02/26/2013 01:30 PM Senate LABOR & COMMERCE

             SB  55-INSURER'S USE OF CREDIT SCORES                                                                          
                                                                                                                                
CHAIR DUNLEAVY  announced the consideration  of SB 55  and stated                                                               
that the bill would not move from committee today.                                                                              
                                                                                                                                
1:51:00 PM                                                                                                                    
STEVE RICCI,  Staff to the  Senate Labor and  Commerce Committee,                                                               
introduced  SB 55  speaking to  the following  sponsor statement:                                                               
[Original punctuation provided.}                                                                                                
                                                                                                                                
     Under current  law (AS  21.36.460), an  insurer writing                                                                    
     new personal insurance policies  in Alaska may consider                                                                    
     a consumer's  credit information to underwrite  or rate                                                                    
     a policy.  An insurer  may consider the  information at                                                                    
     renewal  only if  the  consumer affirmatively  requests                                                                    
     the  continued use.  Under  current statute,  "personal                                                                    
     insurance    policies"     include    property/casualty                                                                    
     insurance   policies  purchased   by  individuals   for                                                                    
     personal  use, such  as homeowner's  coverage or  motor                                                                    
     vehicle coverage.  This does not include  life, health,                                                                    
     disability or commercial property & casualty.                                                                              
                                                                                                                                
     The  authorization for  the use  of credit  information                                                                    
     has  been interpreted  by the  Supreme Court  of Alaska                                                                    
     (Alaska Division of Insurance  v. Progressive, 2007) to                                                                    
     require insurers  to "strip-out"  the impact  of credit                                                                    
     information  on premium  when the  policy renews.  They                                                                    
     must also remove credit information  for a policy after                                                                    
     two years; the duration  of underwriting. Alaska is the                                                                    
     only  state  in  the nation  with  these  renewal-based                                                                    
     restrictions,  which  leaves  many Alaskans  with  non-                                                                    
     competitive policies.                                                                                                      
                                                                                                                                
     A survey  of Alaska  personal insurance  policy writers                                                                    
     in 2009-2010  showed that the credit  score restriction                                                                    
     has  increased premium  rates for  many Alaskans  by as                                                                    
     much as  42 percent. In some  cases, credit information                                                                    
     has  been  shown by  numerous  studies  as an  accurate                                                                    
     predictor  of  risk.   Risk  assessment  tools  provide                                                                    
     insurers the  ability to  offer consumers  lower rates.                                                                    
     Removing credit  information has meant  higher personal                                                                    
     insurance rates for many Alaskans.                                                                                         
                                                                                                                                
MR.  RICCI explained  that  the bill  amends  current statute  to                                                               
allow insurers  to use credit  scores when renewing  an insurance                                                               
policy. Under current  law, an insurer may  consider a consumer's                                                               
credit information when  writing a new insurance  policy, but not                                                               
at renewal.  Section 2  deletes language  from the  definition of                                                               
"adverse  action" and  requires insurers  to notify  consumers if                                                               
they are  negatively impacted by  the use of their  credit score.                                                               
He noted that the bill has a zero fiscal note.                                                                                  
                                                                                                                                
1:53:30 PM                                                                                                                    
SENATOR OLSON asked why an  insurer would use a consumer's credit                                                               
score to determine insurance rates.                                                                                             
                                                                                                                                
MR. RICCI explained that credit is  just one factor in the matrix                                                               
that  insurance companies  use to  assess risk,  and a  number of                                                               
studies  have  shown  that  it   is  a  good  predictor  of  loss                                                               
potential.                                                                                                                      
                                                                                                                                
SENATOR  OLSON  asked if  other,  more  reliable predictors  were                                                               
available.                                                                                                                      
                                                                                                                                
MR.  RICCI clarified  that the  credit  score is  just one  tool;                                                               
experience, history,  age, and other factors  are also considered                                                               
to determine an insurance score.                                                                                                
                                                                                                                                
SENATOR  OLSON  asked him  to  elaborate  on the  prohibition  in                                                               
Section 1 against using an insurance score.                                                                                     
                                                                                                                                
MR. RICCI  clarified that  based on a  2007 Alaska  Supreme Court                                                               
decision insurers are  only prohibited from using  a credit score                                                               
when renewing a policy.                                                                                                         
                                                                                                                                
SENATOR  OLSON asked  what  happens if  somebody  doesn't have  a                                                               
credit score.                                                                                                                   
                                                                                                                                
MR. RICCI deferred the question to Mr. Brine.                                                                                   
                                                                                                                                
1:56:27 PM                                                                                                                    
KENTON  BRINE, Assistant  Vice President  and Northwest  Regional                                                               
Manager,  Property  Casualty  Insurers  Association  of  America,                                                               
Olympia,  WA,  said PCI  is  a  national trade  association  that                                                               
represents about 38  percent of home and  auto insurance policies                                                               
sold and maintained nationwide. The  association has a variety of                                                               
carriers with wide experience using credit information.                                                                         
                                                                                                                                
He explained that  Alaska has had a unique statute  for more than                                                               
10 years.  Like many  other states,  the statue  allows insurance                                                               
companies to look at credit  history when writing a new insurance                                                               
policy, but  unlike any other  state, it  prohibits consideration                                                               
of that  credit information when  the policy renews. The  law can                                                               
be interpreted in more than one  way. Insurers recall that it was                                                               
the legislature's intent to allow the  use of credit both for new                                                               
business and at  renewal. However, the division  of insurance and                                                               
some legislator's  interpretation was  that after two  years that                                                               
information should be removed because  the insurer would know the                                                               
policyholder and  be able  to use other  rating criteria  to take                                                               
the place of credit.                                                                                                            
                                                                                                                                
Insurers challenged the  law in 2006 and a  district court agreed                                                               
with the insurance industry. On  appeal, the Alaska Supreme Court                                                               
ultimately overturned the decision.                                                                                             
                                                                                                                                
MR. BRINE said  the effect of the statute for  many consumers has                                                               
been  insurance rate  increases for  personal line  policies, not                                                               
commercial, health, life or disability insurance.                                                                               
                                                                                                                                
CO-CHAIR  DUNLEAVY  asked  if rates  have  increased  because  of                                                               
averaging.                                                                                                                      
                                                                                                                                
MR.  BRINE replied  it has  to do  with how  insurers use  credit                                                               
information,  and it's  generally  used to  provide discounts  to                                                               
people considered the best risks.  A number of studies looking at                                                               
the use  of credit information  in insurance scores  all conclude                                                               
that there  is a strong  correlation between a  person's personal                                                               
financial  history and  their risk  of  filing insurance  claims.                                                               
Insurers look at  credit scores in order to  price their products                                                               
as accurately  as possible and  match them with  people according                                                               
to the risk  they represent. In most cases,  consumers' credit is                                                               
good enough that  either their credit score will  not affect them                                                               
or  they will  pay less  for insurance  because they  represent a                                                               
better risk.                                                                                                                    
                                                                                                                                
2:01:16 PM                                                                                                                    
SENATOR STEDMAN joined the committee.                                                                                           
                                                                                                                                
MR. BRINE said that since most  consumers benefit from the use of                                                               
credit  scores,  removing the  good  credit  discount results  in                                                               
higher insurance rates for those  people. The people that benefit                                                               
are those  that represent  a higher risk;  they pay  less because                                                               
the people that  represent a lower risk subsidize  them. One side                                                               
result when  somebody finds out  their rate  is going up  is that                                                               
they look for insurance with  another company. That creates churn                                                               
and disruption in the marketplace.                                                                                              
                                                                                                                                
MR. BRINE  related that when  PCI conducted a survey  of carriers                                                               
writing policies in Alaska it  found that, of those reporting, 40                                                               
percent of  personal auto  policies and  30 percent  of homeowner                                                               
insurance policies saw  rate increases of between  11 percent and                                                               
20  percent  as  a  direct  result  of  losing  the  good  credit                                                               
discount.  The most  significant increases  applied to  about one                                                               
quarter of auto  insurance policyholders and about  40 percent of                                                               
homeowner  policyholders  for  no  other  reason  than  that  the                                                               
statute  requires  the  removal  of credit  information  and  the                                                               
rerating of the consumer at renewal.                                                                                            
                                                                                                                                
2:04:30 PM                                                                                                                    
He opined that the Alaska  experience demonstrates the difference                                                               
between myths and realities of  credit scoring. The myths include                                                               
the  notion that  credit  has nothing  to do  with  how a  person                                                               
drives of  whether their house  is going to catch  fire. However,                                                               
many  studies show  that there  is a  direct correlation  between                                                               
risk and established patterns of living.                                                                                        
                                                                                                                                
SENATOR MICCICHE asked if the court  decision was the result of a                                                               
constitutional or statute issue.                                                                                                
                                                                                                                                
MR.  BRINE said  the court  based its  decision on  the statutory                                                               
language.  The specific  reference to  two  years is  not in  the                                                               
statute  and  was  not  addressed  by the  court.  It  was  in  a                                                               
regulation  or  bulletin from  the  insurance  division that  the                                                               
industry has abided.                                                                                                            
                                                                                                                                
MR.  BRINE  recapped  that  the  use  of  credit  information  by                                                               
insurers  saves  money for  most  Alaska  consumers and  prevents                                                               
cross  subsidization,   which  insurers  believe  is   unfair  to                                                               
consumers. A PCI survey has  demonstrated that the Alaska statute                                                               
costs  Alaskan  consumers  money. The  statute  also  discourages                                                               
insurers from entering the Alaska market.                                                                                       
                                                                                                                                
He said  that SB 55  does not  change existing safeguards  in the                                                               
statute. It  allows insurers to consider  credit information when                                                               
renewing  a policy  and it  clarifies the  adverse action  notice                                                               
provisions of the statute. Insurers  would be required to send an                                                               
adverse action  notice when the  current rate  is not as  good as                                                               
the rate the consumer would have  received if the insurer did not                                                               
look at credit.                                                                                                                 
                                                                                                                                
2:10:16 PM                                                                                                                    
ELIZABETH  MOCERI, Director,  State and  Legislative Affairs  for                                                               
Alaska, Allstate Insurance Company, introduced herself.                                                                         
                                                                                                                                
GARY  STRANNIGAN,  Liberty  Mutual Group  and  Safeco  Insurance,                                                               
Seattle, WA, introduced himself.                                                                                                
                                                                                                                                
SENATOR OLSON asked how an  individual is treated if their credit                                                               
rating drops through no fault of their own.                                                                                     
                                                                                                                                
MR.  BRINE pointed  out  that  an insurance  score  is usually  a                                                               
combination of  credit and other  factors, and someone  having an                                                               
anomaly  probably doesn't  mean  that they'll  immediately pay  a                                                               
higher insurance  rate. However, they  might pay more  if they're                                                               
in a group of people who suffered similar anomalies.                                                                            
                                                                                                                                
SENATOR  OLSON  asked  how insurers  compensate  when  the  stock                                                               
market plunges and credit scores go down for a group of people.                                                                 
                                                                                                                                
2:13:06 PM                                                                                                                    
MS. MOCERI  explained that insurers  use credit factors to  put a                                                               
consumer  into  a  tier based  on  that  underlying  credit-based                                                               
information,  but  the  insurer  does not  rerun  the  consumer's                                                               
credit  again on  renewal.  The bill  wouldn't  change that,  but                                                               
would allow  the insurer to  keep the discount that  the consumer                                                               
already  has.  She said  that  60  percent of  Allstate's  Alaska                                                               
customers have  been affected by  this, which has  been expensive                                                               
and  disruptive to  the marketplace.  She  concluded that  Alaska                                                               
isn't  an attractive  place for  insurers because  of the  unique                                                               
interpretation on running credit on renewal of a policy                                                                         
                                                                                                                                
2:15:31 PM                                                                                                                    
SENATOR MICCICHE asked where in the  bill it says credit won't be                                                               
rerun on renewal.                                                                                                               
                                                                                                                                
MS. MOCERI replied the bill  doesn't mention anything that allows                                                               
an insurer to rerun credit.                                                                                                     
                                                                                                                                
SENATOR  MICCICHE  asked  if  it   discourages  an  insurer  from                                                               
rerunning a credit report.                                                                                                      
                                                                                                                                
MS.  MOCERI  reiterated  that  insurers  can't  rerun  credit  on                                                               
renewal and are  required to strip-out the  credit information on                                                               
renewal. SB  55 allows  insurers to keep  their customers  in the                                                               
same tiers when the policy is renewed.                                                                                          
                                                                                                                                
2:17:12 PM                                                                                                                    
SENATOR MICCICHE asked  if this would make  it significantly more                                                               
expensive for a young, struggling family to get insurance.                                                                      
                                                                                                                                
2:17:45 PM                                                                                                                    
MR. STRANNIGAN said that since  2008 people have been paying down                                                               
their  debts and  credit scores  have gradually  improved, on  an                                                               
average  basis, nationwide.  He reiterated  that studies  support                                                               
that  credit is  an accurate  predictor of  risk and  that people                                                               
establish patterns  of responsibility.  They don't  partition the                                                               
responsible parts of their lives.                                                                                               
                                                                                                                                
He  highlighted  that  in  Alaska 72  percent  of  Safeco's  auto                                                               
insurance customers  and 76 percent of  their homeowner insurance                                                               
customers  receive  either  positive or  neutral  treatment  from                                                               
credit  being  included, but  80-85  percent  receive an  adverse                                                               
action  notice. He  emphasized  that Alaska  is  a small,  remote                                                               
market that  has a unique  statute that  makes it very  costly to                                                               
write insurance.  He opined  that SB  55 would go  a long  way to                                                               
drop barriers  and enhance competition  to the benefit  of Alaska                                                               
insurance consumers.                                                                                                            
                                                                                                                                
2:23:22 PM                                                                                                                    
SENATOR MICCICHE asked  if the bill would  create a comparatively                                                               
more expensive  market for  people who are  doing their  best but                                                               
might not have the best credit score.                                                                                           
                                                                                                                                
MR.  BRINE opined  that making  it easier  for carriers  to write                                                               
insurance would  be the  single best help  for families  that are                                                               
having a difficult time. He also  pointed out that the statute is                                                               
merely allowing  something to continue  that is already  in place                                                               
for  new   policies.  Insurance  companies  have   to  deal  with                                                               
probability  and statistics  and they  are looking  for the  best                                                               
tools  possible  to  tie  rates   to  anticipated  behavior.  The                                                               
information available  suggests that credit information  is among                                                               
the strongest predictors available for risk of loss.                                                                            
                                                                                                                                
SENATOR  MICCICHE  recapped that  the  answer  is yes;  insurance                                                               
companies are currently averaging and  the law of basic economics                                                               
says that  more expense  will shift to  lower income  people with                                                               
lower credit scores.                                                                                                            
                                                                                                                                
MR.  BRINE clarified  that there  is no  correlation between  low                                                               
incomes and lower credit scores.                                                                                                
                                                                                                                                
SENATOR MICCICHE cautioned  that insurance costs could  go up for                                                               
people  who  are  having   difficulty  maintaining  their  credit                                                               
scores.                                                                                                                         
                                                                                                                                
2:27:29 PM                                                                                                                    
SENATOR OLSON  asked what adjustment  is made for people  who try                                                               
to get  insurance but  don't have a  credit history  because they                                                               
pay cash for everything.                                                                                                        
                                                                                                                                
MS. MOCERI explained that the  system describes those people as a                                                               
"no  hit"  and they  get  a  neutral  score.  She added  that  an                                                               
insurance  score is  based on  how the  person manages  what they                                                               
have  rather than  how much  they  have. Customers  are given  an                                                               
insurance  score and  placed in  a tier.  On renewal,  60 percent                                                               
lose their credit discount and  they end up subsidizing customers                                                               
with greater risk.  When good risk customers get  a rate increase                                                               
they tend to change companies,  whereas the higher risk customers                                                               
stay because  they get  a rate  decrease. This  inaccurate rating                                                               
affects the  entire book of  business and gives a  higher expense                                                               
ratio, which in turn raises everybody's rates.                                                                                  
                                                                                                                                
SENATOR MICCICHE  expressed concern about the  uninsured motorist                                                               
problem  in  Alaska  and  cautioned  against  doing  anything  to                                                               
encourage  that number  to increase.  He suggested  there may  be                                                               
need  for  something like  a  SR-22  program or  stripped  barren                                                               
insurance policy for  those who can no longer make  it because of                                                               
a combination of their credit and insurance scores.                                                                             
                                                                                                                                
MS.  MOCERI explained  that Alaska  has an  assigned market  risk                                                               
pool for  people who do not  qualify for auto insurance  and it's                                                               
subsidized  by the  insurance industry.  She emphasized  that the                                                               
first factor in  reducing the numbers of uninsured  drivers is to                                                               
make insurance affordable and available.  The industry feels that                                                               
Alaska would be a more attractive  marketplace if it did not have                                                               
a  court decision  that was  out  of line  with the  rest of  the                                                               
country and if it did modernize its regulatory system.                                                                          
                                                                                                                                
2:33:30 PM                                                                                                                    
CINDA SMITH, Senior Counsel, GEICO,  said GIECO supports SB 55 to                                                               
allow credit to be used at  renewal. She noted that the committee                                                               
previously  heard that  the current  requirements result  in some                                                               
policies receiving a higher rate  and some undeservedly receiving                                                               
a  lower rate  and GEICO  feels that  is so  fundamentally unfair                                                               
that it  does not use  credit even  though it would  benefit most                                                               
consumers. Additionally,  requiring the  waiver to be  in writing                                                               
is burdensome.                                                                                                                  
                                                                                                                                
2:35:05 PM                                                                                                                    
ALEX HAGELI,  Property Casualty Insurers Association  of America,                                                               
Olympia, WA,  emphasized that  the use  of credit  information at                                                               
renewal  is not  prohibited under  Alaska law,  but policyholders                                                               
have to  ask for it  to be used at  renewal. He also  pointed out                                                               
that a  number of insurance  companies disregard a  lower rescore                                                               
when a policy renews because they want to keep the customer.                                                                    
                                                                                                                                
2:37:07 PM                                                                                                                    
CHAIR DUNLEAVY announced  that he would hold SB  55 in committee.                                                               
He explained  that he introduced  the bill to explore  whether it                                                               
was good public policy for  some insurance consumers to subsidize                                                               
others.                                                                                                                         
                                                                                                                                
2:38:28 PM                                                                                                                    
MR STRANNIGAN said that in  light of Senator Micciche's questions                                                               
he thought it would be useful  to know about a 2007 initiative in                                                               
the state  of Oregon that  would have banned insurers  from using                                                               
credit  for  homeowner  and  auto policies.  At  the  outset,  75                                                               
percent of voters  wanted to approve the ban,  but the initiative                                                               
failed when voters learned that  people with good credit would be                                                               
subsidizing those with bad credit.