Legislature(2003 - 2004)

04/22/2003 01:35 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
          SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                        
                         April 22, 2003                                                                                         
                           1:35 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Con Bunde, Chair                                                                                                        
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Gary Stevens                                                                                                            
Senator Bettye Davis                                                                                                            
Senator Hollis French                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
CS FOR SENATE BILL NO. 13(JUD)                                                                                                  
"An Act relating to using credit history or insurance scoring                                                                   
for insurance purposes; and providing for an effective date."                                                                   
                                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS ACTION                                                                                                               
                                                                                                                                
SB 13 - See Labor and Commerce minutes dated 4/8/03.                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Mr. Jesse Kiehl                                                                                                                 
Staff to Senator Kim Elton                                                                                                      
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT: Commented on SB 13 for the sponsor.                                                                       
                                                                                                                                
Mr. Birny Birnbaum, Executive Director                                                                                          
Center for Economic Justice                                                                                                     
Texas                                                                                                                           
POSITION STATEMENT: Supported SB 13.                                                                                          
                                                                                                                                
Mr. Sam Sorich, Vice President                                                                                                  
National Association of Independent Insurers                                                                                    
980 Ninth Street, Suite 1600                                                                                                    
Sacramento CA 95814                                                                                                             
POSITION STATEMENT:  Opposed SB 13.                                                                                           
                                                                                                                                
Mr. Eddy Lo, Insurance Manager                                                                                                  
Fair, Isaac and Company                                                                                                         
200 Smith Range Rd.                                                                                                             
San Rafael CA 94903                                                                                                             
POSITION STATEMENT: Opposed SB 13.                                                                                            
                                                                                                                                
Mr. Arthur Parks                                                                                                                
Underwriting Administrator                                                                                                      
State Farm Insurance                                                                                                            
2500 25th Ave., NE                                                                                                              
Salem OR 97317                                                                                                                  
POSITION STATEMENT: Opposed SB 13.                                                                                            
                                                                                                                                
Ms. Elizabeth Moceri                                                                                                            
Regional Counsel                                                                                                                
Allstate Insurance Company                                                                                                      
Bothell WA                                                                                                                      
POSITION STATEMENT: Opposed SB 13.                                                                                            
                                                                                                                                
Mr. Thom Buzard                                                                                                                 
2910 Linda                                                                                                                      
Juneau AK 99801                                                                                                                 
POSITION STATEMENT: Supported SB 13.                                                                                          
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 03-22, SIDE A                                                                                                            
                                                                                                                                
        SB 13-INSURANCE DISCRIMINATION BY CREDIT RATING                                                                     
                                                                                                                                
CHAIR  CON BUNDE  called the  Senate Labor  and Commerce  Standing                                                            
Committee  meeting  to order  at  1:35  p.m. Senator  Seekins  was                                                              
present. Chair Bunde announced SB 13 to be up for consideration.                                                                
                                                                                                                                
MR. JESSE  KIEHL, staff to Senator  Elton, sponsor, said  he would                                                              
answer any  questions or shed further  light on the  discussion as                                                              
it continues today.                                                                                                             
                                                                                                                                
MR.  BIRNY  BIRNBAUM,  Executive  Director,  Center  for  Economic                                                              
Justice, said he  advocates on behalf of low-income  consumers. He                                                              
has been  asked to testify on  credit scoring because of  his many                                                              
years of  experience and expertise  on the topic. His  position is                                                              
that  insurers' use  of credit  information  should be  prohibited                                                              
because  it is  inherently unfair,  discriminates against  certain                                                              
classes  of   consumers,  undermines   the  insurance   mechanism,                                                              
undermines regulatory  oversight of rates, and  violates actuarial                                                              
principles.  He said  that  insurers  say that  if  you have  good                                                              
credit, you  get a  good score and  that simply  is not  the case.                                                              
The vast  majority of  consumers don't  have any delinquencies  or                                                              
bankruptcies  and  yet  a much  greater  percentage  is  penalized                                                              
because of a bad credit score.                                                                                                  
                                                                                                                                
He wanted  to respond to  some comments  made by Mr.  Niehaus from                                                              
Progressive  Insurance [at  a previous  hearing] who  said that  a                                                              
ban on credit  scoring would force Progressive to  raise rates for                                                              
two-thirds of its  policyholders. He said that is  not true. A ban                                                              
on  credit scoring  would simply  prevent insurers  from using  an                                                              
unfair classification  tool. Insurers choose the  rate they charge                                                              
subject  to  review by  the  commissioner  [of the  Department  of                                                              
Community  and Economic Development]  and  nobody is forcing  them                                                              
to raise  rates. Insurers  are saying that  because a  majority of                                                              
consumers  benefit, it  should be  allowed.  However, in  America,                                                              
minorities are supposed  to be protected against  unfair practices                                                              
by  the majority.  He suggested  including  a provision  in SB  13                                                              
that requires  notice be given to  consumers after the  statute is                                                              
enacted that says:                                                                                                              
                                                                                                                                
     Your  legislature has  banned the use  of your  personal                                                                   
     credit information  by insurers to determine  if you are                                                                   
     eligible for  coverage [and] how  much you will  pay. No                                                                   
     insurer is  required to raise  rates or charge  you more                                                                   
     as a result of this law.                                                                                                   
                                                                                                                                
MR.  BIRNBAUM said  Mr.  Niehaus argued  that  good drivers  would                                                              
subsidize bad  drivers, but the  Texas study points out  that even                                                              
in the  worst group of  credit scorers,  there were 12  claims out                                                              
of 100 policies,  while in the best group of  credit scorers there                                                              
were  only 9  claims  out of  100.  The bottom  line  is that  the                                                              
majority of  consumers simply don't  file claims in a  given year.                                                              
The  notion  that   a  group  of  really  bad   drivers  is  being                                                              
subsidized by a group of really good drivers is just not true.                                                                  
                                                                                                                                
MR.  BIRNBAUM said  that Mr.  Niehaus also  argued that  a ban  on                                                              
credit scoring would  create an uneven playing  field where direct                                                              
writers would  have an advantage.  That's not correct  because the                                                              
Fair Credit  Reporting Act  allows insurers to  use credit  to get                                                              
mailing lists  to consumers,  but once  the solicitation  is sent,                                                              
the insurer  is subject to  the insurance  laws of the  state. All                                                              
sorts  of insurers  use credit for  direct mail  - like  Allstate,                                                              
State Farm,  Progressive and  others. Mr.  Niehaus also  failed to                                                              
identify Maryland  as a state  that has  banned the use  of credit                                                              
scoring for  homeowners and severely  restricted its use  for auto                                                              
insurance.  He also  argued that  a  ban on  credit scoring  would                                                              
damage an  Alaska market  that is  already in  bad shape.  He said                                                              
Alaska  ranks 47th  out  of  the 50  states  and the  District  of                                                              
Columbia  in profitability  and that  insurers had  lost money  in                                                              
three  out of  the last  four years.  Those are  the years  during                                                              
which insurers  started using  credit and it's  hard to see  how a                                                              
ban on credit could make the market any worse.                                                                                  
                                                                                                                                
He said  that Mr. Niehaus suggested  that the Legislature  look at                                                              
the National Conference  of Insurance Legislators  (NCIL) model as                                                              
an  alternative.  He  cautioned  that model  was  developed  as  a                                                              
compromise   between  agents   and  insurers   and  doesn't   have                                                              
essential consumer  protections. It simply endorses  the practices                                                              
of most insurers.                                                                                                               
                                                                                                                                
MR. BIRNBAUM provided  the nine factors in the  scoring model that                                                              
Progressive uses:                                                                                                               
                                                                                                                                
1. Months you have managed credit                                                                                               
2. Age at which you first established credit                                                                                    
3. Number of times a payment was past due more than 30 days                                                                     
4.  Number  of loans  and  accounts  with a  satisfactory  current                                                              
payment record                                                                                                                  
5. Number  of credit  card accounts currently  past due  more than                                                              
30 days                                                                                                                         
6.  Percent of  available  credit limit  currently  being used  on                                                              
revolving accounts                                                                                                              
7. Percent  of viable  credit limit  currently  being used  on all                                                              
open accounts                                                                                                                   
8. Months since your most recent auto loan was made                                                                             
9. Credit inquiries you initiated in the past 25 months                                                                         
                                                                                                                                
He  said  a lot  of  those  factors don't  distinguish  between  a                                                              
problem someone  may have had  with credit  five or six  years ago                                                              
and current  problems. They  are factors that  have nothing  to do                                                              
with  how a  person  manages credit  and  whether  that person  is                                                              
going to be a good driver.                                                                                                      
                                                                                                                                
MR. BIRNBAUM said  insurers have argued that the Texas  study is a                                                              
conclusive  independent study  that  demonstrates the  correlation                                                              
between  credit and  risk of loss.  However,  he is very  familiar                                                              
with the  study and the methodology  that was used  was considered                                                              
and   rejected   by  the   National   Association   of   Insurance                                                              
Commissioners  (NAIC) in 1996.  It didn't get  at the  core issue,                                                              
which was whether  credit has actually any unique  contribution to                                                              
explaining  risk of loss  or whether  credit is simply  correlated                                                              
with  some other  factor.  The study  did  show  that the  average                                                              
credit  score for  the standard  market  was significantly  higher                                                              
than the average score for the non-standard market. He advised:                                                                 
                                                                                                                                
     But,  this shouldn't  have happened  because the  credit                                                                   
     scores  were  taken  before   the  insurers  were  using                                                                   
     credit  information. So,  the expectation  was that  the                                                                   
     average  credit scores  would  be about  the same.  What                                                                   
     this shows  conclusively is  that the  use of credit  by                                                                   
     insurers   is  duplicating   some   other  factor   that                                                                   
     insurers  were   already  using  to  distinguish   among                                                                   
     consumers by risk.                                                                                                         
                                                                                                                                
MR. BIRNBAUM  said the  Texas study  shows that credit  replicates                                                              
some other factor  to some extent, but it doesn't  show whether it                                                              
has any unique contribution to explaining risk of loss.                                                                         
                                                                                                                                
MR.   SAM  SORICH,   Vice  President,   National  Association   of                                                              
Independent  Insurers  (NAII), said  about  100 of  NAII's  member                                                              
companies are  doing business  in Alaska  and are responsible  for                                                              
about 60% of  the homeowners and car insurance  written in Alaska.                                                              
He said  when they sell  their product,  they don't know  what the                                                              
ultimate cost  will be; they can  only estimate it. They  could do                                                              
that  and charge  everyone the  same  rate, but  that wouldn't  be                                                              
fair. Over the  years, insurance companies have  tried to identify                                                              
factors  that show  the likelihood  that  a person  would have  an                                                              
insurance loss. They  use things like the number  of miles driven,                                                              
the  type  of car  a  person  has,  how  old a  person  is,  their                                                              
experience,   etc.  Those   factors   go   into  determining   the                                                              
appropriate  rate for a  person. They  try to  make sure  a person                                                              
pays  a  premium that  is  commensurate  with  the risk  of  loss,                                                              
because  it would  be  unfair  to require  them  to  pay more  for                                                              
insurance than  their risk  of loss  factor warrants.  Some people                                                              
use credit  information to  further the goal  of making  sure that                                                              
the premiums charged are commensurate with the risk of loss.                                                                    
                                                                                                                                
MR. SORICH  commented that  the methodology that  was used  by the                                                              
University  of Texas  business  school  was not  paid  for by  the                                                              
industry.  The business school  took 150,000  policies written  in                                                              
1998  that   did  not  use   credit  scoring,  because   insurance                                                              
companies didn't  use credit scoring in 1998.  The business school                                                              
looked  at the  loss experience  and  the credit  scores of  those                                                              
policyholders  and   found  that  the   people  who  had   a  high                                                              
experience of  loss had poor  credit scores  and people who  had a                                                              
lower incidence  of loss  had good  credit scores. The  regression                                                              
analysis of  a relative loss  ratio of  a credit score  was highly                                                              
significant  and indicated  a less  than 1 in  10,000 chance  that                                                              
the relationship observed could be due to chance alone.                                                                         
                                                                                                                                
MR. SORICH  said Mr.  Birnbaum mentioned  that  the study  did not                                                              
look  at whether  credit scoring  just  duplicates other  factors,                                                              
but that is incorrect. He explained:                                                                                            
                                                                                                                                
     The  study  says  logistical   and  multiple  regression                                                                   
     analysis   examined   whether    the   review   of   the                                                                   
     relationship   between  credit   scoring  and   incurred                                                                   
     losses   was   explainable  by   existing   underwriting                                                                   
     variables  or   whether  the  credit  score   added  new                                                                   
     information about  losses not contained in  the existing                                                                   
     underwriting  variables. It  was determined that  credit                                                                   
     scores did  yield new information  not contained  in the                                                                   
     existing  underwriting  variables.  Insurance  companies                                                                   
     have   a  responsibility  to   our  policyholders,   our                                                                   
     customers,  to consider  this  evidence,  because if  we                                                                   
     are forced  to ignore this  evidence, it will  mean that                                                                   
     we will have  to charge people more than  they should be                                                                   
     paying for insurance.                                                                                                      
                                                                                                                                
SENATOR DAVIS arrived at 1:48 p.m.                                                                                              
                                                                                                                                
MR. SORICH pointed  out that the legal basis for  an insurer's use                                                              
of  credit information,  the  federal  Fair Credit  Reporting  Act                                                              
(FCRA)  of  1970,  lists seven  permissible  purposes  for  credit                                                              
information. Insurance  underwriting is expressly detailed  in the                                                              
FCRA. States can  enact legislation restricting the  use of credit                                                              
information by  insurance companies,  but the legislation  may not                                                              
be  inconsistent  with  the  federal law.  No  state  has  enacted                                                              
legislation  similar  to  SB  13  and  no  state  has  enacted  an                                                              
absolute ban on insurers' use of credit information.                                                                            
                                                                                                                                
He explained  the Hawaii  law limits  insurance companies'  use of                                                              
credit  for  rating  of auto  insurance.  It  does  nothing  about                                                              
homeowners  insurance.  Hawaii's  system is  completely  different                                                              
than  Alaska's  system.  Hawaii  has  a  no-fault  auto  insurance                                                              
system, which means  that lawsuits are limited.  Medical costs are                                                              
limited  according   to  a   worker's  compensation   medical  fee                                                              
schedule  and insurance  companies  are required  to offer  after-                                                              
market  parts. All  of those  provisions  help to  lower costs  in                                                              
Hawaii.                                                                                                                         
                                                                                                                                
The use  of credit  scoring provides  the consumer with  basically                                                              
five benefits.  It makes the  insurance companies'  decisions more                                                              
objective. A credit  scores doesn't have a good day  or a bad day;                                                              
it  doesn't have  a gut  feeling about  a person.  A credit  score                                                              
does not  consider a person's race,  age, income, where  they live                                                              
or what kind of car or house they have.                                                                                         
                                                                                                                                
Second,   the  insurance   business  is   based  on   information.                                                              
Insurance  companies  look  at driving  records  and  past  claims                                                              
history.  The  use of  credit  information  helps them  have  more                                                              
information about  the individuals, which  enables them to  make a                                                              
more informed decision.                                                                                                         
                                                                                                                                
Third, credit  information helps  to lower  the cost of  insurance                                                              
because it expedites the underwriting process.                                                                                  
                                                                                                                                
Fourth, based  on the  evidence in Texas  and other  studies, it's                                                              
clear that the  use of credit information helps  to make insurance                                                              
premiums  more equitable.  It  helps insurance  companies  achieve                                                              
the  goal  of   making  sure  that  the  rates   they  charge  are                                                              
commensurate with the risk of loss.                                                                                             
                                                                                                                                
Finally, the  availability of  credit information helps  insurance                                                              
companies to  write more insurance.  They are not in  the business                                                              
of not selling insurance.                                                                                                       
                                                                                                                                
MR. SORICH  said this  practice is  subject to some  controversies                                                              
and  clearly  there  are regulations  and  restrictions  that  are                                                              
appropriate in  this area, but SB  13 takes the wrong  approach by                                                              
imposing an  absolute prohibition.  There are other  alternatives.                                                              
Insurance companies  or agents did not develop the  NCIL model, it                                                              
was adopted by a  group of state legislators. It  was adopted last                                                              
year and  is being considered  and passed  in a number  of states:                                                              
North Dakota,  Nebraska,  Kansas and Oklahoma.  He encouraged  the                                                              
Alaska Legislature to consider this model.                                                                                      
                                                                                                                                
CHAIR BUNDE  asked if someone  had an accident  record but  a good                                                              
credit  score, that  might  help  the person  get  insurance at  a                                                              
lower rate than someone without a good credit score.                                                                            
                                                                                                                                
MR. SORICH replied:                                                                                                             
                                                                                                                                
     In some  cases, it  could. If we  only have the  driving                                                                   
     record to work  on, we have to make our  decisions based                                                                   
     on  the  driving  record.  The  addition  of  additional                                                                   
     information gives us more options.                                                                                         
                                                                                                                                
CHAIR  BUNDE responded  that Mr.  Sorich  had mentioned  insurance                                                              
companies have  a responsibility to  their customers and  asked if                                                              
it wouldn't  be accurate to  say their greatest  responsibility is                                                              
to their  investors, because they  must maintain a profit  or they                                                              
won't stay in business.                                                                                                         
                                                                                                                                
MR.  SORICH replied  that  is true,  but  many  companies are  not                                                              
profit  organizations.  They  are mutual  insurance  companies  or                                                              
reciprocals. They are in the business to stay solvent.                                                                          
                                                                                                                                
1:58 p.m.                                                                                                                       
                                                                                                                                
SENATOR SEEKINS asked when he last bought a vehicle.                                                                            
                                                                                                                                
MR. SORICH replied about five years ago.                                                                                        
                                                                                                                                
SENATOR SEEKINS  asked if he would  have a better credit  score on                                                              
his insurance  rating than someone  who bought a car  three months                                                              
ago.                                                                                                                            
                                                                                                                                
MR.  SORICH replied  the fact  that he  pays his  car payments  on                                                              
time is a valid indicator of how he handles his finances.                                                                       
                                                                                                                                
SENATOR SEEKINS  asked if  the number of  months he  made payments                                                              
made him think that.                                                                                                            
                                                                                                                                
MR.  SORICH   replied  that  different  scoring   models  consider                                                              
payment history  on loans,  such as car  loans. The  credit report                                                              
does not  go back beyond  three years for  car payments. So,  if a                                                              
person just  bought a car,  that piece  of information may  not be                                                              
available to develop the score.                                                                                                 
                                                                                                                                
SENATOR SEEKINS said  he looked at one insurance  company's credit                                                              
model and it  had an 11-point difference  based on how  long ago a                                                              
person bought his or her vehicle.                                                                                               
                                                                                                                                
MR. SORICH  responded that  he thought the  Fair Isaac  model does                                                              
not  consider all  the  inquiries.  The NCIL  specifically  states                                                              
that all those inquiries are considered as one inquiry.                                                                         
                                                                                                                                
SENATOR  SEEKINS  said  his responsibility  model  (from  a  major                                                              
company) indicated  that as the number of  non-insurance inquiries                                                              
went up, the points changed.                                                                                                    
                                                                                                                                
MR. SORICH  said that  Mr. Lo  could probably  answer that  better                                                              
than  he  could  and that  the  Progressive  model  considers  all                                                              
inquiries  for loans made  over a  certain period  of time  as one                                                              
inquiry.                                                                                                                        
                                                                                                                                
MR. EDDY  LO, Insurance Manager,  Fair, Isaac and Company,  used a                                                              
power  point  presentation called  "A  Discussion  on  the Use  of                                                              
Credit  Information  and  Scoring  for Insurance"  that  was  also                                                              
presented  in the form  of a  handout to  members. He pointed  out                                                              
that there  are legal  grounds for  using credit information  with                                                              
insurance.  Fair  Isaac was  a  pioneer  in  modeling the  use  of                                                              
credit  information  over  30 years  ago.  The  FCRA  specifically                                                              
allowed  the use  of credit  scores for  setting insurance  rates,                                                              
but before that,  the FCRA required the consumer-reporting  agency                                                              
to adopt procedures  governing the accuracy, relevancy,  access to                                                              
and  utilization   of  consumer  reports.  He  showed   a  picture                                                              
illustrating  credit information  being  summarized  by a  numeric                                                              
score. It  the score value is  low, there is a  corresponding very                                                              
high loss ratio  (the losses in relationship to  premium collected                                                              
under an  insurance policy), which  has been proved  and validated                                                              
many times.  It shows  that you  can separate  risk by  percentage                                                              
compared to an average number.                                                                                                  
                                                                                                                                
MR. LO  said they make  sure that policy  premiums and  losses are                                                              
matched to credit  information up front. Using  credit information                                                              
at the  beginning of a policy  shows nothing about  the subsequent                                                              
losses  of that  particular  policy's performance.  Starting  with                                                              
that premise,  they tracked actual  losses at 12-month  intervals.                                                              
They  were  able to  see  that  when the  credit  information  was                                                              
summarized  by a numeric  model and  the score  was low,  the loss                                                              
ratios were  very high.  Very high  credit scores correlated  with                                                              
low loss ratios.  This is a Fair Isaac convention,  but he thought                                                              
the  model Senator  Seekins was  basing  his questions  on used  a                                                              
different convention.                                                                                                           
                                                                                                                                
He said based on  looking back in history when  credit had nothing                                                              
[to do  with] losses and trying  to correlate what  happened since                                                              
that time, where  there are even errors, the  resulting losses are                                                              
very  predictable.   Underwriters  like   to  look   at  objective                                                              
information  and there  are many  third party  validations of  the                                                              
information.                                                                                                                    
                                                                                                                                
MR. LO said  the Fair, Isaac and  Company model does not  use age,                                                              
disability,  gender,  health  status,  income,  location,  marital                                                              
status,  nationality,  net  worth,   occupation,  race,  religion,                                                              
sexual  orientation and  zip codes.  They  are not  the only  ones                                                              
saying  the use  of credit  information is  fair. From  2 -  6% of                                                              
people dispute  what is  in their  credit report  and that  is the                                                              
starting point of  the estimate of an error rate;  but the problem                                                              
is,  while even  6% is  acceptable, the  database in  the U.S.  is                                                              
humongous  so if  it applies  to  260 million  people, that  would                                                              
mean  millions of  consumers' reports  need to  be corrected.  The                                                              
FCRA has a very  stringent process to insure the  integrity of the                                                              
data; heavy penalties are involved to insure accuracy is high.                                                                  
                                                                                                                                
They found  for all  insurance inquiries, the  net result  is that                                                              
every time  an inquiry is  generated, statistical data  shows that                                                              
higher and higher losses are expected.                                                                                          
                                                                                                                                
MR. LO  said that Fair  Isaac builds the  models, but they  do not                                                              
calculate the  scores themselves.  Three major reporting  agencies                                                              
do that and  Fair Isaac has contracts  with them all.  The type of                                                              
information  they show are  adverse public  interest records  like                                                              
bankruptcies,  foreclosures, judgments.  Most people,  96 percent,                                                              
do not  have adverse  public records  and have  good credit.  They                                                              
have found  that any delinquencies  over 60  days in the  last two                                                              
years indicate losses  are worse; but once again,  the majority of                                                              
people have  no delinquencies  in their  credit reports.  They are                                                              
not  penalized by  the  use  of credit  information.  Ninety-seven                                                              
percent of  the time,  people do  not have collections  generated.                                                              
Increases in  financial applications  indicate and predict  higher                                                              
losses  in  the  future or  in  the  past,  but they  are  not  an                                                              
absolute indication.                                                                                                            
                                                                                                                                
TAPE 03-22, SIDE B                                                                                                            
                                                                                                                                
SENATOR STEVENS arrived at 2:25 p.m.                                                                                            
                                                                                                                                
MR. LO  continued his explanation  by showing five  different ways                                                              
consumers  are statistically  separated by  underwriters in  terms                                                              
of  risk.  There  is  legal  ground for  the  use  of  credit  for                                                              
insurance  as  defined by  FCRA  and  there are  indications  that                                                              
their model is very predictive statistically.                                                                                   
                                                                                                                                
CHAIR  BUNDE asked  if  credit scoring  was  banned, whether  that                                                              
would create any conflict between state and federal law.                                                                        
                                                                                                                                
MR. LO  replied yes,  because it  is clearly  stated in  FCRA that                                                              
one  of  the   permissible  purposes  of  credit   information  is                                                              
underwriting of insurance.                                                                                                      
                                                                                                                                
SENATOR FRENCH arrived at 2:30 p.m.                                                                                             
                                                                                                                                
SENATOR SEEKINS said  in the model he was provided,  the lower the                                                              
score is, the lower the insurance policy will cost.                                                                             
                                                                                                                                
MR.  LO  responded  that  it  is   exactly  the  opposite  of  his                                                              
convention.                                                                                                                     
                                                                                                                                
SENATOR DAVIS arrived at 2:35 p.m.                                                                                              
                                                                                                                                
SENATOR SEEKINS  asked if a  person bought a  car today or  in the                                                              
last  11 months  versus  more than  48  months  ago, whether  that                                                              
provides  any predictability  and, therefore,  affects a  person's                                                              
credit score.                                                                                                                   
                                                                                                                                
MR. LO  replied that it does  and, from his general  understanding                                                              
of that particular  model, the longer you use  credit information,                                                              
the longer  you practice  financial management  skill with  it and                                                              
get  better at  it.  That generates  lower  losses.  A person  who                                                              
recently  bought  a  car  will  not  have  gone  through  as  much                                                              
financial exercising  and proven on record what it  looks like. He                                                              
said one  particular instance  does not  dominate a credit  score;                                                              
the  overall  profile predicts  the  final  score and  the  future                                                              
losses. "That has been proven to be accurate."                                                                                  
                                                                                                                                
SENATOR  DAVIS  asked  what he  believes  causes  the  correlation                                                              
between credit  scoring and insurance  loss and why he  feels that                                                              
it works.                                                                                                                       
                                                                                                                                
MR. LO  replied that  he assumed she  didn't mean the  statistical                                                              
correlation  relationship,  but  rather why  someone  who  managed                                                              
their finances well  would produce lower losses in  the future. He                                                              
could only give  her a layman's interpretation, because  he is not                                                              
a social  scientist. He  said a  person who  uses credit  well and                                                              
makes  payments on  time  is more  likely to  make  sure the  tire                                                              
pressure in  the car is correct,  that the battery and  lights are                                                              
working,  the oil  level is  properly maintained,  the furnace  is                                                              
working  properly,  and nothing  is  left  laying around  to  trip                                                              
over.                                                                                                                           
                                                                                                                                
SENATOR DAVIS  asked what happens  to people who don't  believe in                                                              
credit. She asked if they get penalized under his model.                                                                        
                                                                                                                                
MR. LO  replied no; if  you can't find a  person on a  credit data                                                              
base, no  score can  be generated  for that person.  It has  to go                                                              
back  to  the  underwriting  guideline  that  clearly  establishes                                                              
traditional underwriting factors. That is not a new phenomenon.                                                                 
                                                                                                                                
MR.   ARTHUR  PARKS,   Underwriting   Administrator,  State   Farm                                                              
Insurance,  said State  Farm has  developed its  own model.  State                                                              
Farm  sampled  1.5  million  policyholders   by  scoring  them  on                                                              
experience and length  of time and looked at what  the loss ratios                                                              
were. They found  a 99% correlation between what  the underwriting                                                              
score  was and  what  the ultimate  loss  ratio  was. Their  model                                                              
incorporates  certain components  from the  credit report  and the                                                              
prior losses  an individual  has incurred.  Those are  combined to                                                              
come up  with a  score that  indicates the  propensity for  future                                                              
losses.                                                                                                                         
                                                                                                                                
MR.  PARKS  explained   that  having  certain   credit  components                                                              
doesn't cause  future losses,  like good grades  in school  do not                                                              
cause  a   good  driving  record,   but  those  qualities   are  a                                                              
predictor. He said  they are looking at the probability  of missed                                                              
or late  payments, as well  as the financial  risk of  incurring a                                                              
loss down  the road  - two  different things.  The way  people fit                                                              
into the  overall formula is different.  You can have  someone who                                                              
has an  excellent credit score  for lending purposes,  but doesn't                                                              
have  a good  score  for underwriting  purposes.  They have  found                                                              
that credit  records are extremely  complete. Recent  studies have                                                              
shown  that anywhere  from  10-22% of  motor  vehicle records  are                                                              
inaccurate, because  people hire attorneys to clear  their record.                                                              
Seventy-nine  percent of  the losses they  get from  comprehensive                                                              
loss  underwriting  exchange  are   inaccurate.  That  means  that                                                              
approximately 21% of the losses don't show up on the exchange.                                                                  
                                                                                                                                
In  summary,  MR.  PARKS said,  banning  credit  for  underwriting                                                              
purposes  will do  several  things.  It will  force  those with  a                                                              
better  risk ratio  to subsidize  those with  a poor loss  history                                                              
and allow  insurance companies  to use  less accurate  information                                                              
to select  and price  business.  It will decrease  the ability  to                                                              
fully  distribute the  cost  of insurance  amongst  those who  are                                                              
driving the costs upwards.                                                                                                      
                                                                                                                                
CHAIR BUNDE announced  that members were being called  back to the                                                              
floor and asked  if everyone would be available  to accept written                                                              
questions. There was general assent.                                                                                            
                                                                                                                                
MS. ELIZABETH MOCERI,  regional counsel, Allstate  Insurance, said                                                              
she  was concerned  about the  viability of  writing insurance  in                                                              
Alaska  and  that  using  credit  is  a  very  valuable  tool  for                                                              
Allstate.  At this  time, Allstate  uses it to  accept and  reject                                                              
applicants  for  insurance. Allstate  does  not  use it  to  price                                                              
insurance  right now  and is  waiting to  find out  if it will  be                                                              
able to. In the  states where Allstate does, it is  able to have a                                                              
rate for  folks it  normally would  not take.  Allstate is  in the                                                              
business  to write  more insurance,  not less.  Alaska has  unique                                                              
rules,  such  as  Rule  82  attorney  fees  and  unique  uninsured                                                              
motorist  provisions,  that  make  writing  insurance  and  paying                                                              
claims very expensive.                                                                                                          
                                                                                                                                
CHAIR  BUNDE said  the committee  heard that  if someone's  credit                                                              
score  has negatively  impacted  their insurance  rates, they  are                                                              
notified.  He wanted  to  know if  that  occurs  with Allstate  as                                                              
well.                                                                                                                           
                                                                                                                                
MR. THOM BUZARD  said he is a  Juneau resident and is  in favor of                                                              
SB 13, which  outlaws the use  of one's credit scores.  He related                                                              
his history  of 18 years  ago when his son  was born with  a major                                                              
birth defect  and hospitalized  for 10 days.  Mr. Buzard  ended up                                                              
being  $50,000 in  debt. If  that  happened now,  six months  from                                                              
now, he would not  be able to get insurance from  anybody. He lost                                                              
everything he  owned trying to pay  all his bills. He  argued that                                                              
people who  are high  risk are the  ones that  need to  be insured                                                              
for society's  protection.  He said the  insurance companies  have                                                              
so  much power  over  their customers  that  they sometimes  don't                                                              
report claims.  He didn't  think it was  reasonable to  use credit                                                              
scoring  because some  people don't  use credit  and some  are too                                                              
young  to   establish  it  -  and   some  of  them   have  medical                                                              
bankruptcies. Some  have fallen prey to easy credit  and failed to                                                              
realize until  it's too late the  mess they had  gotten themselves                                                              
into.                                                                                                                           
                                                                                                                                
CHAIR  BUNDE thanked  him for  his  brevity and  said his  written                                                              
testimony would  be made part of  the record. He said  there would                                                              
be  another opportunity  to discuss  this bill  and adjourned  the                                                              
meeting at 2:55 p.m.                                                                                                            

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