Legislature(2001 - 2002)

03/26/2002 01:35 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
            SB 320-MOTOR VEHICLE INSURANCE & REPAIRS                                                                        
                                                                                                                              
CHAIRMAN STEVENS announced SB 320 to be up for consideration.                                                                   
                                                                                                                                
MS. ANNETTE  DEAL, staff  to Senator Cowdery,  sponsor of  SB 320,                                                              
said this legislation has everything  to do with how auto and home                                                              
premium rates are determined for insurance purposes.                                                                            
                                                                                                                                
     The idea of  the industry is to remove  driver behavior,                                                                   
     or  base very  little  percentage  on it,  meaning  your                                                                   
     tickets  and   your  accidents,  and  replace   it  with                                                                   
     economic considerations meaning  your credit score. This                                                                   
     credit score  is a glimpse in  time, but it is  a seven-                                                                   
     year glimpse  in time, because  your credit  score takes                                                                   
     into account bankruptcies, judgments,  late payments and                                                                   
     all of those factors remain  on your credit for a seven-                                                                   
     year period,  possibly even 10  years where in  the past                                                                   
     driving  records  have used….  In this  scenario  people                                                                   
     with  bad credit who  are good  drivers are  subsidizing                                                                   
     people with good credit who are risky drivers.                                                                             
                                                                                                                                
She  told the  story  of a  Fairbanks  woman who  is  a victim  of                                                              
identity  theft  whose  premiums   have  skyrocketed  and  there's                                                              
basically  nothing she can  do about  it. People  who are  hurt by                                                              
this are  people with a  few glitches on  their credit who  have a                                                              
good  driving  record.  The insurance  industry  will  argue  that                                                              
driving records  are inaccurate,  but the DMV  says they  are very                                                              
accurate  and they  have  never heard  that  they are  inaccurate.                                                              
Credit reports  on the other  hand can be  anywhere from 10  - 60%                                                              
inaccurate. Fixing a credit report can take forever.                                                                            
                                                                                                                                
MS. DEAL  said that insurance companies  tell you that there  is a                                                              
correlation  between  good credit  and  fewer accidents,  but  she                                                              
could  probably prove  to them  through  some sort  of study  that                                                              
people who eat  pickles are in more accidents. They  also say they                                                              
are able  to write more aggressively  in urban markets  and that's                                                              
great except if you consider that about 50% of Alaska is rural.                                                                 
                                                                                                                                
MR.  MARK NIEHAUS,  General Manager,  Progressive Insurance,  said                                                              
they  are the  fourth  largest writer  of  auto  insurance in  the                                                              
country and  have used credit  as an  element of their  rating for                                                              
over 10 years. Currently,  they use credit in 45  of the 48 states                                                              
in which  they write  business. "Credit is  allowable and  we have                                                              
been using it actively in those states."                                                                                        
                                                                                                                                
He said they  have about $45 billion of earned  premium data using                                                              
credit. They have used credit in  Alaska successfully for the last                                                              
six years.  They had an extensive  filing and review  process with                                                              
the  Alaska Division  of  Insurance  where they  closely  examined                                                              
their proposal  and approved it because  they deemed credit  to be                                                              
correlated with  risk of loss, which,  it is. About two  thirds of                                                              
their customers get a lower rate  because of credit and they would                                                              
get  rate increases  if  they couldn't  use  credit.  Some of  the                                                              
increases would  be very  significant like about  30 -  40%. There                                                              
had been  voluminous studies  on credit as  a predictor  of future                                                              
loss and  the Alaska Division of  Insurance has looked at  this as                                                              
well.                                                                                                                           
                                                                                                                                
The  beauty  of  credit  as  a rating  factor  is  that  it's  not                                                              
correlated with  other factors and that's why  insurance companies                                                              
want to  use it.  It's not  correlated with  age, sex, or  marital                                                              
status. "So,  it's powerful and  it's an independent  predictor of                                                              
future losses."                                                                                                                 
                                                                                                                                
Many  independents  reviews  have   been  done  of  this  practice                                                              
including  the  NAIC  and  they  have  concluded  that  credit  is                                                              
predictive of loss.  They could not afford to give  lower rates if                                                              
it weren't justified. "We would go out of business."                                                                            
                                                                                                                                
They use  of credit  for prescreening  is specifically  allowed by                                                              
the  Fair Credit  Reporting Act,  which  has a  lot of  disclosing                                                              
requirements  and  prohibitions on  using  things  like age,  sex,                                                              
religion,  race  and  significant   penalties  for  noncompliance.                                                              
"There is already a lot of protection  out there today in terms of                                                              
the FCRA around use of credit."                                                                                                 
                                                                                                                                
Briefly, he  said the  process is objective  and is an  electronic                                                              
check taking  about  30 seconds.  They pull raw  data from  credit                                                              
vendors and calculate a score using  their algorithm. There are no                                                              
privacy issues,  because the credit  data is not displayed  in the                                                              
office of the independent agent who  is doing the quote. They give                                                              
disclosure to the  customer and ask permission as  required by the                                                              
FCRA before  they even  order their  credit report.  In the  event                                                              
that the rate  comes out higher than the best  rate, customers are                                                              
given an 800  number and get a  free copy of their  credit report.                                                              
If there  are any errors,  they are able  to correct them  and the                                                              
policy will  be reissued at the  revised rate. He added  that they                                                              
get very few of those.                                                                                                          
                                                                                                                                
Progressive  provides   reason  codes,  listing  three   things  a                                                              
customer can do to improve their  credit score. Things that are on                                                              
a  credit  score  include  bankruptcies,   judgments,  tax  leans,                                                              
information  on number  of loans,  credit  limits, late  payments,                                                              
number of  inquiries. Things  not in a  credit report  are income,                                                              
race, gender,  wealth, nationality,  etc. The  use of credit  does                                                              
allow folks  who otherwise wouldn't  qualify to qualify  for their                                                              
preferred rates.                                                                                                                
                                                                                                                                
MR. NIEHAUS said  they have a major problem with  this bill. It is                                                              
a very broad restriction and no other  state has a bill that is so                                                              
broad and would  completely disallow the use of  credit for either                                                              
rating or underwriting.                                                                                                         
                                                                                                                                
     It's going to create an unlevel  playing field, frankly,                                                                   
     and  disadvantage  independent  agents  and  independent                                                                   
     agency  companies  and the  reason  for that  is  direct                                                                   
     writers are specifically allowed to use credit.                                                                            
                                                                                                                                
He said there's  no question that good drivers would  be forced to                                                              
subsidize bad drivers.  Good drivers defined as  those people less                                                              
likely  to  have  a  claim  would under  this  bill  have  to  pay                                                              
significantly  more  insurance  because  of people  who  are  more                                                              
likely to have a claim because of lack of responsibility.                                                                       
                                                                                                                                
MR.  NIEHAUS  said this  is  a  powerful  tool that  would  stifle                                                              
competition.  His  company  is  more willing  to  do  business  in                                                              
Alaska,  because they  can  write more  business  and offer  lower                                                              
rates and that helps them grow.                                                                                                 
                                                                                                                                
2:10 p.m.                                                                                                                       
                                                                                                                                
The AARP  wrote a  letter saying  they support  the bill,  because                                                              
they believe  that retirees  are being  adversely affected  by the                                                              
use  of credit  scoring insurance.  He looked  at the  Progressive                                                              
credit scores by  age, because one of the things  they were saying                                                              
is that  older folks  have worse  credit and  are therefore  being                                                              
hurt by credit  scoring. He found exactly the opposite  to be true                                                              
and showed them  a graph illustrating that as you  get older, your                                                              
average  credit score  gets  better.  He did  not  think the  AARP                                                              
letter was based on any data.                                                                                                   
                                                                                                                                
He also  looked at people without  credit called no  hits. Overall                                                              
nationwide that number is 4.8% of  their business and he looked at                                                              
it for people  over 60 and the  number is 5.2% showing  that there                                                              
is no significant  difference in older versus  younger folks. "So,                                                              
my conclusion is that older folks  actually benefit today from the                                                              
use of credit."                                                                                                                 
                                                                                                                                
He  offered  to  share  data  on   low  income,  consumers,  urban                                                              
residents, etc. He summarized, "I  think this bill is damaging for                                                              
Alaska  consumers. It's  going to  cause higher  rates and  lessen                                                              
competition   and   it's  going   to   force  people   that   have                                                              
responsibility  in terms  of paying  their bills  and in terms  of                                                              
their driving  and record and behavior,  it's going to  force them                                                              
to pay  more to subsidize those  people that are  less responsible                                                              
that don't pay their bills and have more accidents."                                                                            
                                                                                                                                
SENATOR AUSTERMAN asked him to clarify  what states have laws that                                                              
don't allow them to use credit.                                                                                                 
                                                                                                                                
MR. NIEHAUS  replied there are  three states -  California, Hawaii                                                              
and  Georgia  that  don't  use  credit.  In  Hawaii,  there  is  a                                                              
statutory prohibition  on use  of credit  for rating, although  it                                                              
doesn't  deal with underwriting  and  there is  a lawsuit on  that                                                              
issue. California  has no  statutory prohibition  on it.  It's not                                                              
used  in auto  insurance. It's  used in  homeowners insurance  and                                                              
other  commercial  insurance.  It's  not used  in  auto  insurance                                                              
because of propositions one and three,  which allows the insurance                                                              
commissioner to  decide what rating  factors will be used  and the                                                              
commissioner  chose not  to allow  credit as a  rating factor.  He                                                              
wasn't sure about Georgia's position.                                                                                           
                                                                                                                                
SENATOR AUSTERMAN said he had a question  about the credibility of                                                              
credit reports,  because he was involved  in a situation  where he                                                              
spent eight months getting his credit  report straightened out. He                                                              
asked Mr. Niehaus to explain in a  little more detail how they get                                                              
the credit report.                                                                                                              
                                                                                                                                
MR.  NIEHAUS  said  they  gather  the raw  data  from  the  credit                                                              
providers. There  are three primary vendors of  credit information                                                              
and Progressive  uses a company called  Trans Union. They  get the                                                              
raw  data and  have  a mathematical  formula  that calculates  the                                                              
score.                                                                                                                          
                                                                                                                                
He  had some  data on  accuracy. In  2000 his  company ordered  11                                                              
million credit  reports and the  number of errors  and corrections                                                              
was quite  small,  21 changes  for that  year. In  2001, out  of 7                                                              
million credit reports ordered in  the first half of the year they                                                              
had 7 changes.  Another study they  had from Arthur  Anderson said                                                              
that 2% of 15,703  credit reports were disputed and  25% of 12,023                                                              
reports  reviewed  were  disputed   and  3%  of  reports  reviewed                                                              
resulted in  a reversal. There  was a total  of 36 changes  out of                                                              
15,703. He  thought the data was  getting better and  better every                                                              
day as people become more and more aware of a credit score.                                                                     
                                                                                                                                
SENATOR AUSTERMAN  said he knows  that their scoring  system takes                                                              
in risk  factor as  well as credit  and asked  him to explain  how                                                              
they weigh the risk versus credit.                                                                                              
                                                                                                                                
MR. NIEHAUS replied:                                                                                                            
                                                                                                                                
     We basically  have a matrix where we're looking  at risk                                                                   
     factors and  we have seven different categories  of risk                                                                   
     factors  meaning going  from  the person  with no  prior                                                                   
     insurance and  a lot of points  and a younger  driver to                                                                   
     the other  extreme of  an older  driver who's clean  and                                                                   
     prior  insurance,  etc. And  then  we also  have  credit                                                                   
     scores.  So, it's  an array  of rates. In  terms of  the                                                                   
     effect of  credit score, I  can't give you  a percentage                                                                   
     affect.  It  does qualify  as  I mentioned,  people  who                                                                   
     otherwise  would not  get good  rates. They  can get  an                                                                   
     attractive  rate. For  example, somebody  with no  prior                                                                   
     insurance  and a  couple of  points can  actually get  -                                                                   
     normally that person would be  considered a non standard                                                                   
     risk, but  assuming they have  good credit,  that person                                                                   
     could  qualify for  - we have  five tiers  - they  would                                                                   
     qualify  for the  preferred  tier, which  is the  second                                                                   
     best tier that we have. In terms  of premium difference,                                                                   
     you're looking at probably 40%.                                                                                            
                                                                                                                                
SENATOR  AUSTERMAN asked  if they  determined rates  by using  50%                                                              
risk and 50% credit.                                                                                                            
                                                                                                                                
MR. NIEHAUS said  he didn't think there was a  mathematical answer                                                              
to that.                                                                                                                        
                                                                                                                                
SENATOR TORGERSON asked  how long credit scoring had  been used in                                                              
the industry.                                                                                                                   
                                                                                                                                
MR. NIEHAUS answered  that it probably dates back  to the 70s. His                                                              
company has  been using it  for about 10  years and in  this state                                                              
for about six.                                                                                                                  
                                                                                                                                
CHAIRMAN  STEVENS asked  if his  algorithms were  approved by  the                                                              
Division of Insurance.                                                                                                          
                                                                                                                                
MR. NIEHAUS replied yes.                                                                                                        
                                                                                                                                
TAPE 02-15, SIDE B                                                                                                            
                                                                                                                                
CHAIRMAN  STEVENS  asked  if  the   variations  within  the  rates                                                              
approved by the Division of Insurance as well.                                                                                  
                                                                                                                                
MR. NIEHAUS replied yes.                                                                                                        
                                                                                                                                
MR. STEVE CLEARY, Alaska Public Interest  Research Group (AKPIRG),                                                              
supported SB 320 and agreed especially  with Ms. Deal's testimony.                                                              
He said  credit scoring  is bad for  consumers because  they don't                                                              
know how the score is figured and  factors that shouldn't make the                                                              
a  person's  credit score  bad  can  make it  bad  in a  way  that                                                              
shouldn't  happen, like  divorce, unemployment  and large  medical                                                              
bills. Figures from  their national office show that  up to 37% of                                                              
credit  reports are  wrong  and this  can  adversely affect  their                                                              
score.                                                                                                                          
                                                                                                                                
CHAIRMAN  STEVENS  asked  him  to send  that  information  to  the                                                              
committee.                                                                                                                      
                                                                                                                                
MR.  JAMES JENKS,  Legislative Counsel,  U.S.A.A.  in the  western                                                              
United States, said  they are an insurance and  financial services                                                              
company  serving military  families all  over the  world. He  said                                                              
they use credit reports, but very  sparingly. They use them for an                                                              
initial rating for a new policy,  but don't use them for review of                                                              
their cancellations. "After the first  year of experience with us,                                                              
our  rates  for  the  person going  forward  are  based  upon  our                                                              
experience with them."                                                                                                          
                                                                                                                                
They also recognize that other companies  use credit to underwrite                                                              
or  establish the  rate in  different  ways. The  factors used  in                                                              
establishing  rates and underwriting  goes to  the very  nature of                                                              
the competitive  market  place and Alaska  is becoming  increasing                                                              
competitive. So, if  someone does not like the rate  they get from                                                              
one company, they are free to shop around.                                                                                      
                                                                                                                                
MR. JENKS  concluded that  they oppose the  bill and feel  that an                                                              
insurer  should  be able  to  use  valid underwriting  and  rating                                                              
criteria if they can be demonstrated  to have a valid relationship                                                              
to the loss.                                                                                                                    
                                                                                                                                
MR. GLENN CLARY,  Anchorage resident, supported SB  320. There are                                                              
two other  areas that  they could amend  that would help  Alaskans                                                              
even  more. Insurance  companies  operating  in  Alaska sell  auto                                                              
policies because residents  are required by state law  to have it,                                                              
but the  insurance companies  have total  control. Only  after you                                                              
have signed  up and paid your premium  do they send you  a copy of                                                              
the  policy.  Without previous  disclosure  of  the terms  of  the                                                              
policy,  the customer  finds  they have  abdicated  constitutional                                                              
rights and  handed over to  the insurance companies  total control                                                              
of their medical pay out through  their use of independent medical                                                              
examinations (IME).                                                                                                             
                                                                                                                                
He said  what matters to  the insurance  company is that  they get                                                              
the  customer to  the arbitration  table.  He suggested  requiring                                                              
insurance companies to allow their  customers the option to choose                                                              
between  arbitration  and a  jury  trial and  requiring  insurance                                                              
companies to hire  local doctors to do IMEs, which  will establish                                                              
some  accountability  within a  local  community  and prevent  the                                                              
insurance company from hiring "prostitute" doctors.                                                                             
                                                                                                                                
MS.  SUZANNE  KELLY said  she  was  representing herself  and  her                                                              
family and that she is self-employed.  Her insurance rates went up                                                              
because of her credit. She has bought  a house, refinanced and had                                                              
babies;  she uses  her line  of credit  for her  business and  has                                                              
expanded  her business.  "Basically,  my credit  scores went  down                                                              
very low. So, that made my insurance rates go up very high."                                                                    
                                                                                                                                
She got different quotes and found  that if she used her husband's                                                              
social security number,  they would pay low rates.  She thought it                                                              
was very discriminatory  and summarized saying that  she supported                                                              
SB 320. She  said they don't know  how much a credit  score weighs                                                              
from company to company.                                                                                                        
                                                                                                                                
MS.  SARAH  MCNAIR-GROVE,  Property  Casualty  Actuary,  supported                                                              
their efforts  to provide  some kind of  regulation on the  use of                                                              
credit scoring by insurance companies in Alaska.                                                                                
                                                                                                                                
     How far  to go, including  whether it should  be totally                                                                   
     banned or  whether there should just be  some parameters                                                                   
     around  it, we  believe is a  policy call  that is  best                                                                   
     made by you,  but we support your efforts  in discussing                                                                   
     this issue.  The division is responsible to  review auto                                                                   
     insurance rates  and approve them  only if they  are not                                                                   
     excessive,    not    inadequate   and    not    unfairly                                                                   
     discriminatory.  Those  are   the  statutory  standards,                                                                   
     which we use to review a rate filing.                                                                                      
                                                                                                                                
     Credit   information  and  credit   scoring  was   first                                                                   
     approved  for use  in Alaska  approximately  four and  a                                                                   
     half years ago. Extensive documentation  and information                                                                   
     was required  from the insurance company to  support its                                                                   
     use and I  believe Progressive has already  testified to                                                                   
     that. Despite the fact that  it defies common sense, the                                                                   
     correlation  between credit  scores and loss  experience                                                                   
     is high.                                                                                                                   
                                                                                                                                
     Approximately  seven insurance  companies have  approved                                                                   
     auto filings  that include the use of credit  scoring in                                                                   
     Alaska. Since  December 2000, the division  has received                                                                   
     approximately 11 auto and four  homeowner's rate filings                                                                   
     requesting  to use credit information.  Six of  the auto                                                                   
     filings were  not approved as filed, either  because the                                                                   
     insurer totally  withdrew them or because  they withdrew                                                                   
     the  credit-scoring  piece of  the  filing.  Two of  the                                                                   
     filings  were approved. The  remaining auto filings  are                                                                   
     either still  under review or  disapproved. Of  the four                                                                   
     homeowners'  filings, three  of those  also removed  the                                                                   
     credit  scoring information.  The remaining  homeowners'                                                                   
     filing is still under review.  In addition to the rating                                                                   
     process,  an  insurer  can  use  credit  scoring  as  an                                                                   
     underwriting tool.                                                                                                         
                                                                                                                                
     Unlike  grading of  insurance applicants  based on  risk                                                                   
     factors, the  Division of Insurance does not  have prior                                                                   
     approval  authority  over  an insurer's  use  of  credit                                                                   
     information   in    the   underwriting    process.   The                                                                   
     underwriting process  is where the insurer  will look at                                                                   
     the applicant  and decide  whether or  not they want  to                                                                   
     provide coverage to the insured.                                                                                           
                                                                                                                                
     As  the  use  of  credit  scoring   has  increased,  the                                                                   
     division has received consumer  complaints regarding its                                                                   
     use. Most  of these calls  were from consumers  who just                                                                   
     wanted to know whether this  was something that insurers                                                                   
     were  legally entitled  to do  in  Alaska. They  claimed                                                                   
     that their  premiums doubled  or tripled because  of the                                                                   
     use  of credit information.  When we  explained to  them                                                                   
     that,  yes,  it  was  something  insurers  could  do  in                                                                   
     Alaska, that  didn't make them happy, but  they went off                                                                   
     and found  other insurers that  were willing  to provide                                                                   
     them coverage at lower rates.                                                                                              
                                                                                                                                
     In  particular,  one  consumer  who did  file  a  formal                                                                   
     complaint with the division  had a premium increase from                                                                   
     $1,500 to $4,300  and were told this was  based on their                                                                   
     credit   information.   They    checked   their   credit                                                                   
     information  with the credit  agency and it  appeared to                                                                   
     be good. They  went back to the insurer and  the insurer                                                                   
     told  them that  their credit  score  was poor,  because                                                                   
     they  had  too many  requests  for credit  ratings,  one                                                                   
     outstanding  bad  debt, which  the  insured  was in  the                                                                   
     process of disputing and too  much credit card activity.                                                                   
     The consumer  said that  they paid  all of their  credit                                                                   
     cards in  full each month and  they also went  and found                                                                   
     another insurer that would provide them coverage.                                                                          
                                                                                                                                
     We  recently  have  attended   National  Association  of                                                                   
     Insurance Commissioners meetings  and there were several                                                                   
     discussions  on the use of  credit information  at these                                                                   
     meetings. There  are some trickle down affects  and some                                                                   
     unintended   consequences   of   the   use   of   credit                                                                   
     information  in insurance  rates.  One producer  related                                                                   
     several  problems  dealing with  real  estate  purchases                                                                   
     where  the  insured  qualifies  to buy  a  half  million                                                                   
     dollar home, but the insurance  credit score wasn't good                                                                   
     enough for  them to  get coverage with  an A-rated  or a                                                                   
     financially  sound  company.  Their insurance  would  be                                                                   
     provided by  a B-rated company.  The lender  was unhappy                                                                   
     with  that  and they  were  unable  to close.  So,  then                                                                   
     you've  got the  consumer  unhappy, because  they  can't                                                                   
     close  on  the loan;  the  real estate  companies  can't                                                                   
     close the  deal and the lenders aren't  providing money.                                                                   
     So these are the unintended consequences of its use.                                                                       
                                                                                                                                
     Another  consumer  from  Michigan  said  that  they  had                                                                   
     followed their  insurance commissioner's advice  to shop                                                                   
     around  and  get additional  quotes  and find  the  best                                                                   
     deal. After they did this, they  called the commissioner                                                                   
     back and said, "I followed your  advice, but now I can't                                                                   
     get  any coverage  because I've been  told there's  been                                                                   
     too many hits on my credit information.  This has been a                                                                   
     question  that  we  have asked  insurers  when  we  have                                                                   
     looked at  these filings - do  you count these  kinds of                                                                   
     hits and  we have  been told  no. So, there's  anecdotal                                                                   
     evidence that  at least in  theory and practice  if this                                                                   
     consumer  is  correct  and  that's  the  reason  why  he                                                                   
     couldn't get  insurance, but there may be  some mismatch                                                                   
     between those items.                                                                                                       
                                                                                                                                
SENATOR TORGERSON asked how many  auto companies had they approved                                                              
use of credit information for.                                                                                                  
                                                                                                                                
MS. GROVE  replied that they  have currently approved  filings for                                                              
seven insurance companies to use  credit information in their rate                                                              
making  process. "There  are  other  insurers that  use  it as  an                                                              
underwriting tool, which we don't have prior approval for."                                                                     
                                                                                                                                
CHAIRMAN  STEVENS  asked if  they  had  approved  of seven  -  one                                                              
homeowners.                                                                                                                     
                                                                                                                                
MS. GROVE replied she thought it  was one homeowner's filing. They                                                              
have received four filings since  2000 and three of those withdrew                                                              
credit information and she is still looking at one.                                                                             
                                                                                                                                
CHAIRMAN  STEVENS  asked if  the  three voluntarily  withdrew  the                                                              
credit information.                                                                                                             
                                                                                                                                
MS. GROVE indicated that was correct.                                                                                           
                                                                                                                                
CHAIRMAN  STEVENS   thanked  everyone   for  their   comments  and                                                              
adjourned the meeting at 2:45 p.m.                                                                                              

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