each
agency. The scores all may be within 100 points of each other
and they all would be "within the means." He explained that
each company's [results] will be relative within its individual
model; therefore, there's no point in comparing model to model,
score to score. What is an above-average or below-average score
in one model won't be the same in the next.
Number 1484
REPRESENTATIVE CRAWFORD opined that his credit history should
rank him an "ultra-preferred," but because of "some of these
other factors and other ways of weighting these factors," he has
been ranked "standard."
MR. LO offered the example of standard and nonstandard
[business] in one model. Standard starts at [a score of] 650
and higher, whereas nonstandard starts at 650 and lower. In
another model, the standard can start at 700. He mentioned
different markets and niches. He continued as follows:
So, the fact that you are set up by one company in
standard and set up by another company in nonstandard,
that's no surprise, if that's how each company looks
at the business. However, if you are treated as
standard in one company and, using the same model, you
are treated as a nonstandard another time, that is
something you need to investigate ..., because that
shows that there's a change in your credit history;
that's reflecting the change. But it's not due to the
difference between the [models]. It's all, within one
model itself, very consistent.
Number 1530
CHAIR WEYHRAUCH invited the testifiers from the Division of
Insurance back to the witness table to answer questions. He
mentioned an overview of credit scoring and market-conduct
examinations; he asked when its completion is anticipated.
MS. HALL explained that once the report is written, it is given
to the particular insurance carrier, which has 30 days to
respond to that. During that process, it is still a
confidential document. She stated, "Once they have that, they
also have an opportunity for [a] hearing, should they request
one. So, it's hard for us to tell what period of time they may
take on their end. And our reports are not quite finished, is
my understanding."
Number 1660
CHAIR WEYHRAUCH asked if the division has taken a formal
position on either HB 5 or HB 47.
MS. HALL answered no.
Number 1675
REPRESENTATIVE GRUENBERG noted that on page 11 of the previously
cited report by the Division of Insurance, a distinction is
drawn between causality and correlation. He distributed an
article from the "Daily News Opinion" section of the Anchorage
Daily News, dated March 28, 2003, written by George Will, a
columnist for The Washington Post, entitled, "Dan Moynihan Saw
Beyond The Horizon Of His Time." He read a paragraph of the
article, which stated:
The Senate's Sisyphus, Moynihan was forever pushing
uphill a boulder of inconvenient data. A social
scientist trained to distinguish correlation from
causation, and a wit, Moynihan puckishly said a
crucial determinant of the quality of American schools
is proximity to the Canadian border. The barb in his
jest was this: High cognitive outputs correlate not
with high per-pupil expenditures but with a high
percentage of two-parent families. For that, there
was the rough geographical correlation that caused
Moynihan to suggest that states trying to improve
their students' test scores should move closer to
Canada.
REPRESENTATIVE GRUENBERG said he thinks this points out the
possible fallacy in the difference between correlation and
causality. He asked Ms. McNair-Grove if she would reiterate the
difference between the two words and how that relates to the
present issue.
Number 1710
MS. McNAIR-GROVE agreed that there is a difference between
correlation and causation. She noted that some statistical
textbooks have examples of "silly correlations." She said:
What we have tried to do in our review of this is get
a grip on, "Is this a silly correlation between credit
history and loss experience, or is there really
something to it?" And the statistical evidence that
we have seen has led us to approve these, based on the
statutory requirements that we have for approving rate
filings. The statute does not require that there be a
cause-and-effect relationship; it says they can be
demonstrated to have a probable effect upon losses or
expenses.
REPRESENTATIVE GRUENBERG referred to the top of page 12 of the
division's report. He read as follows:
As exemplified in the NAIC report, "the longer a
vehicle is on the road, for example, the more likely
it is that the vehicle may be involved in a random
traffic accident; thus, daily and annual total mileage
may be viewed a causal rating factor."
REPRESENTATIVE GRUENBERG noted that Marilyn Voss-Savant, who is
a bright person, has had a number of examples of this in her
column. The chance of any random accident occurring is exactly
the same regardless of the age of the vehicle, he said. The
question is whether they're on the road or not. He said, "It
is, each individual time segment is totally complete and unto
itself. So is this not a totally false logical example?"
MS. McNAIR-GROVE said she wasn't sure how to respond, but that
the question posed to the division was, "Is correlation enough?"
The point that the division is trying to make, she noted, is
that when somebody comes to the division and says there's a
correlation between "this factor and loss experience," that
doesn't automatically get it approved by the division.
REPRESENTATIVE GRUENBERG asked whether the division would like
the capability through statute to find out the basis of Fair
Isaac's modeling system while preserving that company's
proprietary interest.
Number 1849
MS. HALL answered that it's one point of consideration she would
make. If credit scoring is to be used, she would like the Fair
Isaac or any scoring model made available to the division, along
with some appropriate confidentiality protections of that. That
not only would allow the division to evaluate the model that's
being used, but also would allow it to have the details so that
when it conducts market conduct examinations, it can test to be
sure that an insurance company is actually using the things that
company put in its model that it filed with the division.
REPRESENTATIVE GRUENBERG requested that Mr. Lo provide that
information to DCED.
MR. LO agreed to that.
MR. SORICH noted that a similar provision is in the NCOIL model
Act.
Number 1960
REPRESENTATIVE CRAWFORD asked how the use of credit scoring in
underwriting would affect the consumer's actual insurance bill.
MS. McNAIR-GROVE responded, "If an insurer uses two different
companies for their business - one company may be a preferred
company and one company may be a standard company - they will
have different rates in those two companies. So, depending upon
which company the insured is placed with, yes, it does affect
your rate." She concurred that in some cases, the rate could be
affected considerably.
Number 2075
ROBERT CEDERHOLM, Independent Insurance Agent, said he supports
the ability of companies to use different criteria for
underwriting. He said he believes [credit] scoring is used as
just a tool in one of many forms of underwriting. He commented
that so many companies have come and gone in Alaska because they
did not make a profit. He opined that [insurance] companies
want to do what's best for the insured. He noted that the more
people an insurance company insures, the less chance that
company has of "having any kind of a catastrophe." He added,
"That's the point of insurance."
MR. CEDERHOLM said insurance companies try to keep the rates low
for the insured; if they don't, people have the choice of going
elsewhere. He stated, "I think what's missed in this whole
thing is that people have choices." He added that if rates go
up, then people need to shop around, because it's always in
their best interest to do so. He said two or three insurance
companies control the largest percentage of the business, which
is why so many companies over the years have left the state. He
continued:
Because they leave the state, it keeps those two or
three companies in control of the largest percentage.
And when they're in control of the largest percentage,
they're spreading the risk amongst themselves, and so
they're not the ones that you ever fear ... are going
to leave the state. It's the ones that only have a
little tiny bit of this that are going to leave. And
what happens is, because they have so many clients,
they can keep their rates lower, so it feeds upon
itself.
MR. CEDERHOLM said rates will go up, either because of credit or
just due to losses. When companies apply to the Division of
Insurance to get rates increased, if the information they give
the division doesn't prove they aren't [making a profit], then
they are not allowed to have a rate increase. He said the
public seems to think insurance companies [change rates on a
whim]. Rates are based upon competition, he said. As long as
the cost of doing business increases, the charges will increase,
whether it's caused by credit scoring or anything else. Mr.
Cederholm explained that the reason no one seems to know what
[model] any company uses is that it is secret. Furthermore, it
has to be secret so that the insurance company has a tool that
no one else knows [the details of]; thus it can keep its rates
low in order to have the highest possible percentage of clients
and, therefore, will not have to raise its rates. He added that
people seem to look at the short-term [picture] and not the
long-term one. He opined that keeping companies from having
flexibility will result in their leaving the state, and the few
remaining companies will raise their rates.
Number 2137
REPRESENTATIVE CRAWFORD said he agrees with Mr. Cederholm
regarding the increase of insurance rates, and "8 percent is
about what it's going to take to have companies remain
profitable here." However, he said there are examples that,
because of credit scoring, some people's rates have increased
100 percent because "they got placed in another group." He
said, "Just because I was shopping for lower interest rates on
my mortgages for my rental properties and had a lot of hits, my
insurance rates went up 25 percent one year and 40 percent the
next." He asked if that was fair that his insurance rate was
affected because he was doing the American thing by shopping
around for the best price.
MR. CEDERHOLM replied that credit scoring is a new tool that,
like all new tools, needs fine-tuning. He said that is what's
currently being done. He suggested the rise in rates that
Representative Crawford experienced after his medical situation
may have been due to a glitch in the system. He also suggested
that Representative Crawford call another company that doesn't
use [credit scoring], because it would be in his best interest
to shop around.
MR. CEDERHOLM noted that as an independent agent, he writes for
10 different companies. He said every day he has customers come
in complaining about their current company, and he shops them
out to another one of the 10 companies that he represents. If
they are still not happy, he said, they can go to another
independent agent.
Number 2238
REPRESENTATIVE CRAWFORD responded that he uses independent
agents also, and that shopping around for a lower rate is
exactly what [negatively impacted] his credit score. He said,
"Instead of fine-tuning it, or making it ... more like a laser,
what you're doing is making ... a huge lasso around so many
people that they're getting roped in to a group that they
shouldn't be a part of."
Number 2279
ARTHUR PARKS, Underwriter Administrator, State Farm Insurance
Company ("State Farm") for the Pacific Northwest Dome, testified
that State Farm's underwriting model is different from the model
previously talked about, in that State Farm developed its own
product, using its loss data. State Farm scored three million
of its own policyholders and then tracked the loss experience
with them. The company identified the credit characteristics
that were most predictive and combined those with prior loss
information to develop an underwriting score. State Farm only
uses this model at the time of initial application, for new
business only; it is not used to re-underwrite people, renew
them, or raise their rates at renewal. In addition, he noted,
their model is not used as the sole reason to deny someone
coverage, and it often qualifies people for State Farm's
preferred companies. He offered an example.
MR. PARKS told the committee that whenever a credit score does
keep people from getting the company's very best rate, State
Farm provides notification of "that line in the Fair Credit
Reporting Act." He explained that the notification tells the
people that they were adversely impacted by information
contained in the consumer report, and where they can get a copy
of that report. In addition, State Farm provides those people
with up to four reasons - related either to credit or loss
history - that explains what impacted their scores. He listed
some of the more common reasons given: prior losses, the number
of revolving accounts, the number of late payments, and
collections not related to medical bills or utilities.
MR. PARKS referred to the previous discussion regarding
causation. He said credit components don't cause people to have
future losses, but they are a predictor. He said, "What we've
done is we've tried to capture a highly predictive element that
is extremely complete to help better predict the future losses
that someone might have."
TAPE 03-33, SIDE B
Number 2390
MR. PARKS referred to a 1999 study by the American Insurance
Association that broke income levels into nine groups, from
those people making below $15,000 annually to those making more
than $125,000. What the study showed, he explained, is that
there is no significant difference in the credit score that came
back "for those individuals." Mr. Parks said [the use of credit
scoring] isn't necessarily about decreasing the loss rate; it's
just about trying to award equitable distribution of how
premiums are charged for the losses that will be experienced.
He concluded by reiterating that State Farm continuously
validates its own underwriting model. He added that as the
company gains additional experience with the model, it will be
adjusted as appropriate.
Number 2302
MICHAEL LESSMEIER, Attorney at Law, Lessmeier & Winters,
Lobbyist for State Farm Insurance Company, testified that the
issue before the committee is really one of fairness. He said
repeated studies show that this tool works. He added, "If it
works, and if it allows us to price our product appropriately,
commensurate with the risk that is presented, we should be
allowed to use it." He referred to a paragraph [page 29] of a
review done by the American Academy of Actuaries for the NAIC,
dated November 15, 2002, which read as follows:
Causality is not a requirement for any element in a
risk classification system. For example, drivers with
past accidents and driving violations have been shown
to have higher rates of accidents in the future, and
therefore driving record is a useful and commonly
accepted element of risk classification systems for
automobile insurance. However, histories of past
accidents and violations do not cause driver[s] to
have more accidents. The rating practice that does
exist is based on the fact that, as a group, drivers
who have been accident-prone in the past are likely to
be accident-prone in the future.
MR. LESSMEIER opined that the review is excellent. He noted
that in response to a recent study by the University of Texas,
as well as the Alaska and [State of] Washington studies, the
NAIC asked the American Academy of Actuaries to do a follow-up
study to address some of the questions asked. He said there is
some hope that this study will be completed in the next couple
of months.
MR. LESSMEIER discussed [last year's proposed committee
substitute (CS) for SB 320, sponsored by Senator John Cowdery,
Version 22-LS1462\T, Ford, 4/30/02]. He said it addresses a
number of concerns raised at today's hearing. For example, it
has a confidentiality provision such that, upon request, an
insurer shall file its model with the Division of Insurance, and
it provides appropriate protections for that; it requires an
insurer that takes an adverse action based on credit to give
notice to the insured in writing, stating the significant
factors of the credit history or credit score that resulted in
the adverse action; and it provides that if a disputed credit
history is used and later found inaccurate, there would be a
retroactive fix. Furthermore, it lists a number of things that
an insurer cannot consider in terms of using credit; each was
discussed in great detail with much debate, he said, and six
were ultimately agreed upon. Mr. Lessmeier urged the committee
to use this as a platform because it has involved a significant
amount of work and doesn't totally ban the use of credit.
MR. LESSMEIER referred to Appendix A in the previously noted
report by the Division of Insurance, which shows that the
division sent out solicitations to 91 companies. By the time
the "response time" came out, there were responses from 27
companies that no longer wrote business in Alaska. He opined
that [credit scoring] is a useful tool that's good for
policyholders. He encouraged the committee not to ban [credit
scoring] and to consider last year's proposed CS for SB 320.
Number 2136
REPRESENTATIVE GRUENBERG noted that the provision he'd
previously spoken about with Mr. Lo is found in the [proposed CS
for SB 320] on page 4, lines 16-22, and a similar provision is
found in the NCOIL version on page 5, subsection (9)(b). He
offered his estimation that [the proposed CS for SB 320] is a
"much more comprehensive treatment of the subject of the Fair
Isaac issue."
Number 2099
MR. LESSMEIER noted that credit [as a basis] has been used in
Alaska for approximately three years. He referred to the
previously cited statistics regarding the percentage of the
market held by [State Farm]. Mr. Lessmeier said during that
three-year period [State Farm] has had five complaints about the
use of credit. He said, "This has not been an issue that has
presented a significant number of problems for our policyholders
and, in fact, that is verified by the lack of number of
complaints with the Division of Insurance - not just the lack of
... complaints, but the lack of number of complaints that are
found to be valid." He added that he doesn't know that there
has ever been a single complaint regarding the use of credit in
Alaska found to be valid.
Number 2049
REPRESENTATIVE SEATON said one thing he has found disturbing is
the number of inquiries made about somebody's credit history.
He said, "It seems to be one of these factors that there could
be many reasons for." He asked Mr. Lessmeier if that is a
factor that he finds necessary to use in [an insurance
company's] determinations, or whether it could be eliminated,
which would eliminate a lot of opposition from people who
"obviously know that there could be many reasons for getting
credit checks, and if that's going to influence your automobile
insurance, then that seems, on the face of it, unfair." He
added, "The other factors I could understand. This one I can't
quite."
MR. LESSMEIER answered that [last year's proposed CS for SB 320]
addressed that issue with a provision that, although it didn't
totally eliminate [credit inquiries], did limit the number of
them. He added that there was "a little bit of a qualifier on
that."
Number 1982
ELIZABETH MOCERI, Regional Counsel, Allstate Insurance Company
("Allstate"), told the committee Allstate is the second largest
insurer in Alaska. She said Allstate is concerned about the
insurance market in Alaska and about the availability of
insurers, because it believes in a healthy, competitive
insurance market, as well as healthy markets for its own
agencies. Ms. Moceri said Allstate has exclusive agents who
only sell Allstate and who are waiting for the company to use
credit rating so that they can sell more insurance. She
explained, "For Allstate, it's our growth strategy. We use
credit and ratings so we can sell more insurance at a more
competitive price." She noted that Allstate agencies are small
businesses. Allstate also supports independent agencies in
Southeast Alaska, she added. She mentioned letters from
Allstate agents who are concerned about the market.
MS. MOCERI pointed out that Allstate only uses credit in
underwriting; if a consumer comes to Allstate, the company runs
the credit and either accepts or rejects the consumer. She
said, "When we use it in rating, when you come to us, we have a
price for you. And we have a rate for you, even if you don't
have a credit history." She explained that this enables
Allstate agents to write more business. She said Allstate is
writing more business in the states in which it has introduced
credit in rating. Noting that Allstate conducted its own study
with its own insured, she said, "We took a look at their credit,
we took [a look] at their loss, and there's a connection. It's
predictive and it works. And if it didn't work, we wouldn't use
it."
Number 1888
MS. MOCERI noted that Hawaii is one of the states that she works
with. In Hawaii, she reminded the committee, age, sex, and
length of driving experience cannot be used [in rating for
insurance]; for example, a 16-year-old driver pays the same as a
40-year-old woman who has a lower loss potential. She said
there are huge subsidies built into the risk; [Hawaii's] are the
thirteenth highest in the nation in terms of overall rate. "A
lot of people are paying for other people," she remarked. She
said Allstate has to turn away people who've had tickets, which
makes it difficult for the company to grow.
MS. MOCERI said, "They did pass tort reform in 1999. And right
now we're sort of seeing some legislative creep-back." She
commented that from an insurer's point of view, it is expensive
to do business in Alaska, which has unique laws relating to
attorney fees. She said it is unique to Alaska that people can
buy up to $1 million in uninsured motorist [insurance], while
only having $100,000 limits for someone else. She emphasized
that [Allstate] pays a lot of money in claims in Alaska, which
goes into the cost of "the money you're paying out."
Number 1783
REPRESENTATIVE GRUENBERG referred to Ms. Moceri's previous
statement regarding the 40-year-old woman who pays for the 16-
year-old driver, and asked, "Isn't that the nature of insurance
to spread the risk?"
MS. MOCERI responded that [Allstate] looks at groups and is able
to refine credit to be predictive for each group. Using credit
goes beyond the use of age, gender, and marital status, and
allows companies to take in people that they would normally not
have been able to in the past. The ability to offer insurance
is needed for a healthy, competitive market, she opined. She
suggested, "You could have complaints here of people saying, 'I
can't find insurance.'" She said the Division of Insurance has
indicated that its assigned risk pool - people who cannot find
insurance - has increased.
REPRESENTATIVE GRUENBERG commented that he has heard a lot from
people in the insurance industry regarding the problems caused
by the "uninsured motorist" law in Alaska. He suggested that at
some point perhaps the legislature ought to revisit that issue
if it is causing many problems for people.
Number 1695
MR. NIEHAUS commented that the committee has not heard from the
approximately 12,000 policyholders who would suffer if credit
were eliminated; therefore, he urged the committee not to throw
the baby out with the bathwater. He said a lot of work had gone
into making a CS, and that the Division of Insurance has done a
great job in making sure that "insureds" file the data properly
and that it justifies all of their actions. He urged the
committee to consider the CS [for last year's SB 320].
Number 1659
MR. SORICH, regarding the previously mentioned consumer
inquiries and inquiries showing up on the credit report and
being reflected the insurance score, noted that the Fair Isaac
model does not include nonconsumer-initiated inquiries. Also,
he noted that under that model, inquiries that the consumer
makes for mortgages or car loans within a 30-day period are
condensed into one inquiry. Noting that this provision is also
in the NCOIL model Act, he said he thinks it is a positive
provision in the model. [HB 47 and HB 5 were held over.]
ADJOURNMENT
There being no further business before the committee, the House
State Affairs Standing Committee meeting was adjourned at
12:20 p.m.
| Document Name | Date/Time | Subjects |
|---|