Legislature(2001 - 2002)
02/28/2002 01:41 PM Senate TRA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE TRANSPORTATION COMMITTEE
February 28, 2002
1:41 p.m.
MEMBERS PRESENT
Senator John Cowdery, Chair
Senator Jerry Ward, Vice Chair
Senator Robin Taylor
Senator Kim Elton
MEMBERS ABSENT
Senator Gary Wilken
COMMITTEE CALENDAR
SENATE BILL NO. 320
"An Act relating to certain motor vehicle repairs and prohibiting
discrimination in motor vehicle insurance rates based on credit
rating or credit scoring; and providing for an effective date."
MOVED CSSS 320 (TRA) OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
Annette Skibinski
Staff to Chairman John Cowdery
State Capitol Rm 101
Juneau, AK 99801-1182
POSITION STATEMENT: Introduced SB 320.
Michael Harrold, Northwest Regional Manager
National Association of Independent Insurers
9611 Rainer Ave. South
Seattle WA 98118
POSITION STATEMENT: Opposes SB 320
David McCarter
No address given
Fairbanks, AK
POSITION STATEMENT: Supports SB 320
Tara Drennon
No address given
Fairbanks, AK
POSITION STATEMENT: Supports SB 320
Steve Conn
Alaska Public Interest Research Group
507 E. St.
Anchorage, AK
POSITION STATEMENT: Supports SB 320
Suzanne Kelley, Owner
Alaska Tab & Bind Printing Company
510 West Fireweed Lane
Anchorage, AK 99507
POSITION STATEMENT: Supports SB 320
Dee Hubbard
No address given
Sterling, AK
POSITION STATEMENT: Supports SB 320
Sarah McNair-Grove, Actuary P/C
Dept of Community & Economic Development
Division of Insurance
P.O. Box 110805
Juneau, AK 99811-0805
POSITION STATEMENT: Testified on SB 320
Elizabeth Moceri, Regional Counsel
Allstate Insurance Company
18911 N. Creek Parkway
Bothell, WA 98102
POSITION STATEMENT: Opposes SB 320
ACTION NARRATIVE
TAPE 02-11, SIDE A
CHAIRMAN JOHN COWDERY called the Senate Transportation Committee
meeting to order at 1:41 p.m. Present were Senator Taylor,
Senator Elton and Chairman Cowdery. Senator Ward arrived at 1:45
p.m.
SB 320-MOTOR VEHICLE INSURANCE & REPAIRS
CHAIRMAN COWDERY said the committee would take testimony on one
bill. The bill before the committee was SB 320.
SENATOR TAYLOR noted there was a proposed committee substitute
(CS) in the packet. The CS cut the bill in half and addressed
the credit rating portion of the bill. He moved and asked
unanimous consent that the CS be considered the bill before the
committee. The CS is labeled Work Draft Ford/J dated 2/26/02
(Version J).
CHAIRMAN COWDERY, hearing no objection, stated the bill before
the committee was CSSB 320 (TRA) "An act prohibiting
discrimination in insurance rates based on credit rating or
credit scoring; and providing for an effective date."
MS. ANNETTE SKIBINSKI, staff to Chairman Cowdery, summarized the
sponsor statement for CSSB 320 (TRA).
This bill relates to insurers using credit scoring and
or rating in determining insurance policy rates and
premiums. What does your credit score have to do with
how much you pay for automobile insurance? Just about
everything.
Currently Alaska allows credit scoring to be part of
insurance company rating plans in which underwriting
and rate setting is done. The Alaska Division of
Insurance has a statutory mandate (AS 21.36.120) to
protect the Alaska consumer against discrimination.
Every car and home insurance company in Alaska, except
one, uses credit scoring. Companies believe this
method is a way to predict risk in determining
potential insurance losses. Credit has nothing to do
with risk. The practice of using this data
discriminates against certain types of consumers.
First of all, credit scores and credit reports are many
times inaccurate and contain errors in the information.
They are also very difficult and cumbersome to correct.
There are currently about 25 states considering banning
the use of credit history in determining insurance
rates. Hawaii banned this insurance underwriting and
rate setting practice 15 years ago and their premiums
still today remain some of the lowest in the United
States.
The insurance industry wants to utilize this easy
method to raise rates. Because of epidemic credit
problems throughout our society, this is an easy way to
target consumers and raise their premiums. Why are we
punishing the 40 year old woman with a clean driving
record who simply gets divorced and it changes her
credit status? Why are we raising the premiums of a 70
year old man with a clean driving record whose medical
bills affected his credit history? Your driving record
alone should be the factor for rate setting.
The bottom line is common sense. We have mandatory
insurance laws in this state. And by using credit
scores we are making it even more difficult and
expensive for the Alaskan consumer to obtain insurance.
Simply, SB 320 prohibits insurance companies in Alaska
from using credit scores in either underwriting or rate
setting practices.
CHAIRMAN COWDERY, sponsor of SB 320, said that is the sponsor
statement. He invited Michael Harrold to testify.
MR. MICHAEL HARROLD, Northwest Regional Manager, National
Association of Independent Insurers, explained they are a
property and casualty insurance rate association that represents
over 690 member companies. He shared a handout with committee
members.
MR. HARROLD said studies confirm the correlation between credit
information and loss ratios. He wanted to walk the committee
through the hand out to graphically illustrate the correlation
that exists.
The credit information enables insurers to do a number of things
including:
· Write more business, not less business.
· Renew more policies and accept more new business.
· More aggressively and competently write in urban markets.
· Offer the majority of policyholders lower insurance rates.
· Provide a more fair and equitable pricing structure by
inter-matching rates with risk of loss.
Insurance use of credit information provides a more
objective and unbiased tool for underwriting and rating
insurance risk. For many years insurers were accused
of being very subjective and eyeballing whoever walked
into their office and deciding whether or not they may
or may not have some type of characteristic whether
that person might be their type of person etcetera -
something that could be subjective. With credit
scoring the whole process has become much more
objective.
Credit based insurance scores supplement other sources
of underwriting and rating information that may be
subject to errors, underreporting or misrepresentation.
Driving records are notoriously inaccurate, sometimes
as high as up to 40%. Records of accidents can also be
terribly inaccurate. So credit scoring is another way
to come in and supplement and augment that type of
information and come up with a more predictive tool.
Insurance scores do not consider income, address, race,
ethnicity, religion, gender, familial status, handicap,
nationality, age or marital status. So once again,
this is not something that's factored into an insurance
score. No state insurance department, the departments
have sanctioned an insurer on the grounds that credit
based insurance scores discriminate against low income
or minority consumers. In fact we find that consumers
with incomes below $30,000 and between $30,000 and
$50,000 have insurance scores equivalent to consumers
with incomes greater than $50,000. That what we really
find is that a credit based insurance score has nothing
to do with how rich you are, it has nothing to do with
where you live, has nothing to do with what your race
may be. It simply has to do with how well you managed
what you do have. And for that reason you can have -
people are on - that are low income individuals can
manage their money a lot better than somebody that's
making over a $100,000 that has the opportunity to have
a lot more credit cards and is out buying a lot more
things. It really comes down to personal responsibility
and that personal responsibility translates into the
way that people drive, how well they maintain their
homes and consequently the types of losses that - that
somebody may have being an insured of a particular
company.
We simply would encourage legislators and regulators to
be very wary of a negative impact that imposing
restrictions on insurers use of credit information will
have on the availability and the affordability of
insurance.
MR HARROLD said one of NAIC's member companies did some
predictions of the outcome if this bill is passed and the
use of credit information is banned:
· 51% of their policyholders would receive rate increases
and those rate increases would average about $180 a
year.
· 40% of their policyholder's rates would stay about the
same because the use of credit information does not
impact their rates.
· 9% of their policyholders are the holders most likely
to suffer losses and would get discounts in their
premium.
MR. HARROLD said they thought that was unfair. Hopefully
what a consumer wants is to pay an insurance premium that is
commensurate with the risk they represent and the loss they
are going to have.
SENATOR TAYLOR asked him to repeat those numbers.
MR. HARROLD said 51% would go up by $180 on average.
SENATOR TAYLOR said 40% stays the same. He said 9% of their
policyholders, if they use credit rating, would pay whatever 51
times $180 divided by 9 would equal.
MR. HARROLD said he assumed that might be the way that it would
be.
SENATOR TAYLOR replied:
I don't know what round numbers you're working off of
but if we only took the percentages under a credit
rating policy, 9% of your policies that you have out
there are paying an increase in their policy that would
be equal to what 100 - excuse me, what 51% of that
company's policyholders would pay at the rate of $180.
That must a huge number for the 9%. Can you tell me
what - what amount the 9% are currently being
subsidized today.
MR. HARROLD did not have that information. He said it isn't that
the 9% are being subsidized. Currently 9% pay what is considered
to be an appropriate premium.
He explained that this company currently has five tiers in which
it slots policyholders. If credit scoring is removed from the
equation they would have to truncate that to three tiers and that
is how they estimated the impact on rates. He said he could get
more thorough information and a further breakdown with actual
dollar amounts.
SENATOR TAYLOR said since Mr. Harrold had broken it down to how
much the increase would be on the 51% he could only assume the 9%
was paying that full amount presently in a credit rated policy.
MR. HARROLD said that was a fair assumption.
SENATOR TAYLOR said if the increase would be $180 for 51% then
the average person receiving a bad credit rating is probably
paying $900 more to get insurance through the credit rated policy
than the other people.
MR. HARROLD thought Senator Taylor's math was correct. He said
insurers use a number of factors. They do not just use credit
scoring but that certainly is one of the factors that would be in
that equation. He did not think a $900 difference between a
better rate and a worse rate was uncommon.
SENATOR WARD asked if all states use credit for the basis of
setting rates.
MR. HARROLD said all other states allow the use of credit
ratings. He thought California, through Proposition 103, doesn't
allow its use for automobile insurance.
Under the Fair Credit Reporting Act all insurers are allowed to
do a credit check and pre-screen people for insurance. An
insurer is allowed to pre-screen and to get a list of people who
have a credit score over a certain number and they can extend an
offer to those people. A credit card company might do that and
then make an offer of a particular rate through the mail.
SENATOR WARD asked if all states and all insurance people, except
the automobile insurance in California, are allowed to use credit
ratings and are doing so.
MR. HARROLD said it is allowed and they are doing it.
SENATOR ELTON noted Mr. Harrold had said credit scoring is better
than the eyeballing that used to happen when a customer walked in
the office. He said Mr. Harrold could not possibly have meant the
four insurance providers in Alaska, previous to the use of credit
scoring, made a determination on who can purchase insurance based
on eyeballing.
MR. HARROLD said it would not be just based on eyeballing.
Looking back over the history of the criticisms of the insurance
industry there was a time when people would make those types of
subjective arguments. In Washington State an agent told him a
fellow agent asked people how often they washed their car.
SENATOR ELTON asked if Mr. Harrold was just making an anecdotal
comparison and not saying that was how the insurance industry
operated.
MR. HARROLD said there would not be any basis in losses or ratios
there.
SENATOR ELTON was glad Mr. Harrold cleared that up.
SENATOR WARD asked how the non-credit scoring in California for
automobiles was working.
MR. HARROLD said from his understanding it is part of Proposition
103 so they are not allowed to use it on the rating. California
has a very complicated system and is a bit of a mess.
SENATOR WARD asked if the rates went down in California.
MR. HARROLD did not know.
CHAIRMAN COWDERY said credit scoring had been banned in Hawaii.
He referred to information in the packet that shows that Hawaii's
rates had gone down over the previous three years. He asked if
that was correct.
MR. HARROLD did not know Hawaii's year-by-year statistics. From
his understanding Hawaii banned the use of credit scoring in
ratings almost a decade ago. More recently, the Commissioner of
Insurance in Hawaii told companies they were not able to use
credit scoring for underwriting either. He understood that
policy was in the courts at this time.
CHAIRMAN COWDERY said credit scoring proved to be a big problem
for people getting insurance and for the cost of insurance in
Hawaii.
MR. HARROLD said Hawaii was a "take all comers" state. Insurers
are required to write.
CHAIRMAN COWDERY asked him to restate that.
MR. HARROLD explained that "take all comers" means essentially
you have to write insurance for somebody if they come through the
door.
CHAIRMAN COWDERY asked about the rates.
MR. HARROLD said hearing that Hawaii had some of the lowest rates
in the country in the sponsor statement surprised him. He wanted
to look at a NAIC receipt to verify that.
CHAIRMAN COWDERY said there was an article in the packet from the
th
Wall Street Journal, dated February 20, 2002. He said Indiana
and Washington are likely to pass legislation to restrict the use
of credit history in determining insurance rates, according to
insurance officials. These states are among 25 that are
considering or expected to consider bills to ban or limit the
controversial issue.
MR. HARROLD said there are probably 25 states looking at the
issue. It has certainly exploded on the scene as far as being
looked at. He understood Indiana might not have legislation this
year because there are different bills in the House and Senate
and the respective sponsors are in a bit of a spat. Washington
State is very close to enacting legislation.
CHAIRMAN COWDERY asked if, except for Washington State, he was
saying the other 25 states considering this legislation are not
going to do it.
MR. HARROLD said no, that Chairman Cowdery had singled out
Washington and Indiana. He said this is a process that is
underway in states all across the country.
CHAIRMAN COWDERY asked him to leave all of his handouts for the
record.
MR. HARROLD asked the committee to turn to his handout, which
illustrates why insurers use this tool. Exhibit A looks at
automobile insurance loss ratios.
Relationship of Loss Ratio to Number of Credit Lines
60+ Days Delinquent in Last 24 Months
120.00%
100.00%
80.00%
60.00%
Loss ratio
40.00%
20.00%
0.00%
zeroonetwo or moretotal
Number of Trade Lines 60+ Days
Delinquent in Last 24 Months
MR. HARROLD explained trade lines in this instance are payments
such as credit cards. A dollar paid for insurance would represent
100% of the loss ratio. The first column would be the people who
have not had trade lines delinquent for 60+ days and they average
a loss ratio of 75.4%. If a person has one trade line delinquent
then their loss ratio jumps up to 103.2%. A person with two or
more has a loss ratio of 113.5%.
There is a very direct correlation. The column of people who
have a zero number of trade lines delinquent or zero number of
collections or zero number of adverse public records tend to be
about 86% to 96% of people. The overwhelming majority of people
have what would be considered good credit. They do not fall into
these categories.
Relationship of Loss Ratio to Number of Collections
120.00%
100.00%
80.00%
60.00%
Loss ratio
40.00%
20.00%
0.00%
zeroone or moretotal
Number of Collections
Relationship of Loss Ratio to Number of Adverse
Public Records
100.00%
80.00%
60.00%
Loss ratio
40.00%
20.00%
0.00%
zeroone or moretotal
Number of Adverse Public Records
SENATOR TAYLOR asked what an adverse public record is.
MR. HARROLD said it could be a bankruptcy, foreclosure or
collection.
SENATOR TAYLOR asked if it included domestic violence.
MR. HARROLD said they would not look at that.
SENATOR WARD asked if child support was included.
MR. HARROLD did not think insurers look at child support.
SENATOR TAYLOR said if they look at credit rating they must have
been looking at child support. Child support is one of the
biggest credit items. Alaska has a huge state collection agency
that does nothing but collect child support and the information
is turned over to credit reporting institutions. If child support
was not current he thought that would show up on a credit report.
SENATOR WARD said it does show up.
MR. HARROLD said there are four to five companies that have their
own models. The Fair, Isaac Company and Choice Point are vendor
companies that have models other companies use. They have a
variety of models and the insurers choose one they would like to
use. He said child support may be considered an adverse public
record but they don't necessarily have to look at everything.
They have taken the data and looked at the numbers and figured
out what they think is going to be most predictive of an
insurance loss. There is competition among insurers and vendors
to figure out who can look at the data the best. They compete on
how they look at all the other factors.
SENATOR TAYLOR said adverse public record includes bankruptcies
and foreclosure on a car loan and that type of thing.
MR. HARROLD said he would skip Exhibit B but pointed out that for
homeowner insurance the credit base scores are even more
predictive than for auto insurance, although both are very
predictive.
MR. HARROLD explained that Exhibit C compares the loss ratio
relativity to credit score. A low credit score is negative and a
high credit score is more positive. Losses are higher in the
left hand column for individuals that have low credit scores and
as credit scores get gradually higher and financial
responsibility is reflected, they have fewer and fewer losses.
This is something a non-statistician can look at and see why
insurers are interested in the information and why they found it
to be very effective in predicting loss.
Personal Auto Insurance
1.4
1.2
1
0.8
Loss Ratio Relativity
0.6
0.4
0.2
0
lowhigh
Score Range
CHAIRMAN COWDERY asked if all insurance companies use this same
method.
MR. HARROLD said they look at different records according to what
they work best in. Allstate may look at different factors than
Progressive. Fair, Isaac Company designs models that a number of
insurers buy and use and they look at different factors as well.
They all compete to try to look at the data in the most efficient
manner.
CHAIRMAN COWDERY asked if they share this data with each other.
MR. HARROLD said no. They were very concerned about that data
being public because they put a lot of time and effort into their
models. He said it is the same way with companies that offer
loans on credit cards or a loan for an automobile. They have
their own methods of looking at the numbers in ways they think
are going to be most predictive of who is going to be able to pay
them back.
SENATOR ELTON asked Mr. Harrold to correct him if he was wrong.
He thought it was important to point out that competing insurance
companies may not share information, but companies like Fair,
Isaac sell the credit scoring information. They will sell the
information to other insurers, letting them know when somebody's
policy is about ready to expire so the other insurance companies
can start dumping information in the mail and making phone calls
to people's homes. They may not share the data and how the
formula was reached but they certainly share the information that
is compiled because of credit scoring.
CHAIRMAN COWDERY said they had more information and examples they
would be sharing with the committee.
SENATOR WARD asked if any of the people Mr. Harrold represented
use bad credit on credit cards as one of the criteria.
MR. HARROLD said yes.
SENATOR WARD asked if insurance rates would go up for somebody
with bad credit because of credit cards.
MR. HARROLD said that could be one of the factors that would go
into a credit-scoring model. These are very sophisticated models
so one thing is not going to send rates through the roof. Most
people are going to have good characteristics and bad
characteristics. Most people have a good credit history.
Different types of activities vary in degree. Certainly somebody
that has a bankruptcy and has reached the maximum limit on all of
their credit cards would have a higher score.
SENATOR WARD said he knew of two families where the farther they
went into debt with credit cards the more credit cards were sent
and they used them. These people were not filing bankruptcy, they
were working their way through that. He asked if their insurance
rate would go up.
MR. HARROLD said it would depend on what other factors a
particular insurer's model is taking into account because they
don't just look at credit cards. They look at a wide spectrum of
credit related activities.
SENATOR WARD asked if they would have a higher rate because of
just credit cards.
MR. HARROLD said he could not tell him.
SENATOR WARD asked if the model gave a higher car insurance rate
because of credit cards only. He said it was five or six credit
cards and they were in a lot of financial trouble.
MR. HARROLD said from his understanding based on delinquent trade
lines if they were in debt and had been delinquent on their
credit cards there was a good chance they would have a lower
credit score and a higher potential to be a risk of loss. They
probably would have a higher insurance rate.
SENATOR WARD said they had a credit card and then started
acquiring other cards to pay off the first card.
MR. HARROLD said he was not trying to waffle or be ambiguous.
Different insurers have different models. These are
sophisticated models with a number of factors including non-
credit related factors.
CHAIRMAN COWDERY said Mr. Harrold informed him earlier of how
people feel stress because of debt on credit cards and this
stress was a factor considered by insurers. They do not
necessarily have to be delinquent to have this stress. Stress
can be caused when they have reached the maximum limit and are
only paying the interest.
He said soldiers are going off to war and have increasing stress
and expenses. The spouses are left at home and are also feeling
increased stress. He asked if that affected their rates. He said
he failed to see where stress should affect insurance rates. He
thought the job the legislature was doing was extremely
stressful. He asked Mr. Harrold to make the connection between
stress and insurance rates.
MR. HARROLD said the answer has two parts.
One is that when we were talking last week we were sort
of talking about how, OK, we see a correlation in these
numbers but what's the causation and so you begin to
talk about that. And what we can tell is that first of
all what's most important to an insurer is that their
tool is predictive and that it works. That is the
bottom line. Whether they can figure out the cause or
not is another issue. What I then said is that there
are a number of studies however that have been done in
various fields that look at this type of issue. And the
two things that tend to come up are that yes, people
could be underneath more stress and that people that
are stressed are going to have a higher chance of - of
having a loss or they may be preoccupied with other
aspects of their life so maybe their not paying so much
attention to their driving, maintaining their car,
taking care of their home, things of that nature.
And the other factor was that a consideration of
causation is that these people may have more of a risk
taking type of behavior. This may help us explain why
the person that sees a yellow light and accelerates
through it versus a person that sees a yellow light and
stops. So it's the whole element of risk taking
behavior can come into that as well and just before.
As far as the soldier, Senator, I would take note that
one of our member companies is USAA and they are
insurers for the armed services soldiers current, past
and present. And I would say that they probably have
one of the highest customer loyalty and opinions of how
they are treated by their insurance company in the
country of all insurers. And USAA is a company that is
using credit scoring. It is helping them more
appropriately charge people a premium that is
commensurate with the risk. So I don't think that USAA
would be treating their policyholders in a manor that
would be considered prejudicial in that regard.
CHAIRMAN COWDERY said credit information is personal information
therefore in all the policies, even the USAA policy, somewhere in
the fine print the policyholder gives the insurer the privilege
to check credit.
MR. HARROLD said he was not sure.
CHAIRMAN COWDERY said they couldn't just go check a person's
credit without some consent.
MR. HARROLD said sure they can. He did not think when Chairman
Cowdery received credit card offers in the mail they had called
him up for his consent to check his credit rating. They had not
called Mr. Harrold up when he got credit card offers in the mail.
SENATOR TAYLOR said they were all rotating around the same issue,
but they really hadn't talked about the issue yet.
The issue is those of us lay people that aren't
involved in the insurance industry, we assume that
causation has something to do with rates - if you cause
accidents that your rates will be higher. If you don't
cause accidents your rates will be lower. But there is
absolutely no correlation between causation and many
other factors. I don't know of any relationship here
where causation can be established off of this. There
is a correlation. Now that's a term we use in
statistics. But statistics are fascinating things.
SENATOR TAYLOR said they take a million people in America and
find out everything they can about them. They find weird
anomalies that just occur in statistics. The insurance industry
looks at everything. They have people called actuaries that study
demographics and statistics they can base things on. One of the
biggest things they use in demographics is age. A 16 year old
person could be the most responsible 16 year old in the world but
they are still going to be rated very high and pay an exorbitant
premium because statistically people that are young and
inexperienced get in more accidents and have more problems than
someone in an older age group. Mr. Harrold had testified there
were some areas they didn't use. Senator Taylor said that didn't
mean they didn't look at those areas as a company but they were
not using them.
MR. HARROLD said it did mean they don't look at those areas.
SENATOR TAYLOR said at one point in time some statistician did.
MR. HARROLD said some of these factors are things that insurers
do look at. Insurers do look at gender. They find males tend to
have more accidents than females do.
CHAIRMAN COWDERY asked if that was per mile and whether males
drive more miles than females.
SENATOR TAYLOR said they don't care about miles they are just
looking at gender.
MR. HARROLD said marital status is another factor. A 30 year old
married person is considered to have fewer accidents than a 30
year old that is single. They are not just considered to have
more accidents the numbers show that is the case.
SENATOR TAYLOR said there is a correlation.
MR. HARROLD explained when he pointed to these various factors
that they are simply looking at the way finances are handled and
are not looking at those individual factors as far as putting
that into the credit score.
SENATOR TAYLOR said it is only one part of an overall package.
He asked what other characteristics they use besides age, gender
and marital status.
MR. HARROLD said they could use things like prior insurance.
There are studies that show people who have not had insurance in
the past tend to have higher losses.
SENATOR TAYLOR asked if they used race.
MR. HARROLD said no.
SENATOR TAYLOR asked if he was sure.
MR. HARROLD said yes.
SENATOR TAYLOR asked what if there is a correlation.
MR. HARROLD said it still is not something that should be used.
SENATOR TAYLOR asked why. He said if age is okay and gender is
okay and they want to know about his marital status maybe his
race gets in more wrecks than Mr. Harrold's race does.
MR. HARROLD said it was very possible there could be a
correlation there but as a society it is something they do not
look at.
SENATOR TAYLOR asked about religion and whether Catholics are
more dangerous drivers that Muslims or more dangerous than Hindus
or Baptists.
MR. HARROLD said it would be the same answer.
SENATOR TAYLOR asked why.
MR. HARROLD replied, "That's something that as a society we
decided we should not look at."
SENATOR TAYLOR said that was the point they were trying to get
to. Society would be offended if they started doing racial
profiling.
MR. HARROLD said correct.
SENATOR TAYLOR said society would probably be really offended if
they were doing religious profiling or profiling based on
national origin or color. He said those would all be very
offensive. He said he did not know that insurers were not doing
that. He did not think any of them were going to know if insurers
were doing it or not doing it until someone put a proposal before
a legislature that said absolutely don't to this and have
auditors for the Insurance Commission make sure they are not. He
said they all assume that to be a public policy and no company
would do that.
MR. HARROLD said those are factors they are not allowed to look
at.
SENATOR TAYLOR asked even if there were a tremendous correlation,
the only justification for looking at credit is correlation.
MR. HARROLD said correct.
SENATOR TAYLOR said there is no causation they could speak to
here.
MR. HARROLD said the insurers are interested in the fact that
more accidents and more claims are filed. He could watch Michael
Jordan sink a jump shot and could not explain it as a physicist
but a physicist probably could. What they are interested in is
the fact that Michael Jordan makes a jump shot. It is the same
type of thing.
SENATOR TAYLOR said there is a correlation between the number of
times he shoots and the number of times it goes through the
basket.
SENATOR TAYLOR said there are areas where public policy did not
care if there is a correlation. He thought is was worth the
discussion and debate to talk about whether or not someone's
credit should be used adversely against them for the purpose of
setting rates.
MR. HARROLD understood that was at issue. The insurance industry
thinks it is well within bounds because the consumer wants to pay
a premium that is reflective of the loss they may have. Credit
information is used in many other facets of daily lives.
Acquiring a loan gives people opportunity but the bank is not
going to give them the loan if they don't have good credit.
SENATOR TAYLOR asked what insurers do in regard to significant
others in a same sex relationship. He asked if they received
credit for marital status under insurance programs or non-marital
status and paid a higher rate.
MR. HARROLD said he had never been asked that question before and
was not sure.
SENATOR TAYLOR said maybe it is don't ask, don't tell. Insurers
inquire about marital status when he purchases insurance.
MR. HARROLD said Vermont was the one state that passed such a law
and several other cities have had partnership laws that apply to
health insurance and other things. He did not know whether that
applies to auto insurance.
SENATOR TAYLOR said it might be very interesting and they could
find a tremendously high correlation. He asked if they found a
correlation like that whether they would be using it.
MR. HARROLD said it would be considered off limits.
SENATOR TAYLOR asked if that had been considered yet.
MR. HARROLD said it had not been considered yet and it was very
interesting.
SENATOR WARD said a person living beyond their means who had
trouble with credit cards would be looked at as having bad credit
and maybe have a higher rate. He said the State of Alaska is
self insured and had been living off credit from their account
for ten years. An airline in Anchorage just went into Chapter 11.
They did not pay their bills and their rates did not go up. He
said the insurance company was treating the airline differently
than his cousin that ran the bill up.
MR. HARROLD said that would be a commercial account.
SENATOR WARD said the ability to pay is one criterion. Enron
still has a fleet of vehicles. Even though they may have had a
little downturn in their bottom line, their insurance rates would
not be suffering. He asked if that was correct.
MR. HARROLD said he was not sure that was the case. The ability
to pay is not something that is looked at. It isn't one of the
factors. With commercial insurance the use of credit information
or financial information has been a staple for years. Only more
recently it has begun to be looked at on the personal lines
level.
SENATOR WARD said the airline company is privately owned and they
filed for protection. Their insurance rates have not gone up. He
asked if they should go up if they are equal to the person living
in Mountain View in Anchorage.
MR. HARROLD asked if he was saying if it is fair for one, it is
fair for the other.
SENATOR WARD said no, he was wondering what the insurance
industry would do. He did not know if it was fair or not. He did
not know if it was fair that people kept sending credit cards to
people that were already in trouble. He said he always had a hard
time deciding between somebody that is a business and commercial
and somebody that is non-commercial and a citizen because he felt
the citizen had more rights. He asked if the commercial business
would be treated differently.
MR. HARROLD said it was a question he could put to people and ask
how that would be treated in a commercial context. He did not
know whether in most cases commercial rates would go up.
SENATOR WARD said most commercial businesses are corporations and
a corporation is considered an entity. They have the right to be
sued and sue, to incur debt and not to incur debt and they also
have the right to file bankruptcy just like an individual does.
He did not understand why that entity would be treated
differently.
MR. HARROLD said the bottom line is a dollar and cents question
for both an individual and a corporation.
SENATOR WARD asked if the ability to pay would be the factor.
MR. HARROLD said he was talking about the potential for loss not
a matter of how much money they have. They are going to look at
that corporation in the context of are they going to have losses.
They charge a premium that is appropriate for the losses they may
have. It would be the same with an individual. It was a dollar
and cents question, not a matter of rich or poor but whether or
not they are going to have losses.
SENATOR ELTON said they needed to move along but he had a series
of questions and was going to phrase them in such a way that Mr.
Harrold could answer them yes, no, or I don't know.
SENATOR ELTON assumed with the data shown on the chart, credit
scoring reduces risk for the insurer therefore it should have
some net affect on gross rates for consumers.
MR. HARROLD said not gross in the sense of overall amount. It is
helping insurers better apportion the premiums.
SENATOR ELTON said Progressive is one of the major carriers in
Alaska. Progressive began using credit scoring in 1998. Since
1998, in a series of rate requests to the Division of Insurance,
they have raised rates 18.8%. He asked if it made sense that they
used a more efficient way of determining risk and rates would go
up that much in a period of four years.
MR. HARROLD answered yes it does. The fact that payment rates go
up doesn't mean how accurately they are going to predict how they
go up - it is a separate issue.
SENATOR ELTON asked if he had testified on credit scoring in
Idaho.
MR. HARROLD answered yes.
SENATOR ELTON asked if he remembered who sponsored the
legislation.
MR. HARROLD said John Goedde.
SENATOR ELTON asked what his occupation was.
MR. HARROLD said he was an insurance agent.
SENATOR ELTON asked if Senator Goedde was a Republican.
MR. HARROLD answered yes.
SENATOR ELTON asked if he was there when Senator Goedde said he
had heard of homeowner insurance rates shooting up 300% and said
the biggest losers are the elderly, the very young and members of
minority groups when credit scoring is used.
MR. HARROLD was not sure that was exactly what Senator Goedde
said on the day he was there. He said Senator Goedde could have
said it.
SENATOR ELTON asked if Republican Representative Bill Deal of
Nampa, Idaho was involved in the hearings when Mr. Harrold was
there.
MR. HARROLD said Representative Deal was not there, he is on the
House side.
SENATOR ELTON asked if it would surprise Mr. Harrold and did he
know his background.
MR. HARROLD said Representative Deal was an insurance agent.
SENATOR ELTON asked if it surprised Mr. Harrold to hear
Representative Deal say that using credit scores to judge
existing customers is very inequitable and morally wrong.
MR. HARROLD said, "I read the same quote. I think that was the
article in which the comment that I made was taken out of context
as well."
SENATOR ELTON asked if he thought it was taken out of context.
TAPE 02-11, SIDE B
MR. HARROLD said he could tell them that Representative Deal is
probably close to supporting legislation that does not do nearly
what was on the table there.
SENATOR ELTON said there were very few Democrats in the Idaho
Legislature so he was assuming that any legislator from Idaho
that is quoted is going to be a Republican. He was struck by
this Republican Representative's statement that it was very
inequitable and morally wrong.
SENATOR ELTON thought Mr. Harrold could find it easy to prove
there is a correlation between credit scoring and risk. He asked
if his employers had ever looked at correlations between credit
scoring and discrimination. He was speaking specifically of the
study in Maryland they spoke about a couple of weeks previously.
He asked if Mr. Harrold had reviewed the Maryland report.
MR. HARROLD said he had seen the Maryland report. It's very
incomplete because it does not have a column on there that talks
about what the losses were. It says people in this area pay
higher insurance premiums than people in this other area but it
does not say it is because of the losses in this area.
Territorial rating is one of those components where certain
territories are looked at as a group, just like other factors.
SENATOR ELTON said he did not want to badger Mr. Harrold and
apologized. He said that wasn't a question that was easily
answered by yes or no.
MR. HARROLD said Commissioner Larson of Maryland would not seek
to disallow territorial rating.
SENATOR ELTON said during the conversation they had a couple of
weeks ago, Mr. Harrold had indicated it was possible to look at
insurance rates by zip code in Alaska. The conversation involved
trying to determine whether or not credit scoring had an
inequitable effect between zip codes. He thought he remembered
Mr. Harrold saying they had that capability.
MR. HARROLD thought they had the capability, the data is there.
He had not been able to get the data because the companies and
the government relations people he worked with were very busy at
that time. To get that level of detail, if it was maybe a couple
of states looking into the issue, he could probably ask and get
that information.
SENATOR ELTON said it might be helpful. He said he had a feeling
that Chairman Cowdery was going to want to move the bill so he
did not know how that would reprioritize the work of that unit
but it might be helpful.
SENATOR ELTON asked, if using credit scoring, it is likely that
car insurance or health insurance would go up for an Enron
employee who lost his or her job and missed a utility payment.
MR. HARROLD said it could be possible.
SENATOR ELTON asked if it were possible a Washington State farmer
who was hammered by the drought last year and missed a credit
card payment would see his health insurance premium go up.
MR. HARROLD said a credit score is a snap in time. It may be
very likely that during the time that person had a credit problem
and there was a drought an insurer would not even be looking at
that information. Anything is possible.
SENATOR ELTON asked if it was possible that a recently divorced
woman who has to separate her bank account from her previous
spouse's bank account, applied for auto insurance, her rate would
be higher than it would have been before the divorce.
MR. HARROLD said it is possible.
SENATOR ELTON said what bothered him was they knew all of these
things were possible. He did not disagree there was some kind of
link between credit scoring and risk. He had a letter from
someone in the insurance business in Alaska and this person
talked about two customers. He explained:
· One is a woman who had no accidents or violations and had
prior insurance. She drives to work and has one vehicle.
She does not own a home but rents. Her premium almost
doubled to over $1000 for six months because of credit
scoring.
· Another is a male in his 50's. He has a good income, is
married and owns a home. He owns the same make, model and
year of car. He has a Driving While Intoxicated (DWI)
conviction and was involved in a DWI accident five and half
years ago. The insurance agent suggested that as a new
customer he would have never gotten insurance but because of
his credit score his insurance rate is half the woman's
rate. The woman had no claim.
He asked Mr. Harrold if that sounded like an unusual outcome.
MR. HARROLD said it did sound like an unusual outcome.
SENATOR ELTON asked why that would be if the preponderance of the
underwriting or rating decisions were because of credit scoring.
MR. HARROLD said he did not know what the other factors were with
that person. He did not know what weight the insurer put on
credit scoring.
SENATOR ELTON asked if, before credit scoring, it would have been
more likely than not that the male driver would have had to pay
more for auto insurance than the female driver.
MR. HARROLD said yes. It was also more likely prior to credit
scoring that insurers would not insure a host of people because
they did not have the confidence to do so because they would not
know what their losses might be. That is why they are seeing
insurers insure more people, not less.
SENATOR ELTON said perhaps. He said there are people in rural
Alaska that do not use credit the same way he or Mr. Harrold do.
They don't have an opportunity to use credit the same way and
they often pay by cash or a cashier's check for major things. If
he had a twin that had the same characteristics would it be
likely his twin would pay more for insurance simply because he
lived in a different kind of environment.
MR. HARROLD said had heard from insurers that some people that
don't have a credit history in some cases might actually have
better credit than the average person. In some cases they might
have average credit and there are other examples where their loss
experience is far more severe if they don't have any credit.
SENATOR ELTON asked if his brother converted to a religion that
had a basic precept, would it be likely his brother would pay
more for home or health insurance than he would pay.
MR. HARROLD said he did not know about the health insurance.
SENATOR ELTON asked if it would be more likely than not that his
brother would pay more for auto insurance than himself even
though they had a similar driving record.
MR. HARROLD said it would depend on the company and the history.
SENATOR ELTON said he did not understand that answer. It would
be helpful if Mr. Harrold would give them a formula on how they
use credit scoring and how they get to the credit scoring.
CHAIRMAN COWDERY said they talked about religion. There are
people who do not believe in credit for religious reasons. They
don't have a credit rating. He quoted a statement made by Mr.
Harrold from the December 26, 2001 issue of the Seattle Times:
We're not penalizing anybody but they - that's the
people without credit history - wont' get a reward for
having good credit.
He asked Mr. Harrold if he said that.
MR. HARROLD said those were his words.
SENATOR WARD said due to no fault of their own there are a lot of
people in the timber industry no longer able to make a living
because of actions by government. On top of that, especially in
his district, some of those very same people were involved in the
commercial fishing industry and they are no longer able to make a
living. They would now have a higher rate because they were
behind in payments on their credit cards and other things. He
asked if that was correct.
MR. HARROLD said it is very possible. In all the examples, it is
possible they will pay more and if credit scoring is as
predictive as insurers say, the reason they will pay more is
because they are going to have higher losses. The flip side of
the question could just as easily be should the person that is
not going to have the loss pay more insurance to cover the loss
those people are going to have. That is the equation they are
dealing with, that is really what they are doing.
SENATOR ELTON said he would rather subsidize a good driver with
no claim history who might not have a good credit score, based on
a formula that nobody is willing to share with anybody, than
subsidize a fellow that has a record of DWI accidents. He found
it a little bit off-putting to suggest there is a subsidy that
goes one way but doesn't go the other way.
CHAIRMAN COWDERY asked to his knowledge if there was any effort
when they use credit reports or scoring to determine if the
reports are in fact accurate. Mr. Harrold had stated earlier that
driving records are not accurate.
MR. HARROLD said they do not take each individual record and look
at them because what comes to an insurer has gone through a
credit bureau that had the formula on file. The record runs
through that model and what comes to an insurer is the score.
Insurers are not looking at the personal data of any insured. If
there is an adverse action taken, if somebody has a higher rate
or they are cancelled or non-renewed, then under the Fair Credit
Reporting Act that individual has the right to contact the credit
bureau and get their credit report for free. At that point if the
individual came back to the insurer they could try to correct
that information. Certainly that is something the industry is
willing to do. The industry is more than willing to have more
disclosure to give people an opportunity to find out if the
information is correct and to then go back and re-rate or re-
underwrite the policy to give them the characteristics that are
most important in impacting their credit score. There are a lot
of things the insurance industry is willing to do to help people
better understand the process. That example is not something they
can do with each report that comes through.
MR. DAVID MCCARTER, Fairbanks resident, explained he had a couple
of tickets on his record but no accidents. He worked hard over
three years to make sure he didn't get any more tickets. He used
his turn signal and stopped at yellow lights because he thought
he was going to reap the rewards. He and his wife purchased new
vehicles and thought their premiums would come down. They have a
2001 diesel Ford pick-up and a 2001 Buick Regal. Their premium
was $2430 for the two vehicles. Three days before their insurance
expired he went to almost every insurance company in town. He
discovered if he cancelled with his current company and moved to
another, the very cheapest insurance rate available would have
been $4890 for the two vehicles.
MR. MCCARTER said they have pretty good credit. They own two
houses and one is a rental. In 2001 while buying their house,
they discovered some inaccuracies on their credit report. They
were able to clear that up with the bank but have been fighting
with an attorney to get it off their record and it was not an
easy thing to do. He found, had he changed insurers, his
insurance policy would have more than doubled because of credit
scoring. Insurance companies were saying they were promoting good
driving. He thought the problem was there is no motivation to
drive decently. He really has good credit but was told he had to
submit it to an underwriter who would look at it but there were
no guarantees. State Farm and Allstate would not even write him a
policy. Geico would write a policy but the price was really
outrageous. He thought it was an unfair and discriminatory
practice.
MS. TARA DRENNON, Fairbanks resident, explained she was a victim
of identification (ID) theft. They found out about the theft last
year and notified her insurance company when she renewed their
auto policy. The insurer was not sure he could renew her auto
insurance. They had life insurance, homeowner insurance and
renter insurance through that company for four years and were
told that could work for her. Her credit check came back bad.
The only reason they stayed with that company was because of the
three other policies. They now pay an increased rate because of
her ID theft on her credit report. ID theft is becoming one of
the number one criminal offenses. She does not see how insurers
can single people out by their credit report not knowing these
people had an ID theft. There are individuals that don't know an
ID theft occurred.
MR. STEVE CONN, Alaska Public Interest Research Group (AkPIRG),
said he had attended meetings on credit scoring with national and
local consumer groups. He was glad they were addressing it head
on in Alaska.
The principle reason why many questions raised by the
Senators could not be answered by the representative of
the insurance industry and, in fact, can't be answered
by any insurance agent when these crazy rate hikes come
up is because they are based on computer models - not
just the credit report but computer models that the
companies will not share. In other words, the result in
these little black boxes cannot be verified and cannot
be replicated. And we're just supposed to believe that
you feed in information into this little black machine
and on the other end comes an answer that even your
local agent who's known you all his life or her life
cannot change.
Bob Hunter, who is the Director of Insurance for the
Consumer Federation, said it's like a black box and he
says they haven't verified that minorities, people with
disabilities and the poor aren't discriminated against
by this system. I mean what you're left with wondering
Senator, is whether or not this new proposal that is
now sweeping the country is going to be used as a cover
for illegal discrimination that has already taken place
or will be used as a cover for prospective
discrimination that might take place. And I think many
of the Senators reached that in their - with their
information.
Personal information, real life information about a
person is better than laying them up against a
statistical model. This very clearly will lead to a
kind of discrimination that works directly against
Alaska public policy not only statutorily.
But we have easily 14,000 licensed drivers that don't
have insurance. If we move, if we allow this to happen
here, to what degree are we going to discourage them
from getting insurance and have to carry uninsured on
our own.
MR. CONN maintained the only correlation he saw is on the part of
the insurance companies between their greed and their ingenuity.
Insurance companies know they are not getting the investments
they used to in the stock market so they are trying to take it
out of the customers with a pig in a poke that can't be verified.
MS. SUZANNE KELLEY, owner Alaska Tab & Bind Printing Company,
said when she heard about this issue she talked to about 50
people who were unaware their rates were based on a credit score.
Everyone she had talked with was shocked.
She found out when she got an annual rate increase of about $600,
which was well over a 40% increase. She called the insurance
company and asked what the rate increase was about. Progressive
told her the State of Alaska required a credit check every 36
months. They told her it was in statute. She asked them for the
law and they could not cite it for her.
She called other insurance companies and received quotes and all
were based on credit scoring. Premiums were not based on her
driving ability. She had not been in an accident or made a claim
on her policy.
MS. KELLEY said her homeowner insurance doubled so she changed
companies. She said the only thing that had changed was she had
purchased a home and expanded her business. She uses her own line
of credit and is self-employed and pays her bills on time.
MS. KELLEY said this is discrimination. There are people that are
poor and young who are not going to pay $3000 per year for
insurance just because they don't have credit while working at
Wal-Mart. "This is discrimination. I can pay, they can't."
She checked rates everywhere and talked to every agent she had
received a quote from and the agents had an issue with this. The
agents are working for companies they are not in agreement with
but have no choice because those are the laws and they do not
even understand the laws.
CHAIRMAN COWDERY pointed out the agents are agents of insurance
companies and do not set the rates. They are working on a
commission.
MS. KELLEY said the agents are not aware of the rates or how they
are set. The agents are not in agreement with credit scoring and
have seen many areas where it appears to be discriminatory. They
will admit that.
MS. DEE HUBBARD, Sterling resident, was in support of SB 320.
She found out about credit scoring from a friend two years
earlier and began exploring it. She found no one who could tell
her whether credit scoring was being used or not. Last year she
talked to a gentleman at the National Consumer Insurance Hotline.
He told her in his 40 years of working in the insurance company
business he had never heard of anyone using credit scoring.
She was surprised the legislature had three bills relating to
credit scoring and hoped one of the bills would pass. She said SB
1408, which is being considered in Idaho, goes a little bit
further than SB 320. It will not allow an insurer to charge a
higher premium and in addition the insurer cannot cancel, non-
renew or decline to issue a property or casualty policy or
coverage based primarily on an individual's credit rating or
credit history. With SB 1408, a person cannot be denied
insurance, be told their policy will not be renewed or have their
insurance cancelled strictly because of credit rating or credit
scoring. She thought that might be something the Transportation
Committee would consider as an amendment that would make it
stronger. She would back anything that would make it stronger.
MS. HUBBARD said as a consumer she is tired of being the one that
has to prove she has done nothing wrong. When Wells Fargo bought
her bank, four checks bounced due to bank error and it took seven
hours to get it squared away. She said people who think it is
easy to get a credit report changed should try it one time and
they would change their tune.
CHAIRMAN COWDERY said they had a copy of the Idaho legislation.
He told her the bill would be heard in other committees.
SENATOR ELTON said in one way Chairman Cowdery's bill is stronger
than the Idaho bill. The Idaho bill provides that insurers cannot
charge a higher premium or cancel a policy or coverage based
primarily upon credit scoring. They define base primarily as
meaning that the weight given by the insurer to an individual's
credit rating or credit history exceeds the other weight given by
the insurer. The Idaho bill would allow credit scoring as long as
it doesn't count for more than 49% of the decision making
process.
MS. HUBBARD said Senator Elton was right. She did not necessarily
like the wording that was used in the Idaho bill but she liked
the thrust of not allowing a cancellation or a non-renewal or
someone being declined insurance.
MS. SARAH MCNAIR-GROVE, Property/Casualty Actuary, Division of
Insurance, said the Alaska Division of Insurance agrees with
Chairman Cowdery that additional regulation in the area of credit
scoring by insurance companies is appropriate. However, how far
to go, including whether it should be a total prohibition they
believe is a policy call but they did support the efforts in the
area. She told members:
The Division's responsibility is to review auto
insurance rates and to approve them if they meet the
statutory requirements. And those statutory
requirements are the rates not be excessive, they not
be inadequate and that they not be unfairly
discriminatory. As has already been mentioned here, one
of the first approvals of the use of credit information
in a rate filing occurred approximately four and a half
- five years ago with Progressive's filing. We spent
over a year looking at that filing, gathering
information, looking at the statistical support for its
use, asked many of the same questions that have been
asked here and felt that by the time that was over,
they had provided the information necessary to meet the
statutory requirements and so we approved the filing.
Since then we have approximately seven insurance
companies who have specific filings approved to use
credit information in the rating process. Since
December of 2000, we have also received another eleven
filings requesting to use credit information in the
rating process. Those have been significantly
questioned. Four, actually six of those filings were
withdrawn or the insurer removed the credit information
because they could not provide the information that we
needed. Two of the filings were approved and those are
the USAA filings that were also just recently mentioned
here. The other filings are still either under review
or were disapproved because we could not get the
supporting information that we needed. We have also
four homeowner filings but since we weren't dealing
with those I won't mention those.
CHAIRMAN COWDERY said this bill covers all insurance.
MS. MCNAIR-GROVE said they have four homeowner filings. Three of
those removed the credit information because they could not get
the credit information needed.
An insurer may also use credit scoring in the
underwriting process and the division does not have
prior approval over the underwriting process so we
don't see that criteria before insurers use it. But
other insurers besides these that have rate filings I
believe are using it.
As the use of credit scoring has increased in Alaska,
the division has continued to receive questions,
inquiries and complaints from consumers regarding the
use of credit information similar to the ones that we
have just heard. And it has been very difficult for us
to get good answers from the insurance companies that
consumers can understand as to why credit information
is an appropriate rating tool and how it has affected
their rates.
CHAIRMAN COWDERY asked if there was effort by the Division of
Insurance to verify the accuracy of the credit references
insurers use.
MS. MCNAIR-GROVE said they do not. One of the questions they have
asked insurers that use credit scoring is what opportunities they
provide consumers to get information corrected. Most of them
responded that they follow the Fair Credit Reporting Act.
CHAIRMAN COWDERY said on his own credit report there was
something that was absolutely false. He was completely unaware of
it until he applied for a loan. The loan was approved but he did
not accept it because he was not happy about the false
information. A person could get a traffic ticket driving another
person's car. The owner is unaware of it and it goes to a
collection agency and enters the system.
SENATOR ELTON said they heard testimony that a consumer was told
state law or state regulations require that Progressive do a
credit score periodically. He asked if there is any law or
regulation that requires an insured's carrier to do that.
MS. MCNAIR-GROVE said there is no law or regulation. She believed
the testifier was referring to an insurance company's rating
plan. When an insurance company files with the Division of
Insurance and details how they are going to use the rating plan
and list the criteria they are going to use to determine the
appropriate rate, they must follow that plan. Progressive has
said how they are going to use credit information and people with
a certain credit score get placed in a certain tier. So in that
sense they are following their approved rating plan but there is
no requirement that they use credit information.
SENATOR ELTON said it would probably be an insurer's choice to do
that because that would give them the opportunity to raise rates
if in fact there has been a change in credit history.
He asked if the Division of Insurance reviews the credit scoring
formulas used by insurance carriers in the State of Alaska.
MS. MCNAIR-GROVE said they had tried to do that. That was the
reason why some of the recent filings were withdrawn because they
could not get that information. When they reviewed Progressive's
filing Progressive did their own in-house model and there was not
a third party although they had the same confidentiality
concerns. The division required them to list all of the pieces of
information they used off of the credit report. They did not
require them to give the division the specific weighting, for
example where this piece of information gets two percent and this
piece of information gets minus five percent. The division did
not require that.
SENATOR ELTON said one of the reasons he liked SB 320 was because
the Division of Insurance feels they may have some authority over
the setting of rates because of statutory language that says
unfairly discriminatory. But the division feels they have no
authority over the underwriting component when it comes to credit
scoring. He asked if that was true.
MS. MCNAIR-GROVE explained she would not say they had no
authority. They did not have prior approval authority and they
would have to look at the underwriting process through their
Unfair Trade Practices Law and it would be a market conduct type
exam.
SENATOR TAYLOR thought the Division of Insurance was to protect
the public from outrageous gouging being done by the industry.
To do that they would go through and review claims and the amount
paid out in the form of claims, defense of claims and cost of
handling claims would be a number and that would be how much
money they took in from premiums. Then there would be how much
money they paid out in claims. There would also be how much
profit they made off of investing in a bull market like the last
ten years. The Division of Insurance would look at that and would
say that is a reasonable new rate the insurance companies are
applying for or it is not a reasonable rate. Apparently there is
something else figured in there, which is some level of profit
margin the division believes the insurance companies have to
make.
He said they went through all that during the tort reform
movement when he found out his personal insurance as an attorney
on malpractice had gone up about three or four thousand percent.
There had been no increase in claims in a five-year period. His
insurance commissioners had approved all those increases. At that
point he had lost faith in how much protection he was getting.
On this issue of credit as a factor in the process I'm
concerned that we seemed to have drifted a long ways
away from evaluating an appropriate level of premium
based on claims. And now we seem to determine that an
appropriate level of premium is based on a person's
sex, their gender, based on their age, based on their
marital status and now based on their credit report.
None of which have anything to do with driving a car
but have correlations statistically that may show that
they're a greater risk or a smaller risk. Is that what
we're turning into now is we're going to go to a system
where you'll be pigeon holed and the amount you have to
pay for insurance will depend upon what your credit is,
how old you are, whether or not your married and
whatever other things that they may want. Is that the
kind of system we're moving into now?
MS. MCNAIR-GROVE responded:
I would say that we do look at exactly the kinds of
things that you look at. And you heard discussion of
loss ratios earlier and that is a relationship of how
much you take in in premium compared to how much you
pay out in losses. So we do look at those. We do not
ignore those and look strictly at these models and
various other things. That is part of the process and
we try to be sure that that those match as closely as
possible.
In terms of the other factors, we have been using them
and they have - are what traditionally acceptable,
should we say that, the gender and the age and sex
those have been used for a long time. The credit report
is a new one that's just added to the pot.
SENATOR TAYLOR asked the following questions.
When you said you were unable to get information about
credit reports and how they compile them whether they
verified it was good information or not and so on, how
do you know as a - as a insurance commissioner in this
state, how do you know that they are not utilizing any
other aspect in determining whether or not to either
sell a policy or not to sell one or what rate or what
pigeon hole to put someone in? How do I know that the
insurance industry isn't racially profiling. How did I
know that they're not using religion? How do I know
they're not using sexual preference as a guide? How
would I be assured of that?
MS. MCNAIR-GROVE said they review the filings in which the
insurance company tells them the criteria they are going to use.
The insurance company must then follow the filing as filed with
the division. As the division approves the filing if there are
questions or consumer complaints saying the company is not doing
the right thing then the division has a market conduct process.
They actually go out and review what the companies are doing and
see if they are doing what was approved for them to do.
SENATOR TAYLOR asked if they sent somebody out that actually
pretended they were a buyer and went to an agent and sat down
with them or do they just go out and audit.
MS. MCNAIR-GROVE said probably more of an audit process. We audit
their claim files and look at various pieces of information.
SENATOR TAYLOR said he was very concerned about identity theft.
The legislature may need to address that if it is a factor and
component. He said he passed a bill that made it a more serious
offense. He had not realized how that information might be
misused and abused by people within the insurance industry. He
wanted to talk with Ms. McNair-Grove about that at another time.
SENATOR TAYLOR said each of his children decided to live with
someone for a couple of years before they were married. During
the period of time when they were living with someone they would
have been classed as single and paid a higher rate. He asked if
the Division of Insurance approved that.
MS. MCNAIR-GROVE said it was possible. Whether they paid a higher
rate could depend upon the definition of marital in their
company's filing. If a company would choose to say a long
relationship would fall under the marital category and provide a
statistic that showed they would have the same characteristics as
someone who is married the Division of Insurance could approve
that. It would be the company's choice as to whether or not they
would want to do that.
SENATOR TAYLOR asked if those people who choose not to marry but
live together for a lengthy period of time are paying a single
rate and the Division of Insurance approved that as a factor the
insurance company could use.
MS. MCNAIR-GROVE answered yes.
SENATE TAYLOR said the division does not ask the insurance
company to do these things. They wait for the companies to come
in and volunteer.
MS. MCNAIR-GROVE said it was the companies' responsibility to
make rate filings and set the rating plan.
SENATOR ELTON said it is important to note that a credit report
is different than a credit score. It is relatively easy for a
consumer to have access to their credit report and make
corrections but they don't know how those corrections affect a
credit score. The credit score is a proprietary tool used by the
insurance companies and they don't tell the Division of Insurance
what that formula is. He asked if that was correct.
MS. MCNAIR-GROVE response was inaudible.
MS. ELIZABETH MOCERI, Regional Counsel, Allstate Insurance
Company, testified in opposition to SB 320. She said she was
there to talk about the benefits of credit scoring and why
Allstate Insurance Company uses credit scoring. She said they had
heard a lot of negatives.
MS. MOCERI said their goal is to use credit scoring in rating in
Alaska. With credit scoring, Allstate will provide lower prices,
lower rates and accept more policyholders into their market.
They currently use credit scoring in underwriting in Alaska.
Credit information is predictive of loss history and it's very
accurate. They saw a predictive correlation between credit
scoring information and future loss.
TAPE O2-12, SIDE A
MS. MOCERI said Allstate was one of the companies that withdrew
their filing as Ms. McNair-Grove had indicated. They withdrew not
because they did not want to share their algorithms with the
Division of Insurance but because they could not guarantee its
confidentiality. They are still working with the Division of
Insurance and would like to have some requirement that their
algorithms would be confidential so the Division of Insurance
could review it.
In our states that we do use credit scoring in rating
our policy prices are, our rates, are very competitive.
In the states of Washington and Idaho and Oregon our
agents are - have increased their productivity, their
writing more insurance policy and offering very
competitive rates. And, for example, you mentioned
Idaho. We recently, an Allstate agent testified in
support of credit scoring at the Idaho Senate hearing
and she gave examples, she's marketing to Lithuanian
and Russian and Hispanic immigrants. This group of
policyholders has credit and are receiving - receiving
our best rates. And she feels that she's being very
competitive with State Farm and Progressive and the
other carriers.
MS. MOCERI said two Allstate agents testified in Washington State
in support of credit scoring. They gave examples where using
credit scoring allowed janitors and some medical care
professionals to receive the best rate while other medical
professionals did not receive their most favorable tier. She said
those were examples that you can't tell a book by its cover.
There had been evidence where some people were being
disadvantaged by credit scoring but with Allstate 70% of
policyholders benefit by credit scoring. Allstate gave a very
good discount with credit scoring and was able to give that
discount because of the confidence they have. Not allowing credit
scoring would deprive the majority of policyholders of having
this discount.
CHAIRMAN COWDERY asked if in her opinion the majority of people,
if they understood credit scoring, would approve of it.
MS. MOCERI said she did. She thought the industry had done a
terrible job explaining the use of credit scoring. It is a very
emotional issue and the assumption is that it is negative. Their
scoring model looks at positives and negatives but it is a
holistic approach.
She said they were not going to show the committee the algorithm
because it is proprietary and makes them more competitive. She
said it was not that she didn't want Chairman Cowdery to see it,
she did not want State Farm and Progressive to see it because she
is able to offer a lower rate because of its predictive value. It
is more predictive than tickets.
MS. MOCERI said she wanted to talk about Hawaii. She said Hawaii
is a great place to visit but it is a terrible place to emulate
on legislation. The insurance commissioner asked all the carriers
to voluntarily cease using credit in underwriting and they did.
Allstate agents' production is down 12% because they had to
tighten other underwriting guidelines. If someone has a ticket in
Hawaii they cannot get insurance with Allstate for three years.
That is what would happen in Alaska. Allstate would have to turn
more people away and they want to bring in more people.
SENATOR WARD said Hawaii doesn't allow weighing rates by bad
credit so Allstate's rates have gone up. He asked if that was
correct.
MS. MOCERI said their rates have not gone up but they are turning
people away. It is an availability issue.
SENATOR WARD said Mr. Harrold had said because of an initiative
they can no longer use credit in California. He asked if
Allstate's rates had gone up in California since that proposition
passed.
MS. MOCERI believed they were filing for rate increases in
California.
SENATOR WARD asked if it had gone up.
MS. MOCERI said Allstate Insurance Company had filed for rate
increases in California.
SENATOR WARD asked if that was because of not being able to have
credit weighed into rates.
MS. MOCERI said she could not speak to California. She said she
was not familiar with the laws. She knew California was a very
unique and complicated situation. Because each state has
different guidelines and different requirements and there are
56,000 insurance regulations, it is very difficult to compare
states.
SENATOR WARD asked what percentage of people in Hawaii applying
for insurance are being denied since they did away with credit
scoring.
MS. MOCERI said it was too early to tell. She thought the
carriers would have to tighten down the underwriting guidelines.
Credit is a very valid and predictive tool. When they are
deprived from using that tool they have to use other less
reliable tools. Hawaii is a very unique state and has a unique
take all comers history. Several years ago Hawaii had tort
reform. She said she only remarked on Hawaii because the Senator
talked about it. Hawaii had a mandatory roll back of rates. It
was not voluntary by the carriers it was required by law. She
said there were other reasons why rates went down.
CHAIRMAN COWDERY reiterated there were about 25 other states
currently considering banning the use of credit scoring. In
Hawaii they have had about 15 years of this practice and the
premiums are currently some of the lowest rates in the states.
Hawaii not only banned credit they banned almost everything else
to use in rating. He asked if that was correct.
MS. MOCERI said they were also considering a law that would not
allow certain traffic tickets to be reported to insurance
companies.
SENATOR ELTON said he could understand the witness's aversion to
talking about Hawaii. He asked if Allstate had lost any judgments
in Hawaii in the last two years. He asked if they had lost a
judgment where a court affirmed and ordered them to cease using a
person's length of driving experience in premium calculations.
MS. MOCERI said they do not comment on pending litigation. There
is pending litigation regarding the use of credit in underwriting
in the State of Hawaii.
SENATOR ELTON said the information he had was that they had lost.
A judge had ruled against Allstate.
MS. MOCERI said there was a pending case with the Hawaii Supreme
Court.
SENATOR ELTON asked if a judge had also ruled that Allstate had
violated Hawaii's provision that prohibits the use of credit
rating in setting premiums.
MS. MOCERI said there was a pending case in the Hawaii Supreme
Court of Allstate vs. Metcalfe. They do have pending litigation.
SENATOR ELTON said he could understand her aversion of talking
about Hawaii because it seemed her company might have a few
problems there.
CHAIRMAN COWDERY said in defense of Allstate he had been with
Allstate for 40 years or more. He has a good agent, is satisfied
with him and receives good rates.
He said his daughter is 47 years old and in the last ten years
she had driven 187,000 miles in her pickup truck. She recently
got insurance through Progressive and he believed her premium was
set at $2400 or $2700. He thought that was ridiculous so she
cancelled her policy and he asked his agent to put her on his
policy, which cost approximately $700.
MS. MOCERI said the distinction there is again using credit in
the underwriting side and the rating side. Allstate would like to
resubmit their filing with the state if their algorithm would be
confidential. Under that scenario they have a rate for everyone.
Allstate has a rate for people who don't have a credit history.
In their algorithm people with bankruptcies in their past record
still are eligible for some of their best rates. Seventy percent
of people are getting a credit discount. When they ban credit
they are banning the ability to give that discount to those
people. Those are people that do not cause losses. Credit is
predictive of losses. The people who benefit from banning it are
the people who cause the majority of the losses.
CHAIRMAN COWDERY said his daughter is a single parent and owns a
home worth $180,000 to $200,000. She doesn't owe money on her
home and is current on her credit cards and her insurance rate
was a total shock. He couldn't understand the differential
between that rate and adding her to his policy.
SENATOR TAYLOR said Chairman Cowdery's daughter had some credit
problems and it was the credit problems that Progressive was
using to figure out her rate. That is why her policy rate was
almost $2000 higher. He said that was the concern he had. He
stated:
I love the positive approach you know. It's you really
want to do this because if we get to credit rate people
we'll gouge the heck out of the guy with the bad credit
rating but we're going then to be able to give 70% of
the people a discount off of that. Because on the other
side of your coin you just said 70%. The other 30% are
paying through the nose aren't they?
MS. MOCERI said the 30% that are paying through the nose as
Senator Taylor coined it are the people who are causing the
losses.
SENATOR TAYLOR said she had no evidence of causation. He said she
had a whole lot of evidence and a lot of computer runs that
statistically show there is a correlation. He said she didn't
have anything on causation.
MS. MOCERI said in states where they use credit scoring they
know by tiers who causes losses. "The people with the least
favorable, in our least favorable tier do cause in homeowner's
rates 100% of the losses are caused by the least favorable tier."
They see a very strong correlation and the information they
received was information based on their own studies. She thought
the people who benefit if they ban credit scoring are people who
cause the claims. They are trying to predict for the future.
They are trying to look at how they can be competitive. The
insurance market is a very competitive environment. Allstate
wants to provide the most competitive price.
SENATOR TAYLOR said the only way they can pass on any savings to
anyone is if they get more money from the other people. He said
her numbers are 70%/30%. Mr. Harrold's numbers were around 50%
getting a benefit of $180 by using this system. He thought Mr.
Harrold had agreed that 9% of the people would see a $900
increase in their premium all based on the correlation between
credit rating, not the causation, the correlation. He said Ms.
Moceri wanted to keep using those terms interchangeably and they
certainly are not interchangeable either through statistics or
through the rating schedules and systems they are working under.
SENATOR TAYLOR was reminded of an old establishment in Anchorage
and it operated on the basis: "We cheat the other guy and pass
the savings on to you." He thought that was happening. They are
going to define who the higher risk is through this obtuse thing
called credit rating and then they are going to make certain that
group will pay enough money so Allstate can become "more
competitive in the market and be excited about having 12% more
sales." They can charge less than the other company that probably
isn't invading somebody's privacy to get their credit rating but
is charging rates based upon other factors. He said he didn't
think the law went far enough and suggested they amend it and
eliminate age, gender, marital status and length of driving
experience just like Hawaii did and maybe they will have as low
of premiums as Hawaii.
SENATOR ELTON said he should have checked to see who his auto
insurer was before the hearing. He was pleased to hear Ms. Moceri
believed if allowed to use credit scoring Allstate anticipated
the net effect would be directly opposite the experience of
Progressive where rates went up 19%. Allstate would expect rates
to drop below what they are charging now.
MS. MOCERI said under their rating plan they are able to offer
very competitive rates because they are able to predict how that
group will perform in the future. Because of their confidence in
that prediction, they are able to offer a very competitive rate.
SENATOR ELTON said he understood the competitive nature of their
formulas. He asked if it was true that a lot of insurance
companies just buy a formula from Fair, Isaac Company and there
is no competitive advantage because they are using the same
formula.
MS. MOCERI said some companies do use a company like Fair, Isaac
Company to do their own models and they run different models for
different companies. Allstate has its own model and is big enough
to do studies and research. They spent a lot of time looking at
this issue because their competitors were doing it. If their
competitors were doing it and it wasn't predictive then they
would not use it. Allstate found from their studies it is
predictive.
CHAIRMAN COWDERY asked who paid for their studies.
MS. MOCERI said they have a planning and research center.
CHAIRMAN COWDERY said the outcome is not influenced by who paid
for the studies.
MS. MOCERI said they had a billion dollars in premiums from
policyholders in the United States. They did a blind study and
compared credit information against loss history. They saw a
strong correlation.
Insurance looks at groups and how they perform as a group. It is
fair discrimination. When they look at groups there is
correlation. There always will be exceptions to the group just
like an exception to a ticket. Not all 16 year old boys are bad
drivers. They would think a 16 year old might be a good driver
because they are young, have good eyesight and have better
reflexes but they are worse drivers. They offer good student
discounts and someone could argue that might be discriminatory
but it is something they offer.
SENATOR ELTON moved CSSB 320 (TRA) from committee with attached
fiscal note and individual recommendations. There being no
objection, the motion carried.
CHAIRMAN COWDERY explained the other part of this issue that
involved collision insurance was introduced as SB 348 and would
be heard the following week. He adjourned the meeting at 3:33
p.m.
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