Legislature(2001 - 2002)

04/18/2002 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 BEN STEVENS called the Senate Labor & Commerce Committee                                                             
meeting to order at 1:35 pm and announced SB 320 to be up for                                                                   
consideration.                                                                                                                  
                                                                                                                                
CHAIRMAN  TORGERSON   moved  to   adopt  the  proposed   committee                                                              
substitute,  LS1462\B. There  were  no objections  and  it was  so                                                              
ordered.                                                                                                                        
                                                                                                                                
MR. KURT OLSON, Staff to Senator  Torgerson, explained that the CS                                                              
differs  significantly from  the  previous version  of this  bill,                                                              
which was  one paragraph  long and  prohibited  the use of  credit                                                              
scoring for  personal insurance.  The CS  allows it under  certain                                                              
circumstances. Section  1 deals primarily with the  restriction on                                                              
the use  of credit  history and  credit scoring  and outlines  the                                                              
duties and the  responsibilities of the insurers who  are going to                                                              
be using it. Section 2 deals with  filings the insurance companies                                                              
have  to make  to the  Division of  Insurance.  Probably the  most                                                              
important part  of the section is  the fact that it  would require                                                              
the insurance companies to give the  scoring model to the Division                                                              
of  Insurance.  This is  what  actually  makes the  credit  rating                                                              
program work  and up until this  time, they haven't had  access to                                                              
the model.  This will allow the  Division to determine  whether or                                                              
not there's  anything  that might  have an adverse  impact  on the                                                              
consumers  in Alaska  that are buying  insurance.  Section 3  is a                                                              
sunset provision and takes effect  July 2006. The final section is                                                              
the effective date, January 1, 2003.                                                                                            
                                                                                                                                
MR.  DAVID  MCCARTER,   consumer  from  Fairbanks,   said  he  was                                                              
testifying  due  to  credit  scoring   and  because  there  is  no                                                              
recourse. He  said that  he thought his  insurance rates  would go                                                              
down  when  he hadn't  had  any  tickets  or accidents.  But  with                                                              
Atlanta Casualty,  his rate on  a 2001 Buick  Regal - for  him and                                                              
his  wife  -   for  a  2001  Ford  F250  pickup   was  $2,400  for                                                              
comprehensive, collision  and liability.  Now it's going to  go up                                                              
to $4,400  because of  his credit  score, which  according  to his                                                              
mortgage company  is 620,  650 and 680,  with a combined  score of                                                              
about 640. This  is bad economics, because it's going  to make him                                                              
not want to buy  any more vehicles. Furthermore the  new bill says                                                              
that the guy just  needs to get oral permission,  so he could lie.                                                              
There's no proof. "This bill has no teeth whatsoever…"                                                                          
                                                                                                                                
MR. MCCARTER  said they are not  protecting the consumer  and that                                                              
credit fraud is a number one crime in the U.S. right now.                                                                       
                                                                                                                                
SENATOR DAVIS  said he was acting  like they were  already passing                                                              
this bill  out of  committee and  all they are  doing is  having a                                                              
hearing to debate the issue.                                                                                                    
                                                                                                                                
MR. DAVID  VALDEZ, Fairbanks resident,  said this bill  would have                                                              
an adverse impact on the working  poor, minorities and people from                                                              
the  villages who  can't  establish credit.  He  said they  should                                                              
change Article 1  to an Act that allows rate  discrimination based                                                              
on credit ratings or credit scoring.                                                                                            
                                                                                                                                
CHAIRMAN STEVENS  encouraged the  public to stay  on line  to hear                                                              
what transpires  in committee before  they make a judgment  on the                                                              
final product.                                                                                                                  
                                                                                                                                
MR.  STEVE  CONN,  Executive  Director,   Alaska  Public  Interest                                                              
Research  Group,  agreed  with  the  previous  testifier.  He  was                                                              
shocked to see the committee substitute.                                                                                        
                                                                                                                                
     It  is absolutely  worthless  in terms  of the  original                                                                   
     motivation  of Senator  Cowdery  and it's  in fact  anti                                                                   
     consumer. All  of the so-called rights in  this bill are                                                                   
     already  guaranteed by  federal law.  The way this  bill                                                                   
     simply deals  with the subject  is that it  mixes credit                                                                   
     scoring and  credit history and, of course,  they're not                                                                   
     the same.  Section 1 still gives the  insurance company,                                                                   
     upon the refusal of the consumer,  the right to allow it                                                                   
     to use credit scoring, but the  absolute right to reject                                                                   
     that  consumer  as a  customer.    This the  problem  we                                                                   
     confronted  with the  original bill  and the reason  for                                                                   
     the  ban  was several-fold.  The  credit  histories  are                                                                   
     known  throughout the  country, which  are the  material                                                                   
     used by these  mysterious credit scores to  be in error,                                                                   
     in bad  error and  if you correct  them, they leave  the                                                                   
     errors  in  place. This  does  nothing for  people  like                                                                   
     Senator Cowdery's daughter who  had a unique and serious                                                                   
     event  that effected  her credit history  or victims  of                                                                   
     identity  theft  or  emergency   situations.  This  does                                                                   
     nothing. This  bill effectively says that  the insurance                                                                   
     companies can do what they want…                                                                                           
                                                                                                                                
MR. MARK NIEHAUS, Progressive Insurance,  said he would not repeat                                                              
his previous testimony. He thought  the CS was far superior to the                                                              
original bill  and that about  two-thirds of their  policy holders                                                              
in Alaska,  about 15,000,  are getting  significantly lower  rates                                                              
due to the  use of credit as  part of the rating formula  they are                                                              
using today. If  that ability were to go away,  those people would                                                              
get big rate  increases and they  are trying to prevent  that from                                                              
happening.                                                                                                                      
                                                                                                                                
Section 1, paragraph  (b) requires an adverse notice  action to be                                                              
sent, which is fine, but the second  sentence says the notice must                                                              
state the significant  factors of credit history  that resulted in                                                              
the adverse  action and provide  information on how  credit scores                                                              
can be  improved. Mr. Niehaus said  his company already  does that                                                              
on request,  but that the cost  of the reports is  significant and                                                              
most don't  want it. Their adverse  action notice says that  it is                                                              
free of charge and provides an 800 number to call to get it.                                                                    
                                                                                                                                
MR. NIEHAUS suggested  modifying the second sentence  to something                                                              
like  the  notice  must  state "that  consumers  may  obtain  upon                                                              
request a  free report containing  the significant factors  of the                                                              
credit history" as  opposed to mandating that it  be give to every                                                              
consumer.                                                                                                                       
                                                                                                                                
His second  recommendation  concerned page  4, section 2,  (c)(1),                                                              
the absence of credit. His concern  was an increase in no-hits, if                                                              
they were  automatically giving them  a better rate.  As insurers,                                                              
they have  no way of determining  accuracy or completeness  of the                                                              
information.                                                                                                                    
                                                                                                                                
MR.  NIEHAUS  said,  "The  requirement  that they  can't  use  the                                                              
absence of  credit history  to calculate a  rate doesn't  make any                                                              
sense in a world where we're using credit as part of the rate."                                                                 
                                                                                                                                
He could  not implement that  if he wanted  to and he  thought the                                                              
committee might be saying that they  want no-hits to be treated as                                                              
having average credit  or - he just wasn't sure.  He said that no-                                                              
hits  are  a  very  small  percentage,  less  than  5%,  of  their                                                              
business.  They  have  significant  data showing  that  they  have                                                              
dramatically  higher loss  costs. He suggested  using an  approach                                                              
that was  used in  Washington to  simply require  that the  filing                                                              
justify actuarially  the handling  of the charges  associated with                                                              
credit  no-hits. He  also suggested  using the  effective date  of                                                              
January 1, 2003 to give them time for implementation.                                                                           
                                                                                                                                
SENATOR DAVIS asked  if they serve Washington and  what do they do                                                              
there.                                                                                                                          
                                                                                                                                
MR. NIEHAUS replied  that they serve Washington  and are currently                                                              
using credit.  The bill  he mentioned  has passed,  but it  hadn't                                                              
taken effect  yet. It allows insurers  to continue to  use credit;                                                              
it  just has  to be  filed with  the Department  of Insurance  and                                                              
approved  and   justified  actuarially.   There  are   some  other                                                              
limitations on information  within the credit reports  that can be                                                              
used.                                                                                                                           
                                                                                                                                
SENATOR DAVIS asked if they are doing  business in any state where                                                              
they are not allowed to use credit.                                                                                             
                                                                                                                                
MR. NIEHAUS replied yes - in Hawaii and California.                                                                             
                                                                                                                                
SENATOR  DAVIS asked  if they are  still doing  business in  those                                                              
states.                                                                                                                         
                                                                                                                                
MR. NIEHAUS replied yes and that  it's not a statutory prohibition                                                              
in California, but it's a regulatory requirement.                                                                               
                                                                                                                                
     However,  there are  a  lot of  people  that are  paying                                                                   
     rates  that  are  a  lot higher  than  they  would  have                                                                   
     otherwise  been if  they  would have  been  able to  use                                                                   
     credit…In the state of Alaska  we have been using credit                                                                   
     for a number  of years now and to take  it away…It's one                                                                   
     thing if you've  never had it, but to take  it away now,                                                                   
     the  only way  we  could accomplish  that  - the  result                                                                   
     would be about  two-thirds of the people who  get a rate                                                                   
     increase. There's no way around that.                                                                                      
                                                                                                                                
SENATOR DAVIS  asked if they  had ever had  to remove credit  as a                                                              
factor in rates.                                                                                                                
                                                                                                                                
MR. NIEHAUS replied no.                                                                                                         
                                                                                                                                
SENATOR LEMAN  said that section  2 adds a  new section on  how to                                                              
rate  and it  says  an  insurer may  not  use a  methodology  that                                                              
incorporates gender, race, nationality  or religion. He understood                                                              
that for automobile coverage it's common to use gender.                                                                         
                                                                                                                                
MR. NIEHAUS replied  that he would be happy to  have that deleted.                                                              
"They  don't  want  us  to  treat   the  credit  of  a  woman  any                                                              
differently  from  that of  a  man. A  credit  score  is a  credit                                                              
score…We already use gender ratings anyway…"                                                                                    
                                                                                                                                
CHAIRMAN  STEVENS said  the language  came  from Washington  State                                                              
that prohibits certain types of credit history from being used.                                                                 
                                                                                                                                
MR. KURT  OLSON said the intent  was to specifically  outline that                                                              
credit scoring couldn't be factored in with race and gender.                                                                    
                                                                                                                                
CHAIRMAN STEVENS  said that  the majority of  the issues  that are                                                              
brought up now are  related to the use of the  credit history, not                                                              
to the use of  how the credit scoring is used  in the rate making.                                                              
"This was  an attempt  to say if  you're going  to use  the credit                                                              
history,  you've got  to treat  all credit  histories exactly  the                                                              
same."                                                                                                                          
                                                                                                                                
MR. OLSON indicated that was right.                                                                                             
                                                                                                                                
CHAIRMAN  STEVENS asked  how  many years  they  were using  credit                                                              
scoring in Alaska.                                                                                                              
                                                                                                                                
2:05 pm                                                                                                                         
                                                                                                                                
MR. NIEHAUS replied approximately four years.                                                                                   
                                                                                                                                
CHAIRMAN STEVENS asked  if they had approval from  the Division of                                                              
Investments.                                                                                                                    
                                                                                                                                
MR. NIEHAUS replied yes.                                                                                                        
                                                                                                                                
CHAIRMAN STEVENS asked if any other  state had used credit scoring                                                              
and then removed the ability to use it.                                                                                         
                                                                                                                                
MR. NIEHAUS replied none that he was aware of.                                                                                  
                                                                                                                                
CHAIRMAN STEVENS  asked him to  explain how two-thirds  of Alaskan                                                              
customers' rates would be affected.                                                                                             
                                                                                                                                
MR.  NIEHAUS replied  that  almost all  rates  would be  affected.                                                              
About  two-thirds  of  their customers  would  see  higher  rates,                                                              
hypothetically, if they were required  to completely remove credit                                                              
from the underwriting process.                                                                                                  
                                                                                                                                
CHAIRMAN STEVENS asked, "Why would  everybody's rates go up if you                                                              
eliminated this?"                                                                                                               
                                                                                                                                
MR. NIEHAUS  replied, "It's a zero  sum game. The total  amount of                                                              
premium we would collect would be unchanged."                                                                                   
                                                                                                                                
He  said that  about 30%  of folks  would get  rate decreases  and                                                              
about two-thirds would  get rate increases. "The sum  of all those                                                              
changes would be zero."                                                                                                         
                                                                                                                                
MR. JOHN FURUNESS,  AARP Capitol City Task Force,  said he is also                                                              
the legislative  representative for the local chapter  of National                                                              
Association of Retired Federal Employees  (NARFE). He hadn't had a                                                              
chance to study  the revised bill, but they just  don't think that                                                              
credit ratings should be used to determine auto insurance rates.                                                                
                                                                                                                                
MS. SARAH MCNAIR GROVE, Division of Insurance, said:                                                                            
                                                                                                                                
     We   support   the  legislature's   efforts   to   place                                                                   
     parameters   on  the  use   of  credit  information   in                                                                   
     insurance   rating  and  underwriting.   Now  that   the                                                                   
     discussion has  turned from a prohibition of  the use of                                                                   
     credit information  to identifying what  the appropriate                                                                   
     parameters  should be,  we would  like to  offer just  a                                                                   
     couple of comments on the committee substitute.                                                                            
                                                                                                                                
     Some  of  the  issues  that   the  Division  hears  from                                                                   
     consumers  relate to  credit  problems that  seem to  be                                                                   
     beyond  the  control  of  the  consumer.  As  they  have                                                                   
     identified, it really is the  use of credit history that                                                                   
     seems to  be an  issue - not  complaints about how  it's                                                                   
     actually used in the rate-making  process, but should it                                                                   
     be used at all. For example,  some of the issues we hear                                                                   
     about  are medical bills  that are  caused by a  serious                                                                   
     injury  or  sickness  that can  result  in  poor  credit                                                                   
     through no  fault of the  consumer, themselves.  Some of                                                                   
     the  other issues  we hear  about  are denying  coverage                                                                   
     because  of the number  of hits  on your credit  report.                                                                   
     Part of the insurance industry  and the increased use of                                                                   
     credit  information has  created the  number of hits  on                                                                   
     the reports,  so it  seems like there  needs to  be some                                                                   
     way  to alleviate  that effect  when it  is being  used.                                                                   
     Including  some of  these kinds of  prohibitions on  the                                                                   
     pieces  of information  that  can be  used  on a  credit                                                                   
     report, I think, would go a  long way towards addressing                                                                   
     some of the consumer issues we have heard about.                                                                           
                                                                                                                                
     I just  have one other  suggestion on the  bill, itself,                                                                   
     and  that is that  the definition  of 'adverse  action,'                                                                   
     while it's fine,  is defined by the federal  Fair Credit                                                                   
     Reporting Act  and it might be good to  put specifically                                                                   
     what  we  mean in  Alaska  law  rather than  relying  on                                                                   
     federal legislation.                                                                                                       
                                                                                                                                
SENATOR  AUSTERMAN asked  if she heard  the Progressive  Insurance                                                              
position saying  if credit rating  is eliminated  altogether, that                                                              
the rates  would  change and,  if she  would have  any say on  how                                                              
those rate changes would take place.                                                                                            
                                                                                                                                
MS. GROVE replied:                                                                                                              
                                                                                                                                
     Every  rate filing  or  every change  in  rates must  be                                                                   
     filed  with the  Division of  Insurance and  we look  at                                                                   
     them and review them to be sure  they comply with Alaska                                                                   
     law.  So  a  change  could   not  be  made  without  our                                                                   
     approval.                                                                                                                  
                                                                                                                                
SENATOR  AUSTERMAN asked  if she  anticipated  approving the  rate                                                              
change  they are suggesting  taking  place if  there is no  credit                                                              
rating.                                                                                                                         
                                                                                                                                
MS. GROVE replied  that she would have to look at  the reasons and                                                              
support for that and couldn't say yes or no at this point.                                                                      
                                                                                                                                
MR. MICHAEL  HARROLD, Northwest  Manager, National Association  of                                                              
Independent Insurers, said:                                                                                                     
                                                                                                                                
     I think  this is  a workable  and good compromise  bill,                                                                   
     but certainly  contains aspects that I would  prefer not                                                                   
     be in law.  We truly believe that the way  our companies                                                                   
     have used credit  is to help better price  their product                                                                   
     and that they  use it to write more business,  not less.                                                                   
     They  have been giving  discounts to  consumers who  are                                                                   
     less  of a  risk than  other consumers.  So I  certainly                                                                   
     would not support  some of the restrictions  that are in                                                                   
     the bill, but  I would simply point out again  that it's                                                                   
     a compromise  that I think we  could live with  and that                                                                   
     it does simply more than require  some type of notice or                                                                   
     disclosure  to  be  given.  The fact  that  it  says  an                                                                   
     insurer cannot  deny personal  insurance in whole  or in                                                                   
     part  on the  absence of  credit history.  It does  take                                                                   
     into account  the no-hits that Mr. Niehaus  was speaking                                                                   
     about.  It takes  them into  account both  in regard  to                                                                   
     underwriting as well as coming up with a rate.                                                                             
                                                                                                                                
MR. HARROLD  said he  disagreed with  their treatment of  no-hits,                                                              
because  they  have  been  actuarially   proven  to  be  the  most                                                              
expensive  to  insure.   He  passed  the  committee   a  chart  to                                                              
illustrate  that fact.  He  added that  it  included "thin  files"                                                              
which is  a file  with little  credit. People  who have  the worst                                                              
credit scores have  losses that are well over the  amount of a one                                                              
to one  ratio. It's even  more so for  the no-hits or  thin files.                                                              
That's why insurers use that as a tool.                                                                                         
                                                                                                                                
CHAIRMAN STEVENS asked if there were  percentages that he had from                                                              
his pool of insurers and what percentage  had good credit and what                                                              
percent had average and high risk credit.                                                                                       
                                                                                                                                
MR.  HARROLD  replied  that  insurers  could  probably  have  that                                                              
information. Individual  companies compete in the  market place by                                                              
choosing where they are going to have their break points.                                                                       
                                                                                                                                
CHAIRMAN STEVENS  asked what  is the  percentage of consumers  who                                                              
are going to be  affected by this. How many consumers  have a good                                                              
or average credit rating.                                                                                                       
                                                                                                                                
MR. HARROLD  replied  that he hears  from his  companies that  the                                                              
overwhelming majority of consumers  have good to excellent credit.                                                              
That's why they  have testimony saying the majority  of them would                                                              
have increased  rates  if they couldn't  use credit  for a  rating                                                              
tool.                                                                                                                           
                                                                                                                                
CHAIRMAN STEVENS asked if this tool  was removed and every company                                                              
had to file  for rate changes,  how many of their  companies would                                                              
participate in that. "Would anyone pull out of the market?"                                                                     
                                                                                                                                
MR. HARROLD  replied that  it's possible. "Alaska  has not  been a                                                              
lucrative market from the loss perspective."                                                                                    
                                                                                                                                
CHAIRMAN STEVENS  asked how  many would leave  if the  Division of                                                              
Insurance didn't approve their rate changes.                                                                                    
                                                                                                                                
MR. HARROLD replied,  "Perhaps more would leave or  you would have                                                              
consumers that are simply paying rates that aren't fair."                                                                       
                                                                                                                                
CHAIRMAN STEVENS asked  if he had 700 companies  writing insurance                                                              
in this  state, what would  be the effect  on those  consumers who                                                              
are still looking for insurance.                                                                                                
                                                                                                                                
MR.  HARROLD  replied, "The  less  companies  you have,  the  less                                                              
availability  you have,  but all  600  of those  companies do  not                                                              
write in Alaska."                                                                                                               
                                                                                                                                
SENATOR  AUSTERMAN said  one of  the  concerns he  has with  using                                                              
credit is  that, for example, it  took his daughter six  months to                                                              
get  something off  of  her credit  rating  that  she didn't  know                                                              
anything about.  It took  him, personally, over  one year  when he                                                              
lost his credit  card and had a  bill for $3,800, which  came back                                                              
three years  later when it wasn't  paid. It took him a  year after                                                              
that to get rid  of it with the credit agencies.  He was concerned                                                              
about that  type of example and  how many people  don't understand                                                              
the whole process  of credit rating for insurance  and the effects                                                              
it has on their rates.                                                                                                          
                                                                                                                                
MR. HARROLD  responded that specifically  there is a  provision in                                                              
this  bill  that   states  if  there  is  incorrect   or  disputed                                                              
information,  they could  submit that  and the  insurer has  to go                                                              
back  to  the  inception  of the  policy  period  and  rewrite  or                                                              
reunderwrite and recalculate the premium.                                                                                       
                                                                                                                                
     So,  something positive  could  come out  of getting  it                                                                   
     checked. A  more general comment  would be that  the use                                                                   
     of credit information is just  permeating society and it                                                                   
     isn't just insurance. I would  say the best job that any                                                                   
     consumer advocate can do is  to encourage people to look                                                                   
     at their credit  information. If someone has  an adverse                                                                   
     action  taken against  them, underneath  this bill  they                                                                   
     would be  able to get  their consumer report  free under                                                                   
     the Fair  Credit Reporting Act,  but I think  everybody,                                                                   
     whether   you're   looking   for   auto   insurance   or                                                                   
     homeowner's  insurance or you're  looking at a  mortgage                                                                   
     or buying  a car, it simply  permeates our life  here at                                                                   
     the  beginning of  the 21  Century and  I can't  imagine                                                                   
     that we would be willing to  stop using the information,                                                                   
     because it has so many other benefits.                                                                                     
                                                                                                                                
SENATOR AUSTERMAN asked  for the year that it took  him to get the                                                              
error off his  bill, would they have given him  insurance until it                                                              
was corrected.                                                                                                                  
                                                                                                                                
MR. HARROLD  replied the  way the bill  reads, he didn't  think it                                                              
would go back through  the years, but it says to  the inception of                                                              
the current  policy  term. He also  thought that  the Fair  Credit                                                              
Reporting Act also  requires that if somebody says  that they have                                                              
incorrect  data  in  their  report,  that they  have  30  days  to                                                              
determine whether  or not  that is correct.  If the credit  bureau                                                              
has not made  that determination within  30 days, then it  goes to                                                              
the consumer's advantage.                                                                                                       
                                                                                                                                
MR. MICHAEL  LESSMEIER, State Farm  Insurance Co., said  they have                                                              
approximately  24%   of  the  automobile  insurance   premium  and                                                              
approximately  34  -  35%  of  the  homeowners  insurance  premium                                                              
written  in Alaska.  He said  that they  have found  from all  the                                                              
testimony  up to today  that credit  is an  accurate predictor  of                                                              
loss. The representative from the  Division of Insurance testified                                                              
that the correlation between this  tool and risk of loss was high.                                                              
It has also proven to be a high correlation in their experience.                                                                
                                                                                                                                
     This  is a  tool just  like  many other  tools used  for                                                                   
     predicting  future loss. The  second point that  I would                                                                   
     make  to the  committee is  that  the use  of credit  in                                                                   
     insurance  has not  presented a  significant problem  in                                                                   
     Alaska. I don't know if this  testimony was presented to                                                                   
     your committee,  but it certainly  was presented  to the                                                                   
     House Labor  and Commerce Committee. The  representative                                                                   
     from  the   Division  of   Insurance  was  asked   about                                                                   
     complaints  about the use  of this  tool. I recall  that                                                                   
     her testimony  was that  there may have  been a  few and                                                                   
     she  was then  asked if  there had  been any  complaints                                                                   
     that had  been found to be  valid about the use  of this                                                                   
     tool  and I  think  she said  that  there  was still  an                                                                   
     instance under investigation.                                                                                              
                                                                                                                                
TAPE 02-22, SIDE B                                                                                                            
                                                                                                                                
MR. LESSMEIER  didn't think  it was a  significant problem  in the                                                              
State of Alaska.  His third point was that this is  a tool that is                                                              
used differently by different insurers.                                                                                         
                                                                                                                                
     I  think it's  really important  for  you to  understand                                                                   
     that  we  in  Alaska  have   a  marketplace  that  is  a                                                                   
     competitive marketplace.  It is also important  that you                                                                   
     understand that  as it is used differently  by different                                                                   
     insurers  and  that how it's being used in  rating today                                                                   
     requires the  approval of the Division of  Insurance. To                                                                   
     my  knowledge  there are  very  few companies  that  are                                                                   
     using credit today for rating  purposes. State Farm does                                                                   
     not use  credit for rating purposes,  but if it  is used                                                                   
     for rating  purposes, it must  first be approved  by the                                                                   
     Division  of Insurance  that has  the responsibility  of                                                                   
     insuring that the use of this  tool does not result in a                                                                   
     rate that is excessive. I think that is important.                                                                         
                                                                                                                                
     A final point  that I would make is that  there are many                                                                   
     tools  that already exist  in the  law that would  allow                                                                   
     the Division  of Insurance to address issues  of credit.                                                                   
     The  first one  of course  is  to the  extent that  it's                                                                   
     being  used  in  rating,  that   use  has  already  been                                                                   
     approved  by the Division  of Insurance.  To the  extent                                                                   
     that it's being  used in underwriting, if  it results in                                                                   
     unfair   discrimination,  the   Division  of   Insurance                                                                   
     already  has the  ability to  investigate  that to  take                                                                   
     significant action through the  amendments to the Unfair                                                                   
     Trade  Practices Act  that this  legislature passed  two                                                                   
     years  ago, Senator  Donley's amendment.  So, there  are                                                                   
     significant tools  in the law  right now to  prevent the                                                                   
     misuse of this tool.                                                                                                       
                                                                                                                                
MR. LESSMEIER thought the issue before  them was if they could use                                                              
this tool  to identify  those that present  higher risk  of future                                                              
loss and shouldn't they be able to do that.                                                                                     
                                                                                                                                
     Isn't that better for the consumer  as a whole? Isn't it                                                                   
     better  for  people  to  be able  to  pay  an  insurance                                                                   
     premium  that is more  in accord with  the risk  of loss                                                                   
     that they present?  Isn't that better policy?  We say it                                                                   
     is…                                                                                                                        
                                                                                                                                
CHAIRMAN STEVENS  asked him what other  tools he uses in  basing a                                                              
customer's rates.                                                                                                               
                                                                                                                                
MR. LESSMEIER  replied that  as he understands  it, the  rates are                                                              
based on frequency and severity of  loss. When someone comes in to                                                              
State Farm, they are asked about  their loss experience, accidents                                                              
and  tickets for  automobiles. Their  underwriting  tool looks  at                                                              
loss history,  which has an aspect  of credit. They do  not use it                                                              
to determine what rate they will  pay, but who to accept and where                                                              
to place them.                                                                                                                  
                                                                                                                                
CHAIRMAN  STEVENS  asked how  they  handle  a good  ratepayer  who                                                              
hasn't had any losses and all of  a sudden has bad credit for some                                                              
reason that doesn't have to do with automobiles.                                                                                
                                                                                                                                
MR. LESSMEIER replied that they don't  look at the data other than                                                              
at the very beginning when they determine  whether to write or not                                                              
write.                                                                                                                          
                                                                                                                                
CHAIRMAN STEVENS asked  if they have ever gone back  to rerate and                                                              
if he knew of anyone who did.                                                                                                   
                                                                                                                                
MR. LESSMEIER replied  that they had not used this  tool in Alaska                                                              
to do that.                                                                                                                     
                                                                                                                                
CHAIRMAN STEVENS  asked if he knew  of any companies who  write in                                                              
Alaska that do a credit history with a renewal.                                                                                 
                                                                                                                                
MR. LESSMEIER replied  that he didn't know about  other companies,                                                              
but his didn't.                                                                                                                 
                                                                                                                                
CHAIRMAN STEVENS asked  if Mr. Harrold knew of  any companies that                                                              
did that in Alaska.                                                                                                             
                                                                                                                                
MR. HARROLD replied  that he imagined some companies  would use it                                                              
as a tool.                                                                                                                      
                                                                                                                                
     Different   companies   treat   it   differently.   Some                                                                   
     companies  do not once  they get  them through the  door                                                                   
     they don't look at it upon renewal.  Other companies may                                                                   
     look  every year  and try to  reshuffle the  deck so  to                                                                   
     say.                                                                                                                       
                                                                                                                                
MR.  LESSMEIER  finished  saying   that  they  looked  at  800,000                                                              
records, created a  formula, and applied it to a  control group of                                                              
500,000 and followed that control  group for two years. They found                                                              
that formula  was very  predictive  of future  loss and they  then                                                              
applied  it to  over  one million  new cases  and  found the  same                                                              
thing. As a  tool for them it  is very predictable and  helps them                                                              
in  their goal  of making  sure that  people  pay a  rate that  is                                                              
commensurate with  the risk that  they present. He thought  it was                                                              
important  that   the  legislature  does  not   place  unnecessary                                                              
restrictions on use of this important tool.                                                                                     
                                                                                                                                
In response  to some  testimony there were  two changes  that deal                                                              
with the  issue of  what happens  to someone  who doesn't  have an                                                              
accurate credit  history. At  State Farm  Insurance the  number of                                                              
people who complain  about having an inaccurate  credit history is                                                              
infinitesimally small.  A good change  is allowing the use  of the                                                              
credit model  to be presented to  the Division of  Insurance under                                                              
confidentiality  giving them the  tools they  need to prevent  any                                                              
misuse of it.                                                                                                                   
                                                                                                                                
SENATOR LEMAN  moved on page 1,  line 11, after "state"  to insert                                                              
"that consumers may obtain on request".                                                                                         
                                                                                                                                
SENATOR DAVIS objected for purposes of explanation.                                                                             
                                                                                                                                
SENATOR  LEMAN explained  that the  concern  was that  there is  a                                                              
substantial  cost to  doing this  and many  people probably  won't                                                              
necessarily want  it. The amendment  just says that  when somebody                                                              
asks for it, they have a right to get it.                                                                                       
                                                                                                                                
SENATOR DAVIS  asked if  it was an opt  in/opt out  situation. She                                                              
withdrew her objection.                                                                                                         
                                                                                                                                
SENATOR AUSTERMAN asked  if they would be given the  option in the                                                              
letter of adverse action.                                                                                                       
                                                                                                                                
SENATOR  LEMAN explained  that there  would be  directions in  the                                                              
letter to  call an 800  number or return  a post card  - something                                                              
like that and they would send it to them.                                                                                       
                                                                                                                                
SENATOR DAVIS  said she understood what  it did, but felt  that it                                                              
needed to be  discussed more. She  asked if they were going  to be                                                              
sent  a letter  of  adverse action,  why  the  reason couldn't  be                                                              
stated in the one letter. "Everybody would get it."                                                                             
                                                                                                                                
SENATOR LEMAN withdrew his amendment.                                                                                           
                                                                                                                                
CHAIRMAN STEVENS said  that he would hold SB 320  at the sponsor's                                                              
request.                                                                                                                        
                                                                                                                                
SENATOR  DAVIS said Mr.  Niehaus from  Progressive Insurance  said                                                              
they  would not  be  withdrawing  credit rating  in  the state  of                                                              
Washington and this bill says that it does.                                                                                     
                                                                                                                                
MR. NIEHAUS explained  that Senator Davis is under  the impression                                                              
that the bill passed in Washington  disallows credit and he stated                                                              
that the  bill requires that the  credit be filed with  the office                                                              
of the  Insurance Commissioner  and approved by  them and  it does                                                              
specifically  allow  the use  of  credit saying,  "Credit  history                                                              
shall  not be  used to  determine personal  insurance premiums  or                                                              
eligibility for  coverage unless the insurance scoring  models are                                                              
filed with the commissioner."                                                                                                   
                                                                                                                                
CHAIRMAN  STEVENS  said he  understood  that the  difference  with                                                              
Washington State is that it prohibits certain types of credit.                                                                  
                                                                                                                                
SENATOR  DAVIS  added  that  it   would  have  to  be  filed  [and                                                              
approved].                                                                                                                      
                                                                                                                                
CHAIRMAN STEVENS said he appreciated  everyone's comments and held                                                              
the bill.                                                                                                                       

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