HB 195-INSURER'S USE OF CREDIT HISTORY/SCORES  3:23:25 PM CHAIR KITO announced that the first order of business would be HOUSE BILL NO. 195, "An Act relating to insurer actions based on credit history and insurance scores at insurance policy renewal; and providing for insurer consideration of consumer requests for exceptions of credit history or insurance scores." 3:24:08 PM LORI WING-HEIER, Director, Division of Insurance, Department of Commerce, Community, and Economic Development (DCCED), on behalf of the administration introduced HB 195. She noted that using credit history or insurance scores to rate personal lines insurance is a complex matter, whether the insurance is for legislators or their constituents. There is a misconception, or people tend to think, that credit scores are discriminatory or not a true indicator of a risk when writing an insurance policy. The policies being talked about today are personal lines, she explained, such as auto and homeowner's policies, motorcycles, and recreational vehicles (RVs). For commercial lines, it is common for insurers to ask for financial statements. MS. WING-HEIER stated that Alaska's current statutes allow for the use of credit scoring, or insurance scores, when applying for new business. So, anyone going into a local broker in any community in the state is asked to allow their credit history or insurance score [to be used] and, based on that insurance score, the person may receive a preferred risk. The worst that can happen, she said, is that people without a credit history are given a neutral score. MS. WING-HEIER said one reason for bringing forth HB 195 is that Alaska statute does not allow for the insurance score to be used on renewal unless the insurance broker or insurance company asks for, and receives from the person, a waiver upon each renewal. This is time consuming and costly, she pointed out. Another reason for the bill is that, like legislators, many people travel for their work because they are fishermen, miners, or North Slope workers. The waivers come in the mail and are either disregarded or not returned in a timely manner. Then someone suddenly receives his/her insurance bill or notices that his/her homeowner's [insurance] has been paid out of escrow and the premium has doubled because the credit score or insurance score was not applied to the renewal. It is a cost to the insurance brokers to ensure that everyone is sent the waivers, and it is a cost to consumers when they realize they would have qualified for a preferred rate. But, she continued, to get a preferred rate, Alaska statute requires that this piece of paper be signed every renewal, which could be annually or every six months depending on the policy. 3:27:26 PM MS. WING-HEIER addressed the question of whether [credit history or insurance scores] could have a negative and answered yes. Bad credit will be a negative implication on a person's insurance premiums, she said. Studies have proven that there is a correlation between credit history or insurance scores and a person's likelihood to file an insurance claim. Perhaps it is because those people who keep good credit and pay their bills also take care of their homes and their autos, she continued. Perhaps they are the ones least likely to have speeding tickets. There is a correlation between the insurance score that is derived and an insurance risk. MS. WING-HEIER reiterated that the use of an insurance score is already allowed in new business and that HB 195 would be applied for renewals. In addition, she noted, Governor Walker has asked that the bill contain some important provisions. First, the governor is asking that the consumer be notified of what is called an "adverse action". If someone's credit or insurance score is going to result in the person having a detrimental policy premium, the person must receive written notices from the insurance company. Additionally, that notice must tell the person as a consumer, a policyholder, that they are qualified to go through an appeals process. Part of the appeals process would be based on extenuating life circumstances, she explained, which are outlined in Section 5 of the bill and which include things like medical, job loss, death of a spouse, deployment overseas, and other conditions that a prudent person would consider an extraordinary life circumstance. The consumer would have to appeal the insurance company within 60 days of receiving this adverse action. The insurance company would then make the first determination. Second, she continued, Governor Walker didn't like that last year's Senate Bill 127 said that after this appeals process went through, the final decision maker would be the insurance company. So, HB 195 has been changed to reflect that the final decision maker will be the director of the Division of Insurance through processes and procedures that [the division] already has established for handling other types of appeals for consumer compliance. MS. WING HEIER summarized by stating that HB 195 is about: allowing for credit scoring to be used for renewal; defining an adverse action and what an insurance company must do upon determination that there is an adverse action on a policyholder; and providing an appeals process that goes to the director of the Division of Insurance for adjudication if the policyholder doesn't like the [insurance company's] decision on an appeal filed in regard to extenuating life circumstances. 3:31:19 PM REPRESENTATIVE BIRCH related that he recently had a personal impact where his insurance company was going to ramp up the cost of his car insurance because he needed to sign something, but because he is in Juneau and not home there is a delay in receiving his mail. He said HB 195 is great as well as timely and he appreciates that the bill is being brought forward. 3:32:15 PM REPRESENTATIVE JOSEPHSON offered his understanding that when there has been no insurance policy issued an insurance company can use credit scoring, but not for renewals. MS. WING-HEIER replied that during the original application the applicant still must give permission, but yes, the insurance company can use the applicant's credit score to determine an insurance score. She added that when a person doesn't sign the form it sometimes ends up becoming what is called "churning" because the person always wants to be a new customer, an applicant, as opposed to a renewal. REPRESENTATIVE JOSEPHSON asked what happens if in the initial application the applicant declines to give permission. MS. WING-HEIER qualified she is unable to speak for insurance companies, but that in most cases the applicant would be treated as neutral, meaning not given a preferred rate. 3:33:26 PM REPRESENTATIVE KNOPP noted Senate Bill 127 passed both bodies last year before being vetoed by the governor. He further noted that the language in Senate Bill 127 and HB 195 is identical except for the small tweaks mentioned by Ms. Wing-Heier, which he thinks are good. He asked whether a homeowner's insurance policy that is wrapped into the policyholder's mortgage and automatically paid each month is looked at annually by the insurance company and subject to renewal every year. MS. WING-HEIER answered that that would be subject to HB 195, and even though it is paid through escrow the policyholder could end up with an increased premium if the policyholder does not sign and allow the insurance company to obtain the policyholder's credit history to determine an insurance score. REPRESENTATIVE KNOPP stated he isn't clear on the difference between an insurance score and a credit score. He inquired how they vary and how the insurance score is derived; for example, whether the credit score is used to establish the insurance score. He further inquired whether a new credit history is pulled up every time the policy comes up for renewal or whether the insurance score is used. MS. WING-HEIER replied that a credit score is a part of the insurance score. The overall insurance score may include things that are already allowed, and which are not changed in the bill, such as where the policyholder lives, the number of miles driven to work, the kind of car, and age. Responding further, she said HB 195 requires that an insurance company order a policyholder's credit score at least every 24 months. The administration's intent is that if anyone were to have a poor credit score or insurance score that the person is allowed to improve it. The bill also asks that the insurance company not use a credit report or credit history that is more than 90 days old so that the data is current. 3:36:34 PM REPRESENTATIVE WOOL offered his understanding that if a new homeowner applies for homeowner's insurance, the homeowner is not required to submit a credit score and so might be deemed neutral. He asked whether the credit score requirement is waived when a year later the policy renewal comes up and the policyholder signs something. MS. WING-HEIER responded that what is being waived is the statute and allowing the insurance company to order the policyholder's credit score upon renewal because right now it is not allowed upon renewal. In other words, she continued, a person signing as a new insurer is only allowing the insurance company to order it once, the company cannot do it twice without getting another signature, and the third year the company would need to get yet another signature from the policyholder. REPRESENTATIVE WOOL stated he has a fundamental problem with a person's insurance rate being determined by their insurance score which is somewhat based on a credit score. He said he understands insurance is based on actuarial [science] and the likelihood of having to pay out for a claim, but he pointed out that things can happen to alter a person's credit score that don't necessarily mean the person is more likely to have a house fire. People might lose a job or become divorced causing their credit score to go down, but in his opinion that shouldn't negatively affect them. He noted that when buying a house, a person's credit score will determine if the bank will approve a loan, but it won't determine how much the house costs. He asked whether there are other things where the amount of charge is dependent upon a person's credit score. MS. WING-HEIER answered that she considers insurance a financial product, not a service. She said she is not aware of any service, such as a contractor, where one's credit score is looked at for performing the service. However, she continued, most financial products do look at a person's credit to determine whether to extend the credit, how much credit will be extended, and the rate. REPRESENTATIVE WOOL stated he would call a bank loan a financial product for which a person's credit score is evaluated and the bank determines whether it will make the loan as well as what the interest rate will be. But, he continued, once that is established it remains stable and the bank doesn't do another credit check and raise the interest rate if the credit score has changed. 3:41:09 PM REPRESENTATIVE JOSEPHSON offered his assumption that when it is said that the [director] will make a determination, [the director] doesn't have a file that is looked at but rather a system is used and [the director] delegates it to a subordinate. MS. WING-HEIER confirmed she would as director assign it to a staff member to gather the information and give her a report that it either did or didn't meet the determination or criteria for an extenuating life circumstance. She would not be personally obtaining the information and making a determination. 3:42:11 PM REPRESENTATIVE WOOL surmised that insurance companies probably like this because it must bring them more revenue with a net result of more people paying more money. He asked why some insurance brokers have said they don't like this credit score being used. MS. WING-HEIER answered she thinks it could be controversial because some see it as a negative and don't understand the positives of how this can positively impact consumers. Is there a negative? Certainly, she said. If someone has poor credit it may result in a poor insurance score. It is one factor in determining the insurance score. The statute specifically says that insurance companies cannot just use the credit history to assign an insurance premium. They must use other factors or risk characteristics, such as age, where the policyholder lives, kind of vehicle driven, and driving history. In some cases, she continued, it is perhaps a misunderstanding of how much has been put into this bill to protect consumers to ensure there is an appeal process if they feel that they've been improperly graded, and how much it is to administer the renewals for consumers to sign the waiver. 3:43:52 PM CHAIR KITO stated that the use of age as a criterion for what someone's insurance rate might be is something he went through before age 25 and having to pay a higher premium. He was not necessarily a higher risk, he said, but was in that age category, which means he was an individual that met that statistic. That is accepted because nobody can change their age and it is accepted that there is a correlation between age and risk, but that doesn't mean everybody who is under 25 is going to be driving more poorly. Therefore, [the legislature] cannot change the use of age to establish a credit or insurance score because everybody does. He said he doesn't think correlation means causation, but to find ways to decrease the overall cost of insurance, companies look to try to find risk characteristics that correlate to actual things that can be measured. 3:45:15 PM CHAIR KITO opened public testimony on HB 195. 3:45:39 PM KRISTIE BABCOCK, Agent, State Farm Insurance, testified in support of HB 195. She said she employs eight individuals and markets insurance and financial services to fellow Alaskans. She recalled that last year a similar bill passed the legislature by a large margin but was vetoed. She stated her customers see the impact of the current law every day. They hear about the impact of the current law when her agency calls them and lets them know that the rate they received two years prior when their policy was originally written is going to dramatically change. Her agency lets them know the rate change isn't because of anything they've done. It is not a simple conversation, she advised. Her agency must explain that current law allowed the use of their credit history in their original rate but after two years that credit history must be stripped out. Her agency then explains that there is an option for the customer to give specific permission to use their credit for that policy for the coming year and hopefully avoid the increase. If her agency is successful in reaching them, getting the form to them, getting the form back from them, and all in time to avoid the increase, then there won't be a rate increase for a year. Then the next year comes. MS. BABCOCK said her agency has been doing this for many years now and she has one team member who exclusively deals with the difficulty that this current law presents for her customers. Customers are hard to reach and are busy, and they ask her why she can't just charge them the rate they deserve. They further tell her that they shopped around for their insurance when they first came to her and that's why they chose her. Customers ask why they must get a phone call or letter every year on every policy just to ensure that they don't get over-charged. She noted she has customers of all demographics, of all ages, that have tried hard to keep their credit strong and their driving record strong. She would like to charge them the rate they deserve and that is what HB 195 is about. Alaska is the only state currently that makes the insurance companies take out the credit component on the policy's renewal and it creates this frustrating consumer experience. MS. BABCOCK stated she doesn't see a public purpose served by the current system and urged that the committee help fix it. She related that some people have asked her what the impact of HB 195 on the public would be. First, she said, it would alleviate the dramatic swings in rates, which to customers seems like bait and switch when their starting rate changes at renewal. Second, HB 195 would eliminate the frustrating and cumbersome process of getting a manual waiver signed, thereby automating the renewal process. Lastly, she continued, HB 195 would allow customers to shop with confidence knowing there is stability in both the initial and renewal rating factors. 3:49:46 PM REPRESENTATIVE WOOL asked whether the majority of Ms. Babcock's clients would pay less if credit scores were allowed. MS. BABCOCK replied correct, the majority of Alaskans have favorable credit characteristics that would give them a decrease over the base rate, rather than just paying the base rate. REPRESENTATIVE WOOL inquired whether insurance companies would be losing money if credit checks were allowed. MS. BABCOCK responded it might be thought about as insurance being a zero sum. Insurance companies are going to try to collect the correct premium to take care of the claims for the risk pool that they represent. One of the ideas behind insurance is to try to charge the correct rate for each person for the risk they present. Rates are always changing and the risk of the consumer base that a company insures is always changing. So, she reiterated, the idea is to charge the correct rate for each risk and the insurance company on the backend has the duty to make sure it is charging the overall right rate so that it is able to pay future claims. 3:51:08 PM REPRESENTATIVE KNOPP expressed his appreciation for Ms. Babcock talking about customer dissatisfaction. He said Ms. Babcock has been his insurance agent for 15-20 years and he insures 5 or 6 personal vehicles with her and has both commercial and personal policies. He shared that he is a customer who has called Ms. Babcock's office to complain about all the forms he receives in the mail all the time and asking why he can't just have his rate left alone and the bill sent to him, so he can pay it. This is an important component of HB 195, he said. 3:52:13 PM The committee took a brief at-ease. 3:53:26 PM ARMAND FELICIANO, Esq., Property Casualty Insurers Association of America, testified in support of HB 195. He stated that his association is part of an insurance coalition supporting the bill that includes members such as Alaska USA, American Insurance Association, and the National Association of Mutual Insurance Companies. In the coalition's collective view, he related, HB 195 is a reasonable middle ground that would allow consumers to see the full benefits of credit scoring and put in place an equitable process to solve credit disputes. The bill would address the unnecessary market construction inherent in existing statute, which removes credit scoring upon renewal. Also, he continued, the bill would broaden extraordinary life circumstances and authorize the Division of Insurance to resolve credit disputes. He added that HB 195 is a commonsense approach to fix Alaska's existing credit scoring rules. 3:54:41 PM REPRESENTATIVE WOOL observed that Mr. Feliciano is calling from California and inquired whether California allows credit scores for insurance assessment. MR. FELICIANO replied that California is one of two states that doesn't allow for a credit score. About 23 other states follow the national model, he said, and about half of the other states follow a variation of the national model. REPRESENTATIVE WOOL asked whether there is a lack of insurance companies in California due to being disallowed from using credit scores. He further asked whether it is hard to find insurance in California. MR. FELICIANO responded no, and said California is a very competitive market with lots of insurance companies, so it is not an issue. 3:55:47 PM DANIEL LYNCH testified in opposition to HB 195 and said he believes in privacy and logic. He stated that in his 20-plus years on the Kenai Peninsula there are now more insurance companies, and none have gone out of business because of credit scores. He maintained that credit scores are irrelevant to insurability. An insurer can go to the Division of Motor Vehicles (DMV) and get a person's complete driving history for $10. An insurer can go to Google Earth and plug in a person's address to find the distance to a fire station, flood plain, or beetle-killed forest. He noted that in 1978 he cut up his last credit card and that his last loan from a financial institution was in 1975. Other than three seatbelt violations he hasn't had a ticket or accident in over 35 years. He is free money to the insurance company, he said. What does the committee think his credit score is? Why do his premiums go up every renewal when the values of his vehicles are less, he is retired, and he drives fewer miles? MR. LYNCH stated that vehicle insurance in Alaska is like "Obamacare" [the Affordable Care Act]. Residents are forced to purchase from a private entity or else they can be fined, incarcerated, and their vehicle impounded. Yet the insurance company can cancel, increase rates, or refuse coverage willy- nilly with no logical reason. He pointed out that Wells Fargo opened two to three million new accounts without customer request, which affected the people's credit scores. MR. LYNCH noted that the previous witness is also involved in new financial investment opportunities that have nothing to do with insurance. He said the governor's transmittal letter for the bill talks about the insurance code and the director and that from last year to this year [the bill] adds many consumer protections. But, he continued, requesting a life circumstance exception is his business. He asked whether he would need to hire a secretary and/or attorney to file an appeal and said this would be cumbersome for the consumer, especially for people who travel and might miss the paperwork and who would then have no recourse. He questioned the final judge being the director [of the Division of Insurance] because it is not an elected position and because a previous director was a 20-year employee of the insurance industry. He further pointed out that if a person shops around for insurance and goes to six different companies that would mean six hits against the person's credit scores and a loss in points with each hit. MR. LYNCH stated that if the legislature would like to pass a law to help insurance companies, citizens, and all drivers and pedestrians, then it could eliminate all cell phone use while driving. He closed by asking whether committee members went to Juneau to represent the citizens of Alaska or corporate America and lobbyists. He urged that HB 195 and SB 98 not be passed. 4:00:51 PM REPRESENTATIVE BIRCH asked whether Mr. Lynch has insurance. MR. LYNCH answered correct. REPRESENTATIVE BIRCH inquired as to how an insurer could best size up Mr. Lynch as an insurable party. MR. LYNCH replied that if it were for driving insurance it would be through his driving record. REPRESENTATIVE BIRCH offered his understanding that credit score is a pretty good indicator for insurance companies to validate how good a credit risk someone is or how reliable someone might be for taking care of their possessions. He asked whether Mr. Lynch objects to the insurance companies having access to that information. MR. LYNCH suggested that if he pays his bill every six months that establishes his credit, and he usually pays cash. If one has nothing to do with the other, he continued, the insurance company can go to the DMV and see that he hasn't had a ticket or an accident in 35 years and he will voluntarily tell the company that he doesn't use a cell phone while in his vehicle. One has nothing to do with the other to make it convenient for insurance companies. "Who are we going to make it convenient for next time?" he asked in conclusion. "Fred Meyer, a sporting goods store?" 4:02:53 PM REPRESENTATIVE KNOPP offered his appreciation that Mr. Lynch is probably a person for whom the bill would have a neutral or negative effect as far as using Mr. Lynch's credit score for rating purposes. He noted that about 15 years ago legislation was approved to allow the use of credit scores for rating clients. However, he continued, that is not what HB 195 is about, it is about consumer protection. Since the industry uses credit reporting as a method to rate people, not passing HB 195 would be detrimental to consumers because if [a signed waiver] is not received by the insurance company it will err on the side of caution. Compared to Senate Bill 127 of last year, the adjustments made in HB 195 make it a consumer protection bill. He reiterated that the issue here isn't using credit scores for rating a person as that issue was addressed 15 years ago. MR. LYNCH responded he has been testifying on these bills for the last four or five years because it comes back every year with a change here or there. He recounted Director Wing-Heier stating that HB 195 is about individual policies, not commercial customers, and asked why they are not treated the same. He further recounted Director Wing-Heier stating that the bill does have potential negative consequences if a person has a bad credit score, or, as in his case, no credit score at all. He reiterated his question as to whether committee members are representing the citizens of Alaska or corporate America. 4:05:46 PM CHAIR KITO ascertained no one else wished to testify on HB 195. 4:06:02 PM REPRESENTATIVE STUTES inquired whether HB 195 is also applicable to medical insurance. MS. WING-HEIER answered that it is not applicable. She said it is personal lines, such as auto, homeowners, motorcycles, and recreational vehicles. It is not commercial insurance, workers' compensation, property insurance on a commercial building, general liability, commercial auto, or any type of health or life insurance. REPRESENTATIVE STUTES asked whether there is a reason this isn't affecting commercial insurance. MS. WING-HEIER replied that financial statements are asked for in most commercial accounts. The commercial insurance companies will look at Dun & Bradstreet (D & B) reports. Or, if it is a larger company, they will look at Moody's or S&P and those types of reports, which in essence are a credit report, and then that would be factored into an insurance score. REPRESENTATIVE STUTES, regarding the process for appeals, noted that the industry would be judging its own appeals, rather than an independent body determining whether an individual had a valid appeal. The industry, which stands to profit, would be making the determination, she said. MS. WING-HEIER responded that that is one reason the bill was vetoed last year. Regarding extenuating life circumstances and the appeal process, [under HB 195] the consumer would present written documentation to the insurance company stating why they think they qualify, and if the consumer doesn't receive a favorable response, they bring it to the [Division of Insurance]. The division director has the final say in whether the consumer qualifies through the appeal for a preferred rate and if the consumer should be given a waiver for an extenuating life circumstance. So, she said, the [Division of Insurance] becomes the third party. 4:08:45 PM REPRESENTATIVE KNOPP offered his understanding that under HB 195 something related to medical on a person's credit report could not be used to negatively impact the person's rating as far as insurance. MS. WING-HEIER answered that medical circumstances, medical bills, for the person or family member is one of the extenuating life circumstances that can be appealed for why the person's credit score has taken a turn and why the person deserves a better rate. 4:09:45 PM REPRESENTATIVE WOOL posed a scenario in which he has large medical bills and misses a payment to a hospital, thereby affecting his credit score and in turn his insurance score so that he is then assessed a higher [insurance] fee. He offered his understanding that this would be the point at which he would have to go through the appeal process. MS. WING-HEIER replied that if the medical bills were to such a point that they impacted a person's credit score, then, yes, the person could ask for an appeal. That would be part of the extenuating life circumstances that are defined in the bill. 4:10:36 PM CHAIR KITO held over HB 195.