Legislature(2003 - 2004)
04/22/2003 01:35 PM Senate L&C
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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.
| Document Name | Date/Time | Subjects |
|---|