Legislature(2015 - 2016)BELTZ 105 (TSBldg)
02/25/2016 01:30 PM Senate LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| SB72 | |
| SB141 | |
| SB127 | |
| SB149 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 127 | TELECONFERENCED | |
| *+ | SB 149 | TELECONFERENCED | |
| *+ | SB 152 | TELECONFERENCED | |
| *+ | SB 118 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 72 | TELECONFERENCED | |
| += | SB 141 | TELECONFERENCED | |
SB 127-INSURER'S USE OF CREDIT HISTORY/SCORES
1:55:25 PM
CHAIR COSTELLO reconvened the meeting and announced the
consideration of SB 127. She noted this is the first hearing.
1:56:00 PM
SENATOR CHARLIE HUGGINS, Alaska State Legislature sponsor of SB
127, said the bill relates to renewing insurance for an auto or
home mortgage. He explained that Alaska is the only state that
allows credit scoring to be used when the initial insurance
policy is written, but not upon renewal. SB 127 very simply
allows credit scoring to be used on renewal, which is more
convenient for the policyholder.
1:57:50 PM
LAUREN RASMUSSEN, Staff, Senator Charlie Huggins, provided an
overview of SB 127 on behalf of the sponsor, speaking to the
following sponsor statement.
When Alaskans apply for personal auto and homeowners
insurance, there are several variables of which
companies take into consideration to assess risk.
Factors such as motor vehicle record, good student
discount, marital status, age, and credit history are
allowable by statue; however, when an Alaskan consumer
considers renewing a policy with the same company, the
business is not allowed to use credit history. Under
current law, insurers must strip out credit
information after two years and may only include it
with request from the policy holder.
By not being able to include credit when it benefits
consumers, increases in renewal rates can often be
significant, causing unnecessary market disruption and
consumer complaints. This occurrence leads consumers
to seek new insurance companies which means they may
not secure the benefits of being a long-term policy
holder. Senate Bill 127 would allow for insurance
companies to include credit history at the time of
policy renewal.
The passage of Senate Bill 127 would also require
insurers to make exceptions to a consumer's rate when
the consumer's credit is unfavorably impacted by
extraordinary life circumstances. This applies to the
time of policy inception and policy renewal. An
extraordinary life circumstance clause is a safeguard
for consumers. Unforeseen circumstances include
incidents such as death of an immediate family member,
military deployment, suffering a catastrophic event,
and divorce.
2:01:13 PM
LORI WING-HEIER, Director, Division of Insurance, Department of
Commerce, Community and Economic Development (DCCED), Anchorage,
Alaska, described credit scoring as an emotional topic and said
this bill is written to be neutral and that is the
administration's position on it.
She confirmed that Alaska is the only state that removes the use
of credit scoring to effect a discount or lower insurance rate
upon renewal. A policyholder can, however, receive a discount by
applying for one through their insurance agent or company
representative. Because some people may suffer from the use of
credit scoring, the bill is written so that it cannot impact
someone who might have a lesser credit score than as if credit
scoring were not used at all. She noted that provision was added
when the bill was redrafted last year.
MS. WING-HEIER reported that the division receives complaints
from consumers whose renewed homeowner or auto policy had
increased as much as 70 percent. Their option is to find a new
agent or broker. The consumer got into this situation because
they either didn't understand that for renewals credit scoring
is not automatically allowed in the underwriting practice or
they didn't agree with the use of credit scoring and didn't
complete the form.
She clarified that credit scoring is not based on income, but
how the consumer uses credit and how timely they pay their
bills. She said there is a statistical correlation between a
credit score and the number of claims a person is likely to
have, and that provides an underwriting guideline.
SENATOR GIESSEL asked if a consumer could pay the higher premium
one year and sign the form to use credit scoring for the next
renewal.
MS. WING-HEIER said the consumer would probably be better off
looking for a new insurance company to get started back on using
a credit score in their portfolio.
2:06:01 PM
CHAIR COSTELLO opened public testimony.
2:06:10 PM
KRISTIE BABCOCK, State Farm Agent, Kenai, Alaska, testified in
support of SB 127. She described the impact of the current law
on her customers and why SB 127 offers a solution. Current law
allows the agent to use certain credit components in the
original rate, but after two years those characteristics are
stripped out. The result is a significant increase in the
premium unless the agent is able to get the policyholder's
written permission to use their credit. If the customer doesn't
sign the form in time for the annual renewal, existing law
prohibits the use of credit for subsequent renewals on that
policy. She shared the experiences of several customers that are
all paying more than they should.
SB 127 will alleviate the dramatic swing in rates; eliminate the
frustration and cumbersome process of getting a manual waiver
signed at each renewal; and allow consumers to shop with
confidence, knowing that there is stability in the rating
factors.
2:11:40 PM
SENATOR STEVENS asked how someone is affected if their credit
rate fluctuates.
MS. BABCOCK explained that the policy will be written based on
the consumer's credit at the time. If their credit has improved
when the policy is due for renewal they may see a better
premium. If their credit doesn't improve or worsens, they may
want to do more shopping.
2:12:52 PM
GARY STRANNIGAN, Safeco and Liberty Mutual Insurance, testified
in support of SB 127. He shared Safeco's experience conforming
to the current statute. He related that the cost to program
software to comply with the current statute was $1.25 million.
That becomes a barrier to entry in the broader marketplace given
the size of the market.
2:14:32 PM
MARK CHOATE, representing himself, Juneau, Alaska, testified on
SB 127. He questioned why credit scoring should be used for
something that is mandatory. He further questioned why, after
two years of proven use, the policyholder's credit score has
anything to do with the risk the insurance company is taking in
terms of their driving or maintaining their home.
He claimed that the insurance companies are creating a false
paradigm to create the situation. They factor in credit scores
on buying the policies and then pull that out of the algorithm
for renewal, but they don't consider anything else. What they
should do is reweight other factors, he said.
He suggested the Division of Insurance should look at the
algorithm because there's no reason that two years of driving
history shouldn't be the basis for calculating the premium.
2:18:24 PM
DANIEL LYNCH, representing himself, Kenai, Alaska, testified in
support of SB 127. He is completely opposed to using credit
scores to determine insurance rates at any time. He shared his
personal story of having no credit score. Through choice he has
had no credit cards or loans for 40 years. He maintains his old
vehicle and is a good driver, yet his auto rates go up every
renewal. He urged the committee to go old school and base
insurance rates on driving history, vehicle value, and distance
driven, not a credit rating.
2:21:25 PM
TIM MAUDSLEY, President, Alaska USA Insurance Brokers,
Anchorage, Alaska, testified in support of SB 127. He said the
change embodied in SB 127 will provide consumers with a fair and
accurate rate on insurance renewals and eliminate the confusion
due to policy cancellations and the burden of changing carriers
to maintain insurance and rate discounts. He opined that this
legislation will likely open the door for more insurance
carriers to come to Alaska. This means lower premiums for
consumers.
2:23:20 PM
ARMAND FELICIANO, Property Casualty Insurers Association of
America, California, testified in support of SB 127. This
legislation will allow consumers to receive the full benefit of
credit scoring. He suggested the committee look at what has
happened in Arkansas since it started allowing credit scoring.
Over 40 percent of policyholders have seen their premiums
decrease. The number of policyholders that have seen their
premiums increase has held steady at about 14 percent. A good
number of policyholders have been unaffected since 2011.
2:24:54 PM
CINDA SMITH, Geico, Maryland, echoed previous testimony and
stated support for SB 127.
2:25:44 PM
JEFFERY KINSEY, State Farm Insurance, Bloomington, Illinois,
testified in support of SB 127. He said State Farm insures 1 in
4 autos in Alaska and 1 in 3 homes. He leads a team of
predictive modelers that develop insurance risk scores using
credit-related information. Their analysis and other studies
show that certain credit-related variables are highly predictive
of future insurance losses. Using this information benefits
consumers but neither adds to nor reduces an insurer's profit.
Because it is such a proven effective tool, credit information
is allowed in 47 states including Alaska.
He clarified that the credit information that insurance
companies use is not a FICO score. Those were developed to
estimate a person's ability to repay debt. An insurance risk
score uses credit related variables that have been shown to be
predictive of future insurance losses. He further clarified that
current Alaska law requires all insurance companies to consider
the absence of credit history as rate neutral.
MR. KINSEY said many low-income policyholders benefit from the
use of credit-related information initially, but based on
current Alaska law they are not allowed to continue to enjoy
those benefits after two years with a company. Approximately 60
percent of State Farm personal auto and homeowners policyholders
entering their third year of coverage would receive a rate
increase if their credit information is stripped out at renewal.
State Farm supports SB 127 because it will lead to a healthier
insurance market and increase the affordability of insurance for
Alaskans, he said.
2:29:12 PM
CHAIR COSTELLO asked if he heard Mr. Lynch's testimony.
MR. KINSEY said yes.
CHAIR COSTELLO asked if current law allows the absence of credit
history to be considered rate neutral.
MR. KINSEY said that's correct; existing law requires insurers
to treat the lack of credit history as rate neutral.
CHAIR COSTELLO asked for clarification that a person's credit is
considered when the initial policy is written, but upon renewal
it's absent from the analysis.
MR. KINSEY confirmed that without the waiver, insurance
companies are required to strip out any credit variables that
were used as new business. He recalled that requirement was the
result of a court case.
SENATOR STEVENS asked for help understanding risk and credit
score in the context of insurance.
MR. KINSEY explained that a credit score is oftentimes geared
toward banking and whether or not an individual will repay debt,
whereas an insurance risk score is geared toward insurance and
the likelihood an individual will file a future claim.
CHAIR COSTELLO asked him to put that into an email and send it
to her office.
MR. KINSEY agreed.
SENATOR STEVENS asked if he's saying that a poor credit rating
is predictive of a future insurance claim.
MR. KINSEY said the credit score itself isn't predictive of
future losses, but individual elements from a credit report are
predictive of future losses.
SENATOR STEVENS asked what elements are predictive of future
losses.
MR. KINSEY said they vary by company but generally fall into
four broad categories: performance on credit obligations, credit
seeking behavior, consumer's use of credit such as outstanding
balance to available credit, and length of the credit history.
2:34:47 PM
At ease
2:35:22 PM
CHAIR COSTELLO reconvened the meeting and asked Ms. Wing-Heier
if she had any comment on the testimony today.
MS. WING-HEIER said the comments have all been valid including
those from Mr. Lynch.
SENATOR MEYER asked if it matters to the division that the bill
has no effective date. He would prefer it became effective
immediately.
MS. WING-HEIER said it makes no difference to the division.
SENATOR MEYER asked about the process for an insurance company
to consider a consumer's extraordinary life circumstances.
MS. WING-HEIER said the onus would be on the consumer to explain
to the insurer why their credit score was impacted.
2:38:25 PM
SENATOR MEYER asked if this covers more than auto and home
insurance policies. He mentioned his wife's lost diamond ring.
MS. WING-HEIER replied this is for all personal lines, not
commercial. It would be auto, home, and could extend to
watercraft, equipment, artwork, the loss described, and
umbrellas.
SENATOR MEYER asked about discrimination. He noted that his
insurance increased when his daughter started driving.
MS. WING-HEIER said insurers are not allowed to discriminate and
their research has found it has not been a factor in credit
scoring.
2:40:36 PM
CHAIR COSTELLO closed public testimony and held SB 127 in
committee.