Legislature(2001 - 2002)

03/26/2002 01:35 PM Senate L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                    
                SENATE LABOR & COMMERCE COMMITTEE                                                                             
                         March 26, 2002                                                                                         
                            1:35 p.m.                                                                                           
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ben Stevens, Chair                                                                                                      
Senator Alan Austerman                                                                                                          
Senator John Torgerson                                                                                                          
Senator Bettye Davis                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Loren Leman                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 220                                                                                                             
"An Act relating to the scope of practice authorized under a                                                                    
license to practice hairdressing."                                                                                              
                                                                                                                                
     MOVED CSSB 220(L&C) OUT OF COMMITTEE                                                                                       
                                                                                                                                
CS FOR HOUSE BILL NO. 56(FIN)                                                                                                   
"An Act relating to minimum wages; and providing for an effective                                                               
date."                                                                                                                          
                                                                                                                                
     MOVED CSHB 56(FIN) OUT OF COMMITTEE                                                                                        
                                                                                                                                
CS FOR SENATE BILL NO. 320(TRA)                                                                                                 
"An Act prohibiting discrimination in insurance rates based on                                                                  
credit rating or credit scoring; and providing for an effective                                                                 
date."                                                                                                                          
                                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
SB 220 - See Labor and Commerce minutes dated 3/14/02.                                                                          
                                                                                                                                
HB 56 - No previous action to consider.                                                                                         
                                                                                                                                
SB 320 - See Transportation minutes dated 2/28/02 and Labor and                                                                 
Commerce minutes dated 3/5/02.                                                                                                  
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                              
Ms. Linda Sylvester                                                                                                             
Staff to Representative Kott                                                                                                    
State Capitol Bldg.                                                                                                             
Juneau AK 99811                                                                                                                 
POSITION STATEMENT: Commented on HB 56 for sponsor.                                                                           
                                                                                                                                
Commission Ed Flanagan                                                                                                          
Department of Labor and Workforce Development                                                                                   
PO Box 21149                                                                                                                    
Juneau AK 99802                                                                                                                 
POSITION STATEMENT: Supported HB 56.                                                                                          
                                                                                                                                
Mr. Chip Wagoner                                                                                                                
Alaska Catholic Conference                                                                                                      
3294 Pioneer Avenue                                                                                                             
Juneau AK 99801                                                                                                                 
POSITION STATEMENT: Supported HB 56.                                                                                          
                                                                                                                                
Mr. John Wilson                                                                                                                 
Outback Steakhouse/Restaurant Industry                                                                                          
No address provided                                                                                                             
POSITION STATEMENT:  Opposed HB 56.                                                                                           
                                                                                                                                
Ms. Annette Deal                                                                                                                
Staff to Senator John Cowdery                                                                                                   
State Capitol Bldg.                                                                                                             
Juneau AK 99811                                                                                                                 
POSITION STATEMENT: Commented on SB 320 for the sponsor.                                                                      
                                                                                                                                
Mr. Mark Niehaus, General Manager                                                                                               
Progressive Insurance                                                                                                           
11010 White Rock Rd.                                                                                                            
Rancho Cordova AK 95670                                                                                                         
POSITION STATEMENT: Opposed SB 320.                                                                                           
                                                                                                                                
Mr. Steve Cleary                                                                                                                
Alaska Public Interest Research Group (AKPIRG)                                                                                  
PO Box 101093                                                                                                                   
Anchorage AK 99510                                                                                                              
POSITION STATEMENT: Supported SB 320.                                                                                         
                                                                                                                                
MR. James Jenks, Legislative Counsel                                                                                            
U.S.A.A. Western States                                                                                                         
No address provided                                                                                                             
POSITION STATEMENT: Opposed SB 320.                                                                                           
                                                                                                                                
Mr. Glenn Clary                                                                                                                 
2150 Glacier                                                                                                                    
Anchorage AK 99508                                                                                                              
POSITION STATEMENT: Supported SB 320.                                                                                         
                                                                                                                                
Ms. Suzanne Kelly                                                                                                               
PO Box 91091                                                                                                                    
Anchorage AK 99509                                                                                                              
POSITION STATEMENT: Supported SB 320.                                                                                         
                                                                                                                                
Ms. Sarah McNair-Grove                                                                                                          
Property Actuary                                                                                                                
Division of Insurance                                                                                                           
Department of Community and Economic Development                                                                                
PO Box 110805                                                                                                                   
Juneau AK 99811                                                                                                                 
POSITION STATEMENT: Supported SB 320.                                                                                         
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 02-15, SIDE A                                                                                                            
Number 001                                                                                                                      
            SB 220-SCOPE OF PRACTICE OF HAIRDRESSING                                                                        
                                                                                                                              
CHAIRMAN BEN STEVENS called the Senate  Labor & Commerce Committee                                                            
meeting to  order at 1:35 p.m. and  announced SB 220 to  be up for                                                              
consideration.  He  said there  was  a committee  substitute  that                                                              
addressed the issues that were brought up in the first hearing.                                                                 
                                                                                                                                
SENATOR TORGERSON moved  to adopt the CS to SB 220.  There were no                                                              
objections and it was so ordered.                                                                                               
                                                                                                                                
SENATOR AUSTERMAN moved to pass CSSB  220(L&C) from committee with                                                              
individual recommendations.  There were  no objections and  it was                                                              
so ordered.                                                                                                                     
                                                                                                                                
                       HB  56-MINIMUM WAGE                                                                                  
                                                                                                                                
CHAIRMAN STEVENS announced HB 56 to be up for consideration.                                                                    
                                                                                                                                
MS. LINDA  SYLVESTER, Aide to  Representative Kott, sponsor  of HB
56, said it increases  the minimum wage to a level  that will help                                                              
insure  a minimum  standard  of living  for  Alaska's lowest  paid                                                              
workers.  It is  an  exact duplicate  of  the initiative  petition                                                              
language.                                                                                                                       
                                                                                                                                
     What it basically does is effective  January 1, 2003, an                                                                   
     employer  shall pay  each employee  not less than  $7.15                                                                   
     per hour for work in a pay period  as well as each year,                                                                   
     not later than  September 30, the minimum  wage shall be                                                                   
     adjusted for inflation at 100%  of the CPI at Anchorage.                                                                   
     It  also  includes  that if  the  federal  minimum  wage                                                                   
     increases  and  Alaska's  minimum   wage  looses  ground                                                                   
     against  that, it  will  always be  $1  higher than  the                                                                   
     federal minimum wage.                                                                                                      
                                                                                                                                
SENATOR TORGERSON said he knew that  some other wages were tied to                                                              
the minimum wage  such as busing contracts and  asked what impacts                                                              
this would have.                                                                                                                
                                                                                                                                
COMMISSIONER  ED  FLANAGAN,  Department  of  Labor  and  Workforce                                                              
Development,  replied that  there was  discussion of  that in  the                                                              
House and  a fiscal note  was provided  to House Finance.  That is                                                              
the  only wage  that is  specifically  tied to  the minimum  wage.                                                              
There is reference  in admin regs to make people  salaried if they                                                              
become  a supervisor  in  a  fast  food restaurant,  for  example,                                                              
instead of  paying them by  the hour and they  have to be  paid at                                                              
least two and half times the minimum wage.                                                                                      
                                                                                                                                
SENATOR TORGERSON  asked if the $7  included the $1  addition over                                                              
the feds.                                                                                                                       
                                                                                                                                
COMMISSIONER FLANAGAN replied:                                                                                                  
                                                                                                                                
     The way it's written now the  $7.15 would be the minimum                                                                   
     on January 1. As there are annual  adjustments, it would                                                                   
     either be  the percent to keep  up with inflation  or if                                                                   
     the feds  happen to make  an increase, that  dollar over                                                                   
     would end up  being a greater amount. That  would be the                                                                   
     only  time that  would enter  in. Right now  our law  is                                                                   
     $.50 over  and it  has been since  1959. So, this  would                                                                   
     create  second time.  It's an  either  or, whichever  is                                                                   
     greater.                                                                                                                   
                                                                                                                                
He said the department wholeheartedly supports the bill.                                                                        
                                                                                                                                
MR.  CHIP  WAGONER,  Alaska Catholic  Conference,  said  that  the                                                              
Conference is the  public policy arm of the Roman  Catholic church                                                              
in the  state of Alaska.  At the September  21, 2001  meeting, the                                                              
Conference  unanimously adopted  a  resolution in  support of  the                                                              
minimum wage increase  and the automatic adjustment  provision. He                                                              
said the Church supported a minimum  wage as early as 1919, nearly                                                              
two  decades  before the  federal  Fair  Labor Standards  Act  was                                                              
adopted. He said  the reason for their position is  based on their                                                              
social teaching.                                                                                                                
                                                                                                                                
     The first is  that we give a preferential  option to the                                                                   
     poor and vulnerable. The test  in the eyes of the church                                                                   
     of any  civilization of a society  and of an  economy is                                                                   
     how the poor and vulnerable are treated…                                                                                   
                                                                                                                                
     A second  catholic social teaching  that applies  to the                                                                   
     minimum  wage is the  concept of what  work is.  Work is                                                                   
     more than  a job. Work in  catholic social thought  is a                                                                   
     way  to  participate  with  God's  creation,  a  way  to                                                                   
     contribute to  the common good,  a way to  promote human                                                                   
     dignity  and a way  for people to  meet their needs  and                                                                   
     their  community  obligations.  The  church's  teachings                                                                   
     promote the concept  of what is called a  living wage, a                                                                   
     wage  which  is  adequate for  workers  to  provide  for                                                                   
     themselves and  their families in dignity.  This concept                                                                   
     has  actually  been  adopted   in  over  80  communities                                                                   
     throughout the United States.                                                                                              
                                                                                                                                
     Now,  a  minimum   wage  that  you  are   debating  here                                                                   
     increased to  $7.15 is not in  Alaska a living  wage. In                                                                   
     fact, if a  person worked 40 hours a week,  52 weeks per                                                                   
     year, at $7.15,  she would earn $14,872,  which is below                                                                   
     the poverty threshold  for a family of two.  So although                                                                   
     an increase  in the minimum wage  is, as I said,  a step                                                                   
     in the right direction, it's  a long way before we reach                                                                   
     the living wage concept.                                                                                                   
                                                                                                                                
     What the minimum wage does is  not only helps to provide                                                                   
     for people  in need, but it  gives them a  greater sense                                                                   
     of  self esteem  and  self worth.  Who  benefits from  a                                                                   
     minimum  wage   increase?  These  figures   are  federal                                                                   
     figures,   but  an   increase   in  the   minimum   wage                                                                   
     disproportionately  benefits women,  minorities and  the                                                                   
     nation's  poor. In 1998,  the Economic Policy  Institute                                                                   
     study  found that households  in the  bottom 20% of  the                                                                   
     income  spectrum,  who  receive  only 5%  of  the  total                                                                   
     family  income, received  35% of the  total benefits  of                                                                   
     the last  increase in  the minimum  wage at the  federal                                                                   
     level.  Of those affected  by the  last federal  minimum                                                                   
     wage increase,  72% were adults  and over and  more than                                                                   
     half  of the teenagers  earning minimum  wage when  that                                                                   
     increased  were   in  households  that   received  below                                                                   
     average  incomes.  Over 60%  of the  workers  benefiting                                                                   
     from   the  increase  were   women.  African   Americans                                                                   
     represented   11.7%   of  the   total   workforce   that                                                                   
     benefited,  but  were  18%  of  the  workers  that  were                                                                   
     actually  benefited by  the  increase. Hispanic  workers                                                                   
     represented  11.3% of the workforce,  but were  14.4% of                                                                   
     the workers affected by the increase.                                                                                      
                                                                                                                                
     Another issue  that has  come up is  - are jobs  lost as                                                                   
     when employers  have to lay  off people in order  to pay                                                                   
     for those  who are still with  them. The answer  to that                                                                   
     question is no. Again, the EPI  study failed to find any                                                                   
     systematic  significant  job  loss associated  with  the                                                                   
     federal  1996  - '97  minimum  wage increase.  In  fact,                                                                   
     economists Dave  Card and Adam Kruger, were  studying an                                                                   
     analysis of the  minimum wage increase in  New Jersey on                                                                   
     fast food workers  in the early 90s and they  found that                                                                   
     employment actually increased.                                                                                             
                                                                                                                                
     Also,  Robert Solo,  the MIT  Nobel  Laureate, wrote  in                                                                   
     1995,  that the main  thing about  the research is  that                                                                   
     the evidence of  job loss is weak and the  fact that the                                                                   
     evidence  is weak suggests  that the  impact to jobs  is                                                                   
     small.                                                                                                                     
                                                                                                                                
     Lastly, the issue of school  bus drivers has come up. To                                                                   
     my knowledge  it's the only occupation that  is actually                                                                   
     tied  to the  minimum wage  increase to  a minimum  wage                                                                   
     statute.  I  think  we  need  to  recognize  that  we're                                                                   
     talking about  two different public policies.  The first                                                                   
     public policy  with regards  to this issue is  providing                                                                   
     for  the  least  amount  of  [indisc]  increase  in  the                                                                   
     minimum  wage.  That's  policy number  one.  The  second                                                                   
     policy  is  the  policy  as it  relates  to  school  bus                                                                   
     drivers.                                                                                                                   
                                                                                                                                
1:45 p.m.                                                                                                                       
                                                                                                                                
MR. WAGONER  said he researched the  passage of that bill  in 1990                                                              
and the reason  school bus drivers are tied to  double the minimum                                                              
wage is not to give them an increase  in wages, but to establish a                                                              
floor  for proficiency  for school  bus drivers  because of  their                                                              
concern about safety.                                                                                                           
                                                                                                                                
MR. JOHN WILSON, Outback Steakhouse  Restaurant, said that raising                                                              
the minimum wage  in the restaurant industry would  create a 26.5%                                                              
increase in  wages for anyone  in the restaurant  industry. "There                                                              
is not a business owner that I know  of who can absorb an increase                                                              
like  that  without raising  prices  of  their services  or  their                                                              
products…. In the end it's the consumer who gets hurt."                                                                         
                                                                                                                                
He said  that 80% of  restaurant workers'  wages are for  tips and                                                              
they already  make $15  - $20 per  hour depending  on the  type of                                                              
restaurant they are working in.                                                                                                 
                                                                                                                                
SENATOR DAVIS asked what figures he based the 26.5% increase.                                                                   
                                                                                                                                
MR.WILSON replied that  minimum wage of $5.65 right  now and going                                                              
to $7.15 per hour is a 26.5% increase.                                                                                          
                                                                                                                                
SENATOR DAVIS asked if his restaurant paid the $15 - $20.                                                                       
                                                                                                                                
MR. WILSON replied yes.                                                                                                         
                                                                                                                                
SENATOR  TORGERSON  asked  if  he would  rather  have  this  issue                                                              
decided on the ballot, as the petition  had been certified, and it                                                              
would be on the November ballot.                                                                                                
                                                                                                                                
MR. WILSON replied that he would rather see it on the ballot.                                                                   
                                                                                                                                
SENATOR DAVIS moved  to pass HB 56 from committee  with individual                                                              
recommendations. There were no objections and it was so ordered.                                                                
                                                                                                                                
            SB 320-MOTOR VEHICLE INSURANCE & REPAIRS                                                                        
                                                                                                                              
CHAIRMAN STEVENS announced SB 320 to be up for consideration.                                                                   
                                                                                                                                
MS. ANNETTE  DEAL, staff  to Senator Cowdery,  sponsor of  SB 320,                                                              
said this legislation has everything  to do with how auto and home                                                              
premium rates are determined for insurance purposes.                                                                            
                                                                                                                                
     The idea of  the industry is to remove  driver behavior,                                                                   
     or  base very  little  percentage  on it,  meaning  your                                                                   
     tickets  and   your  accidents,  and  replace   it  with                                                                   
     economic considerations meaning  your credit score. This                                                                   
     credit score  is a glimpse in  time, but it is  a seven-                                                                   
     year glimpse  in time, because  your credit  score takes                                                                   
     into account bankruptcies, judgments,  late payments and                                                                   
     all of those factors remain  on your credit for a seven-                                                                   
     year period,  possibly even 10  years where in  the past                                                                   
     driving  records  have used….  In this  scenario  people                                                                   
     with  bad credit who  are good  drivers are  subsidizing                                                                   
     people with good credit who are risky drivers.                                                                             
                                                                                                                                
She  told the  story  of a  Fairbanks  woman who  is  a victim  of                                                              
identity  theft  whose  premiums   have  skyrocketed  and  there's                                                              
basically  nothing she can  do about  it. People  who are  hurt by                                                              
this are  people with a  few glitches on  their credit who  have a                                                              
good  driving  record.  The insurance  industry  will  argue  that                                                              
driving records  are inaccurate,  but the DMV  says they  are very                                                              
accurate  and they  have  never heard  that  they are  inaccurate.                                                              
Credit reports  on the other  hand can be  anywhere from 10  - 60%                                                              
inaccurate. Fixing a credit report can take forever.                                                                            
                                                                                                                                
MS. DEAL  said that insurance companies  tell you that there  is a                                                              
correlation  between  good credit  and  fewer accidents,  but  she                                                              
could  probably prove  to them  through  some sort  of study  that                                                              
people who eat  pickles are in more accidents. They  also say they                                                              
are able  to write more aggressively  in urban markets  and that's                                                              
great except if you consider that about 50% of Alaska is rural.                                                                 
                                                                                                                                
MR.  MARK NIEHAUS,  General Manager,  Progressive Insurance,  said                                                              
they  are the  fourth  largest writer  of  auto  insurance in  the                                                              
country and  have used credit  as an  element of their  rating for                                                              
over 10 years. Currently,  they use credit in 45  of the 48 states                                                              
in which  they write  business. "Credit is  allowable and  we have                                                              
been using it actively in those states."                                                                                        
                                                                                                                                
He said they  have about $45 billion of earned  premium data using                                                              
credit. They have used credit in  Alaska successfully for the last                                                              
six years.  They had an extensive  filing and review  process with                                                              
the  Alaska Division  of  Insurance  where they  closely  examined                                                              
their proposal  and approved it because  they deemed credit  to be                                                              
correlated with  risk of loss, which,  it is. About two  thirds of                                                              
their customers get a lower rate  because of credit and they would                                                              
get  rate increases  if  they couldn't  use  credit.  Some of  the                                                              
increases would  be very  significant like about  30 -  40%. There                                                              
had been  voluminous studies  on credit as  a predictor  of future                                                              
loss and  the Alaska Division of  Insurance has looked at  this as                                                              
well.                                                                                                                           
                                                                                                                                
The  beauty  of  credit  as  a rating  factor  is  that  it's  not                                                              
correlated with  other factors and that's why  insurance companies                                                              
want to  use it.  It's not  correlated with  age, sex, or  marital                                                              
status. "So,  it's powerful and  it's an independent  predictor of                                                              
future losses."                                                                                                                 
                                                                                                                                
Many  independents  reviews  have   been  done  of  this  practice                                                              
including  the  NAIC  and  they  have  concluded  that  credit  is                                                              
predictive of loss.  They could not afford to give  lower rates if                                                              
it weren't justified. "We would go out of business."                                                                            
                                                                                                                                
They use  of credit  for prescreening  is specifically  allowed by                                                              
the  Fair Credit  Reporting Act,  which  has a  lot of  disclosing                                                              
requirements  and  prohibitions on  using  things  like age,  sex,                                                              
religion,  race  and  significant   penalties  for  noncompliance.                                                              
"There is already a lot of protection  out there today in terms of                                                              
the FCRA around use of credit."                                                                                                 
                                                                                                                                
Briefly, he  said the  process is objective  and is an  electronic                                                              
check taking  about  30 seconds.  They pull raw  data from  credit                                                              
vendors and calculate a score using  their algorithm. There are no                                                              
privacy issues,  because the credit  data is not displayed  in the                                                              
office of the independent agent who  is doing the quote. They give                                                              
disclosure to the  customer and ask permission as  required by the                                                              
FCRA before  they even  order their  credit report.  In the  event                                                              
that the rate  comes out higher than the best  rate, customers are                                                              
given an 800  number and get a  free copy of their  credit report.                                                              
If there  are any errors,  they are able  to correct them  and the                                                              
policy will  be reissued at the  revised rate. He added  that they                                                              
get very few of those.                                                                                                          
                                                                                                                                
Progressive  provides   reason  codes,  listing  three   things  a                                                              
customer can do to improve their  credit score. Things that are on                                                              
a  credit  score  include  bankruptcies,   judgments,  tax  leans,                                                              
information  on number  of loans,  credit  limits, late  payments,                                                              
number of  inquiries. Things  not in a  credit report  are income,                                                              
race, gender,  wealth, nationality,  etc. The  use of credit  does                                                              
allow folks  who otherwise wouldn't  qualify to qualify  for their                                                              
preferred rates.                                                                                                                
                                                                                                                                
MR. NIEHAUS said  they have a major problem with  this bill. It is                                                              
a very broad restriction and no other  state has a bill that is so                                                              
broad and would  completely disallow the use of  credit for either                                                              
rating or underwriting.                                                                                                         
                                                                                                                                
     It's going to create an unlevel  playing field, frankly,                                                                   
     and  disadvantage  independent  agents  and  independent                                                                   
     agency  companies  and the  reason  for that  is  direct                                                                   
     writers are specifically allowed to use credit.                                                                            
                                                                                                                                
He said there's  no question that good drivers would  be forced to                                                              
subsidize bad drivers.  Good drivers defined as  those people less                                                              
likely  to  have  a  claim  would under  this  bill  have  to  pay                                                              
significantly  more  insurance  because  of people  who  are  more                                                              
likely to have a claim because of lack of responsibility.                                                                       
                                                                                                                                
MR.  NIEHAUS  said this  is  a  powerful  tool that  would  stifle                                                              
competition.  His  company  is  more willing  to  do  business  in                                                              
Alaska,  because they  can  write more  business  and offer  lower                                                              
rates and that helps them grow.                                                                                                 
                                                                                                                                
2:10 p.m.                                                                                                                       
                                                                                                                                
The AARP  wrote a  letter saying  they support  the bill,  because                                                              
they believe  that retirees  are being  adversely affected  by the                                                              
use  of credit  scoring insurance.  He looked  at the  Progressive                                                              
credit scores by  age, because one of the things  they were saying                                                              
is that  older folks  have worse  credit and  are therefore  being                                                              
hurt by credit  scoring. He found exactly the opposite  to be true                                                              
and showed them  a graph illustrating that as you  get older, your                                                              
average  credit score  gets  better.  He did  not  think the  AARP                                                              
letter was based on any data.                                                                                                   
                                                                                                                                
He also  looked at people without  credit called no  hits. Overall                                                              
nationwide that number is 4.8% of  their business and he looked at                                                              
it for people  over 60 and the  number is 5.2% showing  that there                                                              
is no significant  difference in older versus  younger folks. "So,                                                              
my conclusion is that older folks  actually benefit today from the                                                              
use of credit."                                                                                                                 
                                                                                                                                
He  offered  to  share  data  on   low  income,  consumers,  urban                                                              
residents, etc. He summarized, "I  think this bill is damaging for                                                              
Alaska  consumers. It's  going to  cause higher  rates and  lessen                                                              
competition   and   it's  going   to   force  people   that   have                                                              
responsibility  in terms  of paying  their bills  and in terms  of                                                              
their driving  and record and behavior,  it's going to  force them                                                              
to pay  more to subsidize those  people that are  less responsible                                                              
that don't pay their bills and have more accidents."                                                                            
                                                                                                                                
SENATOR AUSTERMAN asked him to clarify  what states have laws that                                                              
don't allow them to use credit.                                                                                                 
                                                                                                                                
MR. NIEHAUS  replied there are  three states -  California, Hawaii                                                              
and  Georgia  that  don't  use  credit.  In  Hawaii,  there  is  a                                                              
statutory prohibition  on use  of credit  for rating, although  it                                                              
doesn't  deal with underwriting  and  there is  a lawsuit on  that                                                              
issue. California  has no  statutory prohibition  on it.  It's not                                                              
used  in auto  insurance. It's  used in  homeowners insurance  and                                                              
other  commercial  insurance.  It's  not used  in  auto  insurance                                                              
because of propositions one and three,  which allows the insurance                                                              
commissioner to  decide what rating  factors will be used  and the                                                              
commissioner  chose not  to allow  credit as a  rating factor.  He                                                              
wasn't sure about Georgia's position.                                                                                           
                                                                                                                                
SENATOR AUSTERMAN said he had a question  about the credibility of                                                              
credit reports,  because he was involved  in a situation  where he                                                              
spent eight months getting his credit  report straightened out. He                                                              
asked Mr. Niehaus to explain in a  little more detail how they get                                                              
the credit report.                                                                                                              
                                                                                                                                
MR.  NIEHAUS  said  they  gather  the raw  data  from  the  credit                                                              
providers. There  are three primary vendors of  credit information                                                              
and Progressive  uses a company called  Trans Union. They  get the                                                              
raw  data and  have  a mathematical  formula  that calculates  the                                                              
score.                                                                                                                          
                                                                                                                                
He  had some  data on  accuracy. In  2000 his  company ordered  11                                                              
million credit  reports and the  number of errors  and corrections                                                              
was quite  small,  21 changes  for that  year. In  2001, out  of 7                                                              
million credit reports ordered in  the first half of the year they                                                              
had 7 changes.  Another study they  had from Arthur  Anderson said                                                              
that 2% of 15,703  credit reports were disputed and  25% of 12,023                                                              
reports  reviewed  were  disputed   and  3%  of  reports  reviewed                                                              
resulted in  a reversal. There  was a total  of 36 changes  out of                                                              
15,703. He  thought the data was  getting better and  better every                                                              
day as people become more and more aware of a credit score.                                                                     
                                                                                                                                
SENATOR AUSTERMAN  said he knows  that their scoring  system takes                                                              
in risk  factor as  well as credit  and asked  him to explain  how                                                              
they weigh the risk versus credit.                                                                                              
                                                                                                                                
MR. NIEHAUS replied:                                                                                                            
                                                                                                                                
     We basically  have a matrix where we're looking  at risk                                                                   
     factors and  we have seven different categories  of risk                                                                   
     factors  meaning going  from  the person  with no  prior                                                                   
     insurance and  a lot of points  and a younger  driver to                                                                   
     the other  extreme of  an older  driver who's clean  and                                                                   
     prior  insurance,  etc. And  then  we also  have  credit                                                                   
     scores.  So, it's  an array  of rates. In  terms of  the                                                                   
     effect of  credit score, I  can't give you  a percentage                                                                   
     affect.  It  does qualify  as  I mentioned,  people  who                                                                   
     otherwise  would not  get good  rates. They  can get  an                                                                   
     attractive  rate. For  example, somebody  with no  prior                                                                   
     insurance  and a  couple of  points can  actually get  -                                                                   
     normally that person would be  considered a non standard                                                                   
     risk, but  assuming they have  good credit,  that person                                                                   
     could  qualify for  - we have  five tiers  - they  would                                                                   
     qualify  for the  preferred  tier, which  is the  second                                                                   
     best tier that we have. In terms  of premium difference,                                                                   
     you're looking at probably 40%.                                                                                            
                                                                                                                                
SENATOR  AUSTERMAN asked  if they  determined rates  by using  50%                                                              
risk and 50% credit.                                                                                                            
                                                                                                                                
MR. NIEHAUS said  he didn't think there was a  mathematical answer                                                              
to that.                                                                                                                        
                                                                                                                                
SENATOR TORGERSON asked  how long credit scoring had  been used in                                                              
the industry.                                                                                                                   
                                                                                                                                
MR. NIEHAUS answered  that it probably dates back  to the 70s. His                                                              
company has  been using it  for about 10  years and in  this state                                                              
for about six.                                                                                                                  
                                                                                                                                
CHAIRMAN  STEVENS asked  if his  algorithms were  approved by  the                                                              
Division of Insurance.                                                                                                          
                                                                                                                                
MR. NIEHAUS replied yes.                                                                                                        
                                                                                                                                
TAPE 02-15, SIDE B                                                                                                            
                                                                                                                                
CHAIRMAN  STEVENS  asked  if  the   variations  within  the  rates                                                              
approved by the Division of Insurance as well.                                                                                  
                                                                                                                                
MR. NIEHAUS replied yes.                                                                                                        
                                                                                                                                
MR. STEVE CLEARY, Alaska Public Interest  Research Group (AKPIRG),                                                              
supported SB 320 and agreed especially  with Ms. Deal's testimony.                                                              
He said  credit scoring  is bad for  consumers because  they don't                                                              
know how the score is figured and  factors that shouldn't make the                                                              
a  person's  credit score  bad  can  make it  bad  in a  way  that                                                              
shouldn't  happen, like  divorce, unemployment  and large  medical                                                              
bills. Figures from  their national office show that  up to 37% of                                                              
credit  reports are  wrong  and this  can  adversely affect  their                                                              
score.                                                                                                                          
                                                                                                                                
CHAIRMAN  STEVENS  asked  him  to send  that  information  to  the                                                              
committee.                                                                                                                      
                                                                                                                                
MR.  JAMES JENKS,  Legislative Counsel,  U.S.A.A.  in the  western                                                              
United States, said  they are an insurance and  financial services                                                              
company  serving military  families all  over the  world. He  said                                                              
they use credit reports, but very  sparingly. They use them for an                                                              
initial rating for a new policy,  but don't use them for review of                                                              
their cancellations. "After the first  year of experience with us,                                                              
our  rates  for  the  person going  forward  are  based  upon  our                                                              
experience with them."                                                                                                          
                                                                                                                                
They also recognize that other companies  use credit to underwrite                                                              
or  establish the  rate in  different  ways. The  factors used  in                                                              
establishing  rates and underwriting  goes to  the very  nature of                                                              
the competitive  market  place and Alaska  is becoming  increasing                                                              
competitive. So, if  someone does not like the rate  they get from                                                              
one company, they are free to shop around.                                                                                      
                                                                                                                                
MR. JENKS  concluded that  they oppose the  bill and feel  that an                                                              
insurer  should  be able  to  use  valid underwriting  and  rating                                                              
criteria if they can be demonstrated  to have a valid relationship                                                              
to the loss.                                                                                                                    
                                                                                                                                
MR. GLENN CLARY,  Anchorage resident, supported SB  320. There are                                                              
two other  areas that  they could amend  that would help  Alaskans                                                              
even  more. Insurance  companies  operating  in  Alaska sell  auto                                                              
policies because residents  are required by state law  to have it,                                                              
but the  insurance companies  have total  control. Only  after you                                                              
have signed  up and paid your premium  do they send you  a copy of                                                              
the  policy.  Without previous  disclosure  of  the terms  of  the                                                              
policy,  the customer  finds  they have  abdicated  constitutional                                                              
rights and  handed over to  the insurance companies  total control                                                              
of their medical pay out through  their use of independent medical                                                              
examinations (IME).                                                                                                             
                                                                                                                                
He said  what matters to  the insurance  company is that  they get                                                              
the  customer to  the arbitration  table.  He suggested  requiring                                                              
insurance companies to allow their  customers the option to choose                                                              
between  arbitration  and a  jury  trial and  requiring  insurance                                                              
companies to hire  local doctors to do IMEs, which  will establish                                                              
some  accountability  within a  local  community  and prevent  the                                                              
insurance company from hiring "prostitute" doctors.                                                                             
                                                                                                                                
MS.  SUZANNE  KELLY said  she  was  representing herself  and  her                                                              
family and that she is self-employed.  Her insurance rates went up                                                              
because of her credit. She has bought  a house, refinanced and had                                                              
babies;  she uses  her line  of credit  for her  business and  has                                                              
expanded  her business.  "Basically,  my credit  scores went  down                                                              
very low. So, that made my insurance rates go up very high."                                                                    
                                                                                                                                
She got different quotes and found  that if she used her husband's                                                              
social security number,  they would pay low rates.  She thought it                                                              
was very discriminatory  and summarized saying that  she supported                                                              
SB 320. She  said they don't know  how much a credit  score weighs                                                              
from company to company.                                                                                                        
                                                                                                                                
MS.  SARAH  MCNAIR-GROVE,  Property  Casualty  Actuary,  supported                                                              
their efforts  to provide  some kind of  regulation on the  use of                                                              
credit scoring by insurance companies in Alaska.                                                                                
                                                                                                                                
     How far  to go, including  whether it should  be totally                                                                   
     banned or  whether there should just be  some parameters                                                                   
     around  it, we  believe is a  policy call  that is  best                                                                   
     made by you,  but we support your efforts  in discussing                                                                   
     this issue.  The division is responsible to  review auto                                                                   
     insurance rates  and approve them  only if they  are not                                                                   
     excessive,    not    inadequate   and    not    unfairly                                                                   
     discriminatory.  Those  are   the  statutory  standards,                                                                   
     which we use to review a rate filing.                                                                                      
                                                                                                                                
     Credit   information  and  credit   scoring  was   first                                                                   
     approved  for use  in Alaska  approximately  four and  a                                                                   
     half years ago. Extensive documentation  and information                                                                   
     was required  from the insurance company to  support its                                                                   
     use and I  believe Progressive has already  testified to                                                                   
     that. Despite the fact that  it defies common sense, the                                                                   
     correlation  between credit  scores and loss  experience                                                                   
     is high.                                                                                                                   
                                                                                                                                
     Approximately  seven insurance  companies have  approved                                                                   
     auto filings  that include the use of credit  scoring in                                                                   
     Alaska. Since  December 2000, the division  has received                                                                   
     approximately 11 auto and four  homeowner's rate filings                                                                   
     requesting  to use credit information.  Six of  the auto                                                                   
     filings were  not approved as filed, either  because the                                                                   
     insurer totally  withdrew them or because  they withdrew                                                                   
     the  credit-scoring  piece of  the  filing.  Two of  the                                                                   
     filings  were approved. The  remaining auto filings  are                                                                   
     either still  under review or  disapproved. Of  the four                                                                   
     homeowners'  filings, three  of those  also removed  the                                                                   
     credit  scoring information.  The remaining  homeowners'                                                                   
     filing is still under review.  In addition to the rating                                                                   
     process,  an  insurer  can  use  credit  scoring  as  an                                                                   
     underwriting tool.                                                                                                         
                                                                                                                                
     Unlike  grading of  insurance applicants  based on  risk                                                                   
     factors, the  Division of Insurance does not  have prior                                                                   
     approval  authority  over  an insurer's  use  of  credit                                                                   
     information   in    the   underwriting    process.   The                                                                   
     underwriting process  is where the insurer  will look at                                                                   
     the applicant  and decide  whether or  not they want  to                                                                   
     provide coverage to the insured.                                                                                           
                                                                                                                                
     As  the  use  of  credit  scoring   has  increased,  the                                                                   
     division has received consumer  complaints regarding its                                                                   
     use. Most  of these calls  were from consumers  who just                                                                   
     wanted to know whether this  was something that insurers                                                                   
     were  legally entitled  to do  in  Alaska. They  claimed                                                                   
     that their  premiums doubled  or tripled because  of the                                                                   
     use  of credit information.  When we  explained to  them                                                                   
     that,  yes,  it  was  something  insurers  could  do  in                                                                   
     Alaska, that  didn't make them happy, but  they went off                                                                   
     and found  other insurers that  were willing  to provide                                                                   
     them coverage at lower rates.                                                                                              
                                                                                                                                
     In  particular,  one  consumer  who did  file  a  formal                                                                   
     complaint with the division  had a premium increase from                                                                   
     $1,500 to $4,300  and were told this was  based on their                                                                   
     credit   information.   They    checked   their   credit                                                                   
     information  with the credit  agency and it  appeared to                                                                   
     be good. They  went back to the insurer and  the insurer                                                                   
     told  them that  their credit  score  was poor,  because                                                                   
     they  had  too many  requests  for credit  ratings,  one                                                                   
     outstanding  bad  debt, which  the  insured  was in  the                                                                   
     process of disputing and too  much credit card activity.                                                                   
     The consumer  said that  they paid  all of their  credit                                                                   
     cards in  full each month and  they also went  and found                                                                   
     another insurer that would provide them coverage.                                                                          
                                                                                                                                
     We  recently  have  attended   National  Association  of                                                                   
     Insurance Commissioners meetings  and there were several                                                                   
     discussions  on the use of  credit information  at these                                                                   
     meetings. There  are some trickle down affects  and some                                                                   
     unintended   consequences   of   the   use   of   credit                                                                   
     information  in insurance  rates.  One producer  related                                                                   
     several  problems  dealing with  real  estate  purchases                                                                   
     where  the  insured  qualifies  to buy  a  half  million                                                                   
     dollar home, but the insurance  credit score wasn't good                                                                   
     enough for  them to  get coverage with  an A-rated  or a                                                                   
     financially  sound  company.  Their insurance  would  be                                                                   
     provided by  a B-rated company.  The lender  was unhappy                                                                   
     with  that  and they  were  unable  to close.  So,  then                                                                   
     you've  got the  consumer  unhappy, because  they  can't                                                                   
     close  on  the loan;  the  real estate  companies  can't                                                                   
     close the  deal and the lenders aren't  providing money.                                                                   
     So these are the unintended consequences of its use.                                                                       
                                                                                                                                
     Another  consumer  from  Michigan  said  that  they  had                                                                   
     followed their  insurance commissioner's advice  to shop                                                                   
     around  and  get additional  quotes  and find  the  best                                                                   
     deal. After they did this, they  called the commissioner                                                                   
     back and said, "I followed your  advice, but now I can't                                                                   
     get  any coverage  because I've been  told there's  been                                                                   
     too many hits on my credit information.  This has been a                                                                   
     question  that  we  have asked  insurers  when  we  have                                                                   
     looked at  these filings - do  you count these  kinds of                                                                   
     hits and  we have  been told  no. So, there's  anecdotal                                                                   
     evidence that  at least in  theory and practice  if this                                                                   
     consumer  is  correct  and  that's  the  reason  why  he                                                                   
     couldn't get  insurance, but there may be  some mismatch                                                                   
     between those items.                                                                                                       
                                                                                                                                
SENATOR TORGERSON asked how many  auto companies had they approved                                                              
use of credit information for.                                                                                                  
                                                                                                                                
MS. GROVE  replied that they  have currently approved  filings for                                                              
seven insurance companies to use  credit information in their rate                                                              
making  process. "There  are  other  insurers that  use  it as  an                                                              
underwriting tool, which we don't have prior approval for."                                                                     
                                                                                                                                
CHAIRMAN  STEVENS  asked if  they  had  approved  of seven  -  one                                                              
homeowners.                                                                                                                     
                                                                                                                                
MS. GROVE replied she thought it  was one homeowner's filing. They                                                              
have received four filings since  2000 and three of those withdrew                                                              
credit information and she is still looking at one.                                                                             
                                                                                                                                
CHAIRMAN  STEVENS  asked if  the  three voluntarily  withdrew  the                                                              
credit information.                                                                                                             
                                                                                                                                
MS. GROVE indicated that was correct.                                                                                           
                                                                                                                                
CHAIRMAN  STEVENS   thanked  everyone   for  their   comments  and                                                              
adjourned the meeting at 2:45 p.m.                                                                                              

Document Name Date/Time Subjects