Legislature(2001 - 2002)

02/28/2002 01:41 PM TRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
            SB 320-MOTOR VEHICLE INSURANCE & REPAIRS                                                                        
CHAIRMAN COWDERY  said the committee  would take testimony  on one                                                              
bill.  The bill before the committee was SB 320.                                                                                
SENATOR  TAYLOR noted there  was a  proposed committee  substitute                                                              
(CS) in  the packet.   The CS cut the  bill in half  and addressed                                                              
the  credit rating  portion  of  the bill.    He moved  and  asked                                                              
unanimous consent  that the CS be  considered the bill  before the                                                              
committee.   The CS  is labeled  Work Draft  Ford/J dated  2/26/02                                                              
(Version J).                                                                                                                    
CHAIRMAN  COWDERY, hearing  no objection,  stated the bill  before                                                              
the   committee   was  CSSB   320   (TRA)  "An   act   prohibiting                                                              
discrimination  in  insurance  rates  based on  credit  rating  or                                                              
credit scoring; and providing for an effective date."                                                                           
MS. ANNETTE SKIBINSKI,  staff to Chairman Cowdery,  summarized the                                                              
sponsor statement for CSSB 320 (TRA).                                                                                           
     This bill  relates to insurers using credit  scoring and                                                                   
     or  rating in  determining  insurance  policy rates  and                                                                   
     premiums.   What does your credit  score have to do with                                                                   
     how much you  pay for automobile insurance?   Just about                                                                   
     Currently  Alaska allows  credit scoring  to be part  of                                                                   
     insurance  company rating  plans  in which  underwriting                                                                   
     and  rate  setting is  done.    The Alaska  Division  of                                                                   
     Insurance  has a  statutory  mandate  (AS 21.36.120)  to                                                                   
     protect  the  Alaska  consumer  against  discrimination.                                                                   
     Every car  and home insurance company in  Alaska, except                                                                   
     one,  uses  credit  scoring.    Companies  believe  this                                                                   
     method  is   a  way  to  predict  risk   in  determining                                                                   
     potential insurance  losses.   Credit has nothing  to do                                                                   
     with   risk.     The  practice   of   using  this   data                                                                   
     discriminates against certain types of consumers.                                                                          
     First of all, credit scores  and credit reports are many                                                                   
     times inaccurate and contain  errors in the information.                                                                   
     They are also very difficult  and cumbersome to correct.                                                                   
     There are currently about 25  states considering banning                                                                   
     the  use  of credit  history  in  determining  insurance                                                                   
     rates.   Hawaii banned  this insurance underwriting  and                                                                   
     rate setting  practice 15 years  ago and their  premiums                                                                   
     still  today remain  some of  the lowest  in the  United                                                                   
     The  insurance  industry  wants  to  utilize  this  easy                                                                   
     method  to  raise rates.    Because of  epidemic  credit                                                                   
     problems throughout our society,  this is an easy way to                                                                   
     target consumers  and raise their premiums.   Why are we                                                                   
     punishing  the 40 year  old woman  with a clean  driving                                                                   
     record  who  simply gets  divorced  and it  changes  her                                                                   
     credit status?  Why are we raising  the premiums of a 70                                                                   
     year old man  with a clean driving record  whose medical                                                                   
     bills affected his credit history?   Your driving record                                                                   
     alone should be the factor for rate setting.                                                                               
     The  bottom line  is common  sense.   We have  mandatory                                                                   
     insurance  laws in  this  state.   And  by using  credit                                                                   
     scores  we  are  making  it   even  more  difficult  and                                                                   
     expensive for the Alaskan consumer  to obtain insurance.                                                                   
     Simply, SB  320 prohibits insurance companies  in Alaska                                                                   
     from using credit scores in  either underwriting or rate                                                                   
     setting practices.                                                                                                         
CHAIRMAN  COWDERY, sponsor  of SB  320, said that  is the  sponsor                                                              
statement.  He invited Michael Harrold to testify.                                                                              
MR.  MICHAEL   HARROLD,  Northwest   Regional  Manager,   National                                                              
Association  of   Independent  Insurers,  explained   they  are  a                                                              
property and  casualty insurance rate association  that represents                                                              
over 690  member companies.   He shared  a handout with  committee                                                              
MR. HARROLD  said studies confirm  the correlation  between credit                                                              
information  and loss  ratios.  He  wanted to  walk the  committee                                                              
through  the hand out  to graphically  illustrate the  correlation                                                              
that exists.                                                                                                                    
The credit information  enables insurers to do a  number of things                                                              
   · Write more business, not less business.                                                                                    
   · Renew more policies and accept more new business.                                                                          
   · More aggressively and competently write in urban markets.                                                                  
  · Offer the majority of policyholders lower insurance rates.                                                                  
   · Provide a more fair and equitable pricing structure by                                                                     
     inter-matching rates with risk of loss.                                                                                    
     Insurance  use of  credit  information  provides a  more                                                                   
     objective and unbiased tool  for underwriting and rating                                                                   
     insurance risk.   For many  years insurers were  accused                                                                   
     of being  very subjective and eyeballing  whoever walked                                                                   
     into their office  and deciding whether or  not they may                                                                   
     or  may not  have some  type  of characteristic  whether                                                                   
     that person  might be  their type  of person etcetera  -                                                                   
     something  that  could  be   subjective.    With  credit                                                                   
     scoring   the  whole  process   has  become  much   more                                                                   
     Credit based  insurance scores supplement  other sources                                                                   
     of  underwriting  and  rating information  that  may  be                                                                   
     subject to errors, underreporting  or misrepresentation.                                                                   
     Driving  records are  notoriously inaccurate,  sometimes                                                                   
     as high as up to 40%.  Records  of accidents can also be                                                                   
     terribly inaccurate.   So credit scoring is  another way                                                                   
     to  come in  and  supplement and  augment  that type  of                                                                   
     information and come up with a more predictive tool.                                                                       
     Insurance scores do not consider  income, address, race,                                                                   
     ethnicity, religion, gender,  familial status, handicap,                                                                   
     nationality,  age or  marital  status.   So once  again,                                                                   
     this is not something that's  factored into an insurance                                                                   
     score.   No state insurance department,  the departments                                                                   
     have sanctioned  an insurer  on the grounds  that credit                                                                   
     based insurance  scores discriminate against  low income                                                                   
     or minority consumers.   In fact we find  that consumers                                                                   
     with  incomes  below  $30,000 and  between  $30,000  and                                                                   
     $50,000  have insurance scores  equivalent to  consumers                                                                   
     with incomes greater than $50,000.   That what we really                                                                   
     find is that a credit based  insurance score has nothing                                                                   
     to do with  how rich you are, it has nothing  to do with                                                                   
     where you  live, has nothing  to do with what  your race                                                                   
     may be.  It  simply has to do with how  well you managed                                                                   
     what you  do have.  And for  that reason you can  have -                                                                   
     people  are on  - that  are low  income individuals  can                                                                   
     manage  their money  a lot better  than somebody  that's                                                                   
     making over a $100,000 that  has the opportunity to have                                                                   
     a lot  more credit  cards and is  out buying a  lot more                                                                   
     things. It really comes down  to personal responsibility                                                                   
     and  that personal  responsibility  translates into  the                                                                   
     way  that people  drive, how  well  they maintain  their                                                                   
     homes and consequently  the types of losses  that - that                                                                   
     somebody  may  have being  an  insured of  a  particular                                                                   
     We simply would encourage legislators  and regulators to                                                                   
     be  very  wary  of  a  negative   impact  that  imposing                                                                   
     restrictions on insurers use  of credit information will                                                                   
     have  on  the  availability  and  the  affordability  of                                                                   
MR HARROLD said one of NAIC's member companies did some                                                                         
predictions of the outcome if this bill is passed and the                                                                       
use of credit information is banned:                                                                                            
   · 51% of their policyholders would receive rate increases                                                                    
     and  those rate  increases would  average  about $180  a                                                                   
   · 40% of their policyholder's rates would stay about the                                                                     
     same  because the  use of  credit  information does  not                                                                   
     impact their rates.                                                                                                        
   · 9% of their policyholders are the holders most likely                                                                      
     to  suffer  losses  and would  get  discounts  in  their                                                                   
MR. HARROLD  said they  thought that  was unfair.   Hopefully                                                                   
what a consumer wants is to pay an  insurance premium that is                                                                   
commensurate with  the risk they represent and  the loss they                                                                   
are going to have.                                                                                                              
SENATOR TAYLOR asked him to repeat those numbers.                                                                               
MR. HARROLD said 51% would go up by $180 on average.                                                                            
SENATOR  TAYLOR said  40% stays  the same.   He said  9% of  their                                                              
policyholders, if  they use credit  rating, would pay  whatever 51                                                              
times $180 divided by 9 would equal.                                                                                            
MR. HARROLD  said he assumed that  might be the way that  it would                                                              
SENATOR TAYLOR replied:                                                                                                         
     I don't  know what round  numbers you're working  off of                                                                   
     but  if we  only  took the  percentages  under a  credit                                                                   
     rating  policy, 9% of  your policies  that you have  out                                                                   
     there are paying an increase  in their policy that would                                                                   
     be  equal to  what 100  - excuse  me, what  51% of  that                                                                   
     company's policyholders  would pay at the rate  of $180.                                                                   
     That must  a huge number  for the 9%.   Can you  tell me                                                                   
     what  -   what  amount  the   9%  are  currently   being                                                                   
     subsidized today.                                                                                                          
MR. HARROLD did not have that information.   He said it isn't that                                                              
the 9% are being subsidized.  Currently  9% pay what is considered                                                              
to be an appropriate premium.                                                                                                   
He explained that  this company currently has five  tiers in which                                                              
it slots  policyholders.   If credit scoring  is removed  from the                                                              
equation they would have to truncate  that to three tiers and that                                                              
is how they estimated  the impact on rates.  He  said he could get                                                              
more  thorough information  and a  further  breakdown with  actual                                                              
dollar amounts.                                                                                                                 
SENATOR TAYLOR  said since Mr. Harrold  had broken it down  to how                                                              
much the increase would be on the  51% he could only assume the 9%                                                              
was paying that full amount presently in a credit rated policy.                                                                 
MR. HARROLD said that was a fair assumption.                                                                                    
SENATOR TAYLOR  said if  the increase would  be $180 for  51% then                                                              
the  average person  receiving  a bad  credit  rating is  probably                                                              
paying $900 more to get insurance  through the credit rated policy                                                              
than the other people.                                                                                                          
MR. HARROLD  thought Senator Taylor's  math was correct.   He said                                                              
insurers use  a number of  factors.  They  do not just  use credit                                                              
scoring but that certainly is one  of the factors that would be in                                                              
that  equation.   He did  not think  a $900  difference between  a                                                              
better rate and a worse rate was uncommon.                                                                                      
SENATOR  WARD asked  if all  states use  credit for  the basis  of                                                              
setting rates.                                                                                                                  
MR.  HARROLD  said  all  other states  allow  the  use  of  credit                                                              
ratings.  He thought California,  through Proposition 103, doesn't                                                              
allow its use for automobile insurance.                                                                                         
Under the  Fair Credit Reporting  Act all insurers are  allowed to                                                              
do  a credit  check  and  pre-screen  people  for insurance.    An                                                              
insurer is allowed  to pre-screen and to get a list  of people who                                                              
have a credit score  over a certain number and they  can extend an                                                              
offer to  those people.  A credit card  company might do  that and                                                              
then make an offer of a particular rate through the mail.                                                                       
SENATOR WARD asked if all states  and all insurance people, except                                                              
the automobile insurance in California,  are allowed to use credit                                                              
ratings and are doing so.                                                                                                       
MR. HARROLD said it is allowed and they are doing it.                                                                           
SENATOR ELTON noted Mr. Harrold had  said credit scoring is better                                                              
than the eyeballing that used to  happen when a customer walked in                                                              
the office. He said Mr. Harrold could  not possibly have meant the                                                              
four insurance providers in Alaska,  previous to the use of credit                                                              
scoring, made a determination on  who can purchase insurance based                                                              
on eyeballing.                                                                                                                  
MR.  HARROLD  said it  would  not  be just  based  on  eyeballing.                                                              
Looking back over  the history of the criticisms  of the insurance                                                              
industry there  was a time when  people would make those  types of                                                              
subjective arguments.   In  Washington State an  agent told  him a                                                              
fellow agent asked people how often they washed their car.                                                                      
SENATOR ELTON  asked if Mr. Harrold  was just making  an anecdotal                                                              
comparison  and not  saying that  was how  the insurance  industry                                                              
MR. HARROLD said there would not  be any basis in losses or ratios                                                              
SENATOR ELTON was glad Mr. Harrold cleared that up.                                                                             
SENATOR WARD  asked how the  non-credit scoring in  California for                                                              
automobiles was working.                                                                                                        
MR. HARROLD said from his understanding  it is part of Proposition                                                              
103 so they are  not allowed to use it on the  rating.  California                                                              
has a very complicated system and is a bit of a mess.                                                                           
SENATOR WARD asked if the rates went down in California.                                                                        
MR. HARROLD did not know.                                                                                                       
CHAIRMAN COWDERY  said credit scoring  had been banned  in Hawaii.                                                              
He referred to information in the  packet that shows that Hawaii's                                                              
rates had gone  down over the previous  three years.  He  asked if                                                              
that was correct.                                                                                                               
MR. HARROLD did  not know Hawaii's year-by-year  statistics.  From                                                              
his  understanding Hawaii  banned  the use  of  credit scoring  in                                                              
ratings almost a  decade ago.  More recently,  the Commissioner of                                                              
Insurance  in Hawaii  told companies  they  were not  able to  use                                                              
credit  scoring  for  underwriting  either.   He  understood  that                                                              
policy was in the courts at this time.                                                                                          
CHAIRMAN COWDERY  said credit scoring  proved to be a  big problem                                                              
for people  getting  insurance and  for the cost  of insurance  in                                                              
MR. HARROLD said  Hawaii was a "take all comers"  state.  Insurers                                                              
are required to write.                                                                                                          
CHAIRMAN COWDERY asked him to restate that.                                                                                     
MR. HARROLD  explained  that "take all  comers" means  essentially                                                              
you have to write insurance for somebody  if they come through the                                                              
CHAIRMAN COWDERY asked about the rates.                                                                                         
MR. HARROLD said hearing that Hawaii  had some of the lowest rates                                                              
in the country in the sponsor statement  surprised him.  He wanted                                                              
to look at a NAIC receipt to verify that.                                                                                       
CHAIRMAN COWDERY said there was an  article in the packet from the                                                              
Wall Street  Journal, dated February  20,  2002.  He  said Indiana                                                              
and Washington are likely to pass  legislation to restrict the use                                                              
of credit  history in  determining insurance  rates, according  to                                                              
insurance  officials.   These  states   are  among  25   that  are                                                              
considering  or expected  to consider  bills to  ban or limit  the                                                              
controversial issue.                                                                                                            
MR.  HARROLD said  there are  probably  25 states  looking at  the                                                              
issue. It  has certainly  exploded on  the scene  as far  as being                                                              
looked at.  He understood Indiana  might not have legislation this                                                              
year because  there are  different bills in  the House  and Senate                                                              
and the respective  sponsors are in  a bit of a spat.   Washington                                                              
State is very close to enacting legislation.                                                                                    
CHAIRMAN COWDERY  asked if,  except for  Washington State,  he was                                                              
saying the  other 25 states  considering this legislation  are not                                                              
going to do it.                                                                                                                 
MR.  HARROLD  said  no,  that Chairman  Cowdery  had  singled  out                                                              
Washington  and  Indiana.   He  said this  is  a process  that  is                                                              
underway in states all across the country.                                                                                      
CHAIRMAN COWDERY  asked him to leave  all of his handouts  for the                                                              
MR. HARROLD  asked the  committee  to turn to  his handout,  which                                                              
illustrates  why insurers  use  this  tool.   Exhibit  A looks  at                                                              
automobile insurance loss ratios.                                                                                               
      Relationship of Loss Ratio to Number of Credit Lines                                                                      
              60+ Days Delinquent in Last 24 Months                                                                             
                                                       Loss ratio                                                             
                zeroonetwo or moretotal                                                                                       
                 Number of Trade Lines 60+ Days                                                                                 
                  Delinquent in Last 24 Months                                                                                  
MR. HARROLD  explained trade lines  in this instance  are payments                                                              
such as credit cards. A dollar paid  for insurance would represent                                                              
100% of the loss ratio.  The first  column would be the people who                                                              
have not had trade lines delinquent  for 60+ days and they average                                                              
a loss ratio of 75.4%.  If a person  has one trade line delinquent                                                              
then their  loss ratio jumps up to  103.2%.  A person  with two or                                                              
more has a loss ratio of 113.5%.                                                                                                
There is  a very  direct correlation.   The  column of people  who                                                              
have a  zero number of  trade lines delinquent  or zero  number of                                                              
collections or  zero number of adverse  public records tend  to be                                                              
about 86% to  96% of people.  The overwhelming  majority of people                                                              
have what would be considered good  credit.  They do not fall into                                                              
these categories.                                                                                                               
       Relationship of Loss Ratio to Number of Collections                                                                      
                                                        Loss ratio                                                            
                 zeroone or moretotal                                                                                         
                      Number of Collections                                                                                     
         Relationship of Loss Ratio to Number of Adverse                                                                        
                         Public Records                                                                                         
                                                        Loss ratio                                                            
                 zeroone or moretotal                                                                                         
                Number of Adverse Public Records                                                                                
SENATOR TAYLOR asked what an adverse public record is.                                                                          
MR. HARROLD said it could be a bankruptcy, foreclosure or                                                                       
SENATOR TAYLOR asked if it included domestic violence.                                                                          
MR. HARROLD said they would not look at that.                                                                                   
SENATOR WARD asked if child support was included.                                                                               
MR. HARROLD did not think insurers look at child support.                                                                       
SENATOR TAYLOR said  if they look at credit rating  they must have                                                              
been  looking  at child  support.  Child  support  is one  of  the                                                              
biggest credit items.   Alaska has a huge state  collection agency                                                              
that does  nothing but collect  child support and  the information                                                              
is turned over to credit reporting  institutions. If child support                                                              
was not current he thought that would  show up on a credit report.                                                              
SENATOR WARD said it does show up.                                                                                              
MR. HARROLD said there are four to  five companies that have their                                                              
own models.   The Fair, Isaac Company and Choice  Point are vendor                                                              
companies  that have  models other  companies  use.   They have  a                                                              
variety of models  and the insurers choose one they  would like to                                                              
use.  He  said child support  may be considered an  adverse public                                                              
record  but they  don't necessarily  have to  look at  everything.                                                              
They have  taken the data  and looked  at the numbers  and figured                                                              
out  what  they  think  is  going to  be  most  predictive  of  an                                                              
insurance loss.   There is competition among insurers  and vendors                                                              
to figure out who can look at the  data the best.  They compete on                                                              
how they look at all the other factors.                                                                                         
SENATOR TAYLOR  said adverse  public record includes  bankruptcies                                                              
and foreclosure on a car loan and that type of thing.                                                                           
MR. HARROLD said he would skip Exhibit  B but pointed out that for                                                              
homeowner  insurance   the  credit  base  scores   are  even  more                                                              
predictive  than  for  auto  insurance,  although  both  are  very                                                              
MR.  HARROLD explained  that  Exhibit C  compares  the loss  ratio                                                              
relativity to credit score.  A low  credit score is negative and a                                                              
high credit  score is  more positive.   Losses  are higher  in the                                                              
left hand column  for individuals that have low  credit scores and                                                              
as   credit   scores   get   gradually    higher   and   financial                                                              
responsibility  is reflected,  they have  fewer and fewer  losses.                                                              
This  is something  a non-statistician  can  look at  and see  why                                                              
insurers are interested  in the information and why  they found it                                                              
to be very effective in predicting loss.                                                                                        
                     Personal Auto Insurance                                                                                    
                                                 Loss Ratio Relativity                                                        
                           Score Range                                                                                          
CHAIRMAN COWDERY  asked if all  insurance companies use  this same                                                              
MR. HARROLD said they look at different  records according to what                                                              
they work  best in.  Allstate  may look at different  factors than                                                              
Progressive. Fair,  Isaac Company designs models that  a number of                                                              
insurers buy and  use and they look at different  factors as well.                                                              
They all compete to try to look at  the data in the most efficient                                                              
CHAIRMAN COWDERY asked if they share this data with each other.                                                                 
MR. HARROLD  said no.   They were very  concerned about  that data                                                              
being public because they put a lot  of time and effort into their                                                              
models.  He said  it is  the same  way with  companies that  offer                                                              
loans  on credit  cards or  a loan  for an  automobile. They  have                                                              
their own  methods of looking  at the  numbers in ways  they think                                                              
are going to be most predictive of  who is going to be able to pay                                                              
them back.                                                                                                                      
SENATOR ELTON  asked Mr. Harrold to  correct him if he  was wrong.                                                              
He thought it was important to point  out that competing insurance                                                              
companies  may not  share information,  but  companies like  Fair,                                                              
Isaac sell  the credit  scoring information.   They will  sell the                                                              
information to  other insurers, letting them know  when somebody's                                                              
policy is about  ready to expire so the other  insurance companies                                                              
can start dumping  information in the mail and  making phone calls                                                              
to  people's homes.   They  may not  share  the data  and how  the                                                              
formula was reached but they certainly  share the information that                                                              
is compiled because of credit scoring.                                                                                          
CHAIRMAN COWDERY said they had more  information and examples they                                                              
would be sharing with the committee.                                                                                            
SENATOR WARD  asked if any of  the people Mr.  Harrold represented                                                              
use bad credit on credit cards as one of the criteria.                                                                          
MR. HARROLD said yes.                                                                                                           
SENATOR WARD  asked if  insurance rates would  go up  for somebody                                                              
with bad credit because of credit cards.                                                                                        
MR. HARROLD  said that could be one  of the factors that  would go                                                              
into a credit-scoring model.  These  are very sophisticated models                                                              
so one  thing is not  going to send  rates through the  roof. Most                                                              
people   are  going   to  have   good   characteristics  and   bad                                                              
characteristics.   Most  people  have   a  good  credit   history.                                                              
Different types of activities vary  in degree.  Certainly somebody                                                              
that has a bankruptcy and has reached  the maximum limit on all of                                                              
their credit cards would have a higher score.                                                                                   
SENATOR WARD said  he knew of two families where  the farther they                                                              
went into debt  with credit cards the more credit  cards were sent                                                              
and they used them. These people  were not filing bankruptcy, they                                                              
were working their  way through that. He asked  if their insurance                                                              
rate would go up.                                                                                                               
MR.  HARROLD  said  it  would  depend  on  what  other  factors  a                                                              
particular  insurer's model  is taking into  account because  they                                                              
don't just look at credit cards.   They look at a wide spectrum of                                                              
credit related activities.                                                                                                      
SENATOR WARD  asked if they  would have  a higher rate  because of                                                              
just credit cards.                                                                                                              
MR. HARROLD said he could not tell him.                                                                                         
SENATOR WARD asked  if the model gave a higher  car insurance rate                                                              
because of credit  cards only.  He said it was  five or six credit                                                              
cards and they were in a lot of financial trouble.                                                                              
MR. HARROLD said from his understanding  based on delinquent trade                                                              
lines  if they  were  in debt  and had  been  delinquent on  their                                                              
credit  cards there  was a  good chance  they would  have a  lower                                                              
credit score  and a higher potential  to be a risk of  loss.  They                                                              
probably would have a higher insurance rate.                                                                                    
SENATOR  WARD  said  they  had a  credit  card  and  then  started                                                              
acquiring other cards to pay off the first card.                                                                                
MR. HARROLD  said he  was not  trying to  waffle or be  ambiguous.                                                              
Different   insurers   have   different   models.      These   are                                                              
sophisticated  models  with a  number  of factors  including  non-                                                              
credit related factors.                                                                                                         
CHAIRMAN  COWDERY said  Mr. Harrold  informed him  earlier of  how                                                              
people  feel stress  because  of  debt on  credit  cards and  this                                                              
stress  was  a  factor  considered  by  insurers.    They  do  not                                                              
necessarily have  to be  delinquent to have  this stress.   Stress                                                              
can be  caused when they  have reached  the maximum limit  and are                                                              
only paying the interest.                                                                                                       
He said soldiers  are going off to war and have  increasing stress                                                              
and expenses.  The spouses are left  at home and are  also feeling                                                              
increased stress. He  asked if that affected their  rates. He said                                                              
he failed  to see where stress  should affect insurance  rates. He                                                              
thought  the   job  the  legislature   was  doing   was  extremely                                                              
stressful.  He asked Mr.  Harrold to  make the connection  between                                                              
stress and insurance rates.                                                                                                     
MR. HARROLD said the answer has two parts.                                                                                      
     One is that when we were talking  last week we were sort                                                                   
     of talking about how, OK, we  see a correlation in these                                                                   
     numbers  but what's the  causation and  so you begin  to                                                                   
     talk about that.  And what we  can tell is that first of                                                                   
     all what's  most important to  an insurer is  that their                                                                   
     tool  is  predictive and  that  it  works. That  is  the                                                                   
     bottom line.  Whether they can  figure out the  cause or                                                                   
     not is  another issue.  What I then  said is that  there                                                                   
     are a number  of studies however that have  been done in                                                                   
     various fields that look at  this type of issue. And the                                                                   
     two things  that tend  to come up  are that yes,  people                                                                   
     could  be underneath  more stress and  that people  that                                                                   
     are stressed are  going to have a higher chance  of - of                                                                   
     having  a loss  or they  may be  preoccupied with  other                                                                   
     aspects of their life so maybe  their not paying so much                                                                   
     attention  to  their  driving,  maintaining  their  car,                                                                   
     taking care of their home, things of that nature.                                                                          
     And  the  other  factor  was  that  a  consideration  of                                                                   
     causation is that  these people may have more  of a risk                                                                   
     taking type  of behavior. This  may help us  explain why                                                                   
     the  person that  sees a  yellow  light and  accelerates                                                                   
     through it versus a person that  sees a yellow light and                                                                   
     stops.  So  it's  the  whole   element  of  risk  taking                                                                   
     behavior can come into that as well and just before.                                                                       
     As far as  the soldier, Senator, I would  take note that                                                                   
     one  of  our  member  companies is  USAA  and  they  are                                                                   
     insurers for  the armed services soldiers  current, past                                                                   
     and present.   And I would  say that they  probably have                                                                   
     one of the highest customer  loyalty and opinions of how                                                                   
     they  are  treated by  their  insurance company  in  the                                                                   
     country of all  insurers. And USAA is a company  that is                                                                   
     using   credit  scoring.   It  is   helping  them   more                                                                   
     appropriately   charge   people   a  premium   that   is                                                                   
     commensurate with  the risk. So I don't think  that USAA                                                                   
     would be  treating their policyholders  in a  manor that                                                                   
     would be considered prejudicial in that regard.                                                                            
CHAIRMAN COWDERY  said credit information is  personal information                                                              
therefore in all the policies, even  the USAA policy, somewhere in                                                              
the fine  print the policyholder  gives the insurer  the privilege                                                              
to check credit.                                                                                                                
MR. HARROLD said he was not sure.                                                                                               
CHAIRMAN  COWDERY said  they  couldn't just  go  check a  person's                                                              
credit without some consent.                                                                                                    
MR. HARROLD  said sure they can.   He did not think  when Chairman                                                              
Cowdery received  credit card offers  in the mail they  had called                                                              
him up for his  consent to check his credit rating.   They had not                                                              
called Mr. Harrold up when he got  credit card offers in the mail.                                                              
SENATOR TAYLOR said they were all  rotating around the same issue,                                                              
but they really hadn't talked about the issue yet.                                                                              
     The  issue  is  those  of  us  lay  people  that  aren't                                                                   
     involved  in  the  insurance industry,  we  assume  that                                                                   
     causation has something to do  with rates - if you cause                                                                   
     accidents that  your rates will be higher.  If you don't                                                                   
     cause accidents  your rates will be lower.  But there is                                                                   
     absolutely  no correlation  between  causation and  many                                                                   
     other  factors. I  don't know of  any relationship  here                                                                   
     where causation  can be established off of  this.  There                                                                   
     is  a  correlation.   Now  that's  a  term   we  use  in                                                                   
     statistics.  But statistics are fascinating things.                                                                        
SENATOR  TAYLOR said  they take a  million people  in America  and                                                              
find  out  everything  they  can   about  them.  They  find  weird                                                              
anomalies that just  occur in statistics.  The  insurance industry                                                              
looks at everything. They have people  called actuaries that study                                                              
demographics and  statistics they can  base things on. One  of the                                                              
biggest things  they use  in demographics  is age.  A 16  year old                                                              
person could be the most responsible  16 year old in the world but                                                              
they are still going  to be rated very high and  pay an exorbitant                                                              
premium   because  statistically   people  that   are  young   and                                                              
inexperienced get  in more accidents  and have more  problems than                                                              
someone in  an older  age group. Mr.  Harrold had testified  there                                                              
were some areas  they didn't use. Senator Taylor  said that didn't                                                              
mean they didn't  look at those areas  as a company but  they were                                                              
not using them.                                                                                                                 
MR. HARROLD said it did mean they don't look at those areas.                                                                    
SENATOR TAYLOR said at one point in time some statistician did.                                                                 
MR. HARROLD  said some of these  factors are things  that insurers                                                              
do look at.  Insurers do look at  gender. They find males  tend to                                                              
have more accidents than females do.                                                                                            
CHAIRMAN  COWDERY asked  if that  was per mile  and whether  males                                                              
drive more miles than females.                                                                                                  
SENATOR  TAYLOR said  they don't  care about miles  they are  just                                                              
looking at gender.                                                                                                              
MR. HARROLD said  marital status is another factor.  A 30 year old                                                              
married person  is considered  to have fewer  accidents than  a 30                                                              
year old  that is  single. They  are not  just considered  to have                                                              
more accidents the numbers show that is the case.                                                                               
SENATOR TAYLOR said there is a correlation.                                                                                     
MR. HARROLD  explained when  he pointed  to these various  factors                                                              
that they are  simply looking at the way finances  are handled and                                                              
are not  looking at  those individual  factors  as far as  putting                                                              
that into the credit score.                                                                                                     
SENATOR TAYLOR  said it  is only one  part of an overall  package.                                                              
He asked what  other characteristics they use  besides age, gender                                                              
and marital status.                                                                                                             
MR.  HARROLD said  they  could use  things  like prior  insurance.                                                              
There are studies  that show people who have not  had insurance in                                                              
the past tend to have higher losses.                                                                                            
SENATOR TAYLOR asked if they used race.                                                                                         
MR. HARROLD said no.                                                                                                            
SENATOR TAYLOR asked if he was sure.                                                                                            
MR. HARROLD said yes.                                                                                                           
SENATOR TAYLOR asked what if there is a correlation.                                                                            
MR. HARROLD said it still is not something that should be used.                                                                 
SENATOR TAYLOR  asked why.  He said  if age is okay and  gender is                                                              
okay and  they want  to know  about his  marital status  maybe his                                                              
race gets in more wrecks than Mr. Harrold's race does.                                                                          
MR.  HARROLD  said   it  was  very  possible  there   could  be  a                                                              
correlation there  but as  a society it  is something they  do not                                                              
look at.                                                                                                                        
SENATOR  TAYLOR asked  about religion  and  whether Catholics  are                                                              
more dangerous drivers that Muslims  or more dangerous than Hindus                                                              
or Baptists.                                                                                                                    
MR. HARROLD said it would be the same answer.                                                                                   
SENATOR TAYLOR asked why.                                                                                                       
MR.  HARROLD  replied, "That's  something  that  as a  society  we                                                              
decided we should not look at."                                                                                                 
SENATOR TAYLOR  said that  was the point  they were trying  to get                                                              
to.   Society  would  be offended  if  they started  doing  racial                                                              
MR. HARROLD said correct.                                                                                                       
SENATOR TAYLOR said  society would probably be  really offended if                                                              
they  were  doing  religious  profiling   or  profiling  based  on                                                              
national  origin  or  color.  He  said those  would  all  be  very                                                              
offensive.  He said  he did not know that insurers  were not doing                                                              
that. He did not think any of them  were going to know if insurers                                                              
were doing it or not doing it until  someone put a proposal before                                                              
a  legislature  that  said  absolutely  don't  to  this  and  have                                                              
auditors for the  Insurance Commission make sure they  are not. He                                                              
said they  all assume that  to be a  public policy and  no company                                                              
would do that.                                                                                                                  
MR. HARROLD  said those are factors  they are not allowed  to look                                                              
SENATOR TAYLOR asked even if there  were a tremendous correlation,                                                              
the only justification for looking at credit is correlation.                                                                    
MR. HARROLD said correct.                                                                                                       
SENATOR  TAYLOR said  there is no  causation they  could speak  to                                                              
MR. HARROLD  said the  insurers are  interested  in the fact  that                                                              
more accidents and more claims are  filed.  He could watch Michael                                                              
Jordan sink  a jump shot and could  not explain it as  a physicist                                                              
but a physicist  probably could.   What they are interested  in is                                                              
the fact that  Michael Jordan makes  a jump shot.  It  is the same                                                              
type of thing.                                                                                                                  
SENATOR TAYLOR said  there is a correlation between  the number of                                                              
times  he shoots  and  the number  of times  it  goes through  the                                                              
SENATOR TAYLOR  said there are areas  where public policy  did not                                                              
care  if there is  a correlation.   He  thought is  was worth  the                                                              
discussion  and debate  to  talk about  whether  or not  someone's                                                              
credit should  be used adversely  against them for the  purpose of                                                              
setting rates.                                                                                                                  
MR. HARROLD understood that was at  issue.  The insurance industry                                                              
thinks it is well within bounds because  the consumer wants to pay                                                              
a premium that  is reflective of  the loss they may have.   Credit                                                              
information  is  used  in  many   other  facets  of  daily  lives.                                                              
Acquiring  a loan gives  people opportunity  but  the bank  is not                                                              
going to give them the loan if they don't have good credit.                                                                     
SENATOR TAYLOR  asked what  insurers do  in regard to  significant                                                              
others  in a  same sex  relationship.  He asked  if they  received                                                              
credit for marital status under insurance  programs or non-marital                                                              
status and paid a higher rate.                                                                                                  
MR. HARROLD said he had never been  asked that question before and                                                              
was not sure.                                                                                                                   
SENATOR TAYLOR said  maybe it is don't ask, don't  tell.  Insurers                                                              
inquire about marital status when he purchases insurance.                                                                       
MR. HARROLD said Vermont was the  one state that passed such a law                                                              
and several other  cities have had partnership laws  that apply to                                                              
health insurance and  other things.  He did not  know whether that                                                              
applies to auto insurance.                                                                                                      
SENATOR TAYLOR  said it might be  very interesting and  they could                                                              
find a tremendously  high correlation.   He asked if they  found a                                                              
correlation like that whether they would be using it.                                                                           
MR. HARROLD said it would be considered off limits.                                                                             
SENATOR TAYLOR asked if that had been considered yet.                                                                           
MR. HARROLD  said it had not been  considered yet and it  was very                                                              
SENATOR  WARD said  a person  living  beyond their  means who  had                                                              
trouble with credit cards would be  looked at as having bad credit                                                              
and maybe  have a  higher rate.   He said the  State of  Alaska is                                                              
self insured  and had  been living off  credit from their  account                                                              
for ten years. An airline in Anchorage  just went into Chapter 11.                                                              
They did  not pay their  bills and their rates  did not go  up. He                                                              
said the  insurance company was  treating the airline  differently                                                              
than his cousin that ran the bill up.                                                                                           
MR. HARROLD said that would be a commercial account.                                                                            
SENATOR  WARD said  the ability  to  pay is  one criterion.  Enron                                                              
still has  a fleet of  vehicles. Even though  they may have  had a                                                              
little downturn in their bottom line,  their insurance rates would                                                              
not be suffering.  He asked if that was correct.                                                                                
MR. HARROLD said  he was not sure that was the  case.  The ability                                                              
to pay  is not something  that is looked at.  It isn't one  of the                                                              
factors. With commercial  insurance the use of  credit information                                                              
or financial  information has been  a staple for years.  Only more                                                              
recently  it has  begun  to be  looked at  on  the personal  lines                                                              
SENATOR WARD said the airline company  is privately owned and they                                                              
filed for protection.  Their insurance rates have not  gone up. He                                                              
asked if they should go up if they  are equal to the person living                                                              
in Mountain View in Anchorage.                                                                                                  
MR. HARROLD asked  if he was saying  if it is fair for  one, it is                                                              
fair for the other.                                                                                                             
SENATOR  WARD  said  no,  he  was  wondering  what  the  insurance                                                              
industry would do. He did not know  if it was fair or not.  He did                                                              
not know if it  was fair that people kept sending  credit cards to                                                              
people that were already in trouble.  He said he always had a hard                                                              
time deciding between  somebody that is a business  and commercial                                                              
and somebody that is non-commercial  and a citizen because he felt                                                              
the citizen had  more rights. He asked if the  commercial business                                                              
would be treated differently.                                                                                                   
MR. HARROLD said it was a question  he could put to people and ask                                                              
how that  would be treated  in a commercial  context.  He  did not                                                              
know whether in most cases commercial rates would go up.                                                                        
SENATOR WARD said most commercial  businesses are corporations and                                                              
a corporation is considered an entity.   They have the right to be                                                              
sued and sue,  to incur debt and  not to incur debt and  they also                                                              
have the  right to file bankruptcy  just like an  individual does.                                                              
He  did   not  understand  why   that  entity  would   be  treated                                                              
MR. HARROLD  said the bottom line  is a dollar and  cents question                                                              
for both an individual and a corporation.                                                                                       
SENATOR WARD asked if the ability to pay would be the factor.                                                                   
MR. HARROLD said  he was talking about the potential  for loss not                                                              
a matter of how  much money they have.  They are  going to look at                                                              
that corporation in the context of  are they going to have losses.                                                              
They charge a premium that is appropriate  for the losses they may                                                              
have. It  would be the  same with an  individual. It was  a dollar                                                              
and cents question,  not a matter  of rich or poor but  whether or                                                              
not they are going to have losses.                                                                                              
SENATOR ELTON said  they needed to move along but  he had a series                                                              
of questions and  was going to phrase them in such  a way that Mr.                                                              
Harrold could answer them yes, no, or I don't know.                                                                             
SENATOR ELTON  assumed with  the data shown  on the chart,  credit                                                              
scoring  reduces risk  for the  insurer therefore  it should  have                                                              
some net affect on gross rates for consumers.                                                                                   
MR. HARROLD said not gross in the  sense of overall amount.  It is                                                              
helping insurers better apportion the premiums.                                                                                 
SENATOR ELTON  said Progressive  is one of  the major  carriers in                                                              
Alaska.  Progressive began  using  credit scoring  in 1998.  Since                                                              
1998, in a series  of rate requests to the Division  of Insurance,                                                              
they have raised rates 18.8%. He  asked if it made sense that they                                                              
used a more efficient  way of determining risk and  rates would go                                                              
up that much in a period of four years.                                                                                         
MR. HARROLD answered yes it does.   The fact that payment rates go                                                              
up doesn't mean how accurately they  are going to predict how they                                                              
go up - it is a separate issue.                                                                                                 
SENATOR  ELTON asked  if he  had  testified on  credit scoring  in                                                              
MR. HARROLD answered yes.                                                                                                       
SENATOR   ELTON  asked   if  he  remembered   who  sponsored   the                                                              
MR. HARROLD said John Goedde.                                                                                                   
SENATOR ELTON asked what his occupation was.                                                                                    
MR. HARROLD said he was an insurance agent.                                                                                     
SENATOR ELTON asked if Senator Goedde was a Republican.                                                                         
MR. HARROLD answered yes.                                                                                                       
SENATOR ELTON  asked if he was  there when Senator Goedde  said he                                                              
had heard of  homeowner insurance rates shooting up  300% and said                                                              
the biggest losers are the elderly,  the very young and members of                                                              
minority groups when credit scoring is used.                                                                                    
MR. HARROLD  was not  sure that  was exactly  what Senator  Goedde                                                              
said on the day  he was there.  He said Senator  Goedde could have                                                              
said it.                                                                                                                        
SENATOR  ELTON asked  if Republican  Representative  Bill Deal  of                                                              
Nampa, Idaho  was involved  in the hearings  when Mr.  Harrold was                                                              
MR. HARROLD said  Representative Deal was not there,  he is on the                                                              
House side.                                                                                                                     
SENATOR ELTON  asked if it would  surprise Mr. Harrold and  did he                                                              
know his background.                                                                                                            
MR. HARROLD said Representative Deal was an insurance agent.                                                                    
SENATOR  ELTON  asked   if  it  surprised  Mr.   Harrold  to  hear                                                              
Representative  Deal  say  that   using  credit  scores  to  judge                                                              
existing customers is very inequitable and morally wrong.                                                                       
MR. HARROLD  said, "I read the same  quote.  I think  that was the                                                              
article in which the comment that  I made was taken out of context                                                              
as well."                                                                                                                       
SENATOR ELTON asked if he thought it was taken out of context.                                                                  
TAPE 02-11, SIDE B                                                                                                            
MR. HARROLD  said he could tell  them that Representative  Deal is                                                              
probably close to  supporting legislation that does  not do nearly                                                              
what was on the table there.                                                                                                    
SENATOR  ELTON said  there were very  few Democrats  in the  Idaho                                                              
Legislature  so he  was assuming  that any  legislator from  Idaho                                                              
that is  quoted is  going to be  a Republican.   He was  struck by                                                              
this  Republican  Representative's  statement  that  it  was  very                                                              
inequitable and morally wrong.                                                                                                  
SENATOR  ELTON thought  Mr. Harrold  could find  it easy to  prove                                                              
there is a correlation between credit  scoring and risk.  He asked                                                              
if his  employers had ever  looked at correlations  between credit                                                              
scoring and  discrimination. He was  speaking specifically  of the                                                              
study in Maryland  they spoke about a couple of  weeks previously.                                                              
He asked if Mr. Harrold had reviewed the Maryland report.                                                                       
MR.  HARROLD said  he had  seen the  Maryland report.   It's  very                                                              
incomplete because it  does not have a column on  there that talks                                                              
about  what the  losses  were. It  says people  in  this area  pay                                                              
higher insurance  premiums than people  in this other area  but it                                                              
does  not  say  it  is  because   of  the  losses  in  this  area.                                                              
Territorial  rating  is  one of  those  components  where  certain                                                              
territories are looked at as a group, just like other factors.                                                                  
SENATOR  ELTON said  he did  not want  to badger  Mr. Harrold  and                                                              
apologized.  He  said  that  wasn't a  question  that  was  easily                                                              
answered by yes or no.                                                                                                          
MR. HARROLD  said Commissioner Larson  of Maryland would  not seek                                                              
to disallow territorial rating.                                                                                                 
SENATOR ELTON  said during the conversation  they had a  couple of                                                              
weeks ago,  Mr. Harrold had indicated  it was possible to  look at                                                              
insurance rates by  zip code in Alaska. The  conversation involved                                                              
trying  to  determine  whether  or   not  credit  scoring  had  an                                                              
inequitable  effect between  zip codes.  He thought he  remembered                                                              
Mr. Harrold saying they had that capability.                                                                                    
MR. HARROLD  thought they had the  capability, the data  is there.                                                              
He had  not been able  to get the  data because the  companies and                                                              
the government relations  people he worked with were  very busy at                                                              
that time.  To get that level of  detail, if it was maybe a couple                                                              
of states  looking into the issue,  he could probably ask  and get                                                              
that information.                                                                                                               
SENATOR ELTON said it might be helpful.   He said he had a feeling                                                              
that Chairman  Cowdery was going  to want to  move the bill  so he                                                              
did not  know how that  would reprioritize  the work of  that unit                                                              
but it might be helpful.                                                                                                        
SENATOR ELTON  asked, if using credit  scoring, it is  likely that                                                              
car  insurance  or health  insurance  would  go  up for  an  Enron                                                              
employee who lost his or her job and missed a utility payment.                                                                  
MR. HARROLD said it could be possible.                                                                                          
SENATOR ELTON asked if it were possible  a Washington State farmer                                                              
who was  hammered by  the drought  last year  and missed  a credit                                                              
card payment would see his health insurance premium go up.                                                                      
MR. HARROLD  said a credit  score is  a snap in  time.  It  may be                                                              
very likely that during the time  that person had a credit problem                                                              
and there was  a drought an insurer  would not even be  looking at                                                              
that information.  Anything is possible.                                                                                        
SENATOR ELTON  asked if it was  possible that a  recently divorced                                                              
woman  who has  to separate  her  bank account  from her  previous                                                              
spouse's bank account, applied for  auto insurance, her rate would                                                              
be higher than it would have been before the divorce.                                                                           
MR. HARROLD said it is possible.                                                                                                
SENATOR ELTON  said what bothered him  was they knew all  of these                                                              
things were possible.  He did not disagree there  was some kind of                                                              
link  between  credit scoring  and  risk.  He  had a  letter  from                                                              
someone  in  the insurance  business  in  Alaska and  this  person                                                              
talked about two customers.  He explained:                                                                                      
   · One is a woman who had no accidents or violations and had                                                                  
     prior  insurance. She  drives to  work and  has one  vehicle.                                                              
     She  does not  own  a home  but rents.    Her premium  almost                                                              
     doubled  to  over $1000  for  six  months because  of  credit                                                              
   · Another is a male in his 50's. He has a good income, is                                                                    
     married and  owns a  home. He owns  the same make,  model and                                                              
     year  of  car.  He  has a  Driving  While  Intoxicated  (DWI)                                                              
     conviction and  was involved in a DWI accident  five and half                                                              
     years  ago.  The insurance  agent  suggested  that  as a  new                                                              
     customer he would have never  gotten insurance but because of                                                              
     his  credit score  his  insurance rate  is  half the  woman's                                                              
     rate. The woman had no claim.                                                                                              
He asked Mr. Harrold if that sounded like an unusual outcome.                                                                   
MR. HARROLD said it did sound like an unusual outcome.                                                                          
SENATOR ELTON asked why that would  be if the preponderance of the                                                              
underwriting or rating decisions were because of credit scoring.                                                                
MR. HARROLD said he did not know  what the other factors were with                                                              
that  person. He  did  not know  what weight  the  insurer put  on                                                              
credit scoring.                                                                                                                 
SENATOR ELTON asked if, before credit  scoring, it would have been                                                              
more likely  than not that the male  driver would have  had to pay                                                              
more for auto insurance than the female driver.                                                                                 
MR. HARROLD  said yes.  It was  also more  likely prior  to credit                                                              
scoring that  insurers would not  insure a host of  people because                                                              
they did not have  the confidence to do so because  they would not                                                              
know  what their  losses might  be. That  is why  they are  seeing                                                              
insurers insure more people, not less.                                                                                          
SENATOR ELTON  said perhaps.   He said  there are people  in rural                                                              
Alaska that do not  use credit the same way he  or Mr. Harrold do.                                                              
They don't  have an  opportunity to  use credit  the same  way and                                                              
they often pay by cash or a cashier's  check for major things.  If                                                              
he  had a  twin that  had  the same  characteristics  would it  be                                                              
likely his  twin would  pay more for  insurance simply  because he                                                              
lived in a different kind of environment.                                                                                       
MR. HARROLD  said had  heard from insurers  that some  people that                                                              
don't have  a credit  history in  some cases  might actually  have                                                              
better credit  than the average person.  In some cases  they might                                                              
have average credit and there are  other examples where their loss                                                              
experience is far more severe if they don't have any credit.                                                                    
SENATOR ELTON  asked if his brother  converted to a  religion that                                                              
had a  basic precept,  would it  be likely  his brother  would pay                                                              
more for home or health insurance than he would pay.                                                                            
MR. HARROLD said he did not know about the health insurance.                                                                    
SENATOR ELTON asked  if it would be more likely than  not that his                                                              
brother  would  pay more  for  auto  insurance than  himself  even                                                              
though they had a similar driving record.                                                                                       
MR. HARROLD said it would depend on the company and the history.                                                                
SENATOR ELTON  said he did not  understand that answer.   It would                                                              
be helpful  if Mr. Harrold would  give them a formula on  how they                                                              
use credit scoring and how they get to the credit scoring.                                                                      
CHAIRMAN  COWDERY  said  they talked  about  religion.  There  are                                                              
people who  do not believe in  credit for religious  reasons. They                                                              
don't have  a credit  rating. He  quoted a  statement made  by Mr.                                                              
Harrold from the December 26, 2001 issue of the Seattle Times:                                                                  
       We're not penalizing anybody but they - that's the                                                                       
     people without credit history - wont' get a reward for                                                                     
     having good credit.                                                                                                        
He asked Mr. Harrold if he said that.                                                                                           
MR. HARROLD said those were his words.                                                                                          
SENATOR WARD said due to no fault  of their own there are a lot of                                                              
people in  the timber  industry no  longer able  to make  a living                                                              
because of  actions by government.  On top of that,  especially in                                                              
his district, some of those very  same people were involved in the                                                              
commercial fishing industry and they  are no longer able to make a                                                              
living.  They would  now  have a  higher  rate  because they  were                                                              
behind  in payments  on their credit  cards and  other things.  He                                                              
asked if that was correct.                                                                                                      
MR. HARROLD said  it is very possible. In all the  examples, it is                                                              
possible  they  will  pay  more   and  if  credit  scoring  is  as                                                              
predictive  as insurers  say, the  reason  they will  pay more  is                                                              
because they  are going to have higher  losses.  The flip  side of                                                              
the question  could just  as easily be  should the person  that is                                                              
not going to  have the loss pay  more insurance to cover  the loss                                                              
those people  are going to  have.  That  is the equation  they are                                                              
dealing with, that is really what they are doing.                                                                               
SENATOR ELTON  said he would rather  subsidize a good  driver with                                                              
no claim history who might not have  a good credit score, based on                                                              
a  formula that  nobody is  willing  to share  with anybody,  than                                                              
subsidize a  fellow that has a  record of DWI accidents.  He found                                                              
it a  little bit off-putting  to suggest  there is a  subsidy that                                                              
goes one way but doesn't go the other way.                                                                                      
CHAIRMAN COWDERY  asked to his knowledge  if there was  any effort                                                              
when  they use  credit  reports or  scoring  to  determine if  the                                                              
reports are in fact accurate. Mr.  Harrold had stated earlier that                                                              
driving records are not accurate.                                                                                               
MR. HARROLD said they do not take  each individual record and look                                                              
at  them because  what  comes to  an insurer  has  gone through  a                                                              
credit  bureau that  had  the formula  on  file.  The record  runs                                                              
through that  model and  what comes  to an  insurer is the  score.                                                              
Insurers are not  looking at the personal data of  any insured. If                                                              
there is  an adverse action taken,  if somebody has a  higher rate                                                              
or they are cancelled  or non-renewed, then under  the Fair Credit                                                              
Reporting Act that individual has  the right to contact the credit                                                              
bureau and get their credit report  for free. At that point if the                                                              
individual  came back  to the insurer  they could  try to  correct                                                              
that  information. Certainly  that  is something  the industry  is                                                              
willing to  do. The  industry is  more than  willing to  have more                                                              
disclosure  to give  people  an opportunity  to  find  out if  the                                                              
information  is correct and  to then  go back  and re-rate  or re-                                                              
underwrite the  policy to give  them the characteristics  that are                                                              
most important  in impacting their  credit score. There are  a lot                                                              
of things the  insurance industry is willing to do  to help people                                                              
better understand the process. That  example is not something they                                                              
can do with each report that comes through.                                                                                     
MR. DAVID MCCARTER, Fairbanks resident,  explained he had a couple                                                              
of tickets  on his record but no  accidents.  He worked  hard over                                                              
three years to make sure he didn't  get any more tickets.  He used                                                              
his turn  signal and stopped at  yellow lights because  he thought                                                              
he was going to  reap the rewards.  He and his  wife purchased new                                                              
vehicles and thought their premiums  would come down.  They have a                                                              
2001 diesel  Ford pick-up and a  2001 Buick Regal.   Their premium                                                              
was $2430 for the two vehicles. Three  days before their insurance                                                              
expired  he went to  almost every  insurance company  in town.  He                                                              
discovered if he  cancelled with his current company  and moved to                                                              
another,  the very cheapest  insurance rate  available would  have                                                              
been $4890 for the two vehicles.                                                                                                
MR. MCCARTER  said they  have pretty  good credit.   They  own two                                                              
houses and  one is a  rental.  In  2001 while buying  their house,                                                              
they discovered  some inaccuracies on  their credit report.   They                                                              
were able to  clear that up with  the bank but have  been fighting                                                              
with an  attorney to  get it off  their record  and it was  not an                                                              
easy  thing  to  do.  He  found,  had  he  changed  insurers,  his                                                              
insurance policy  would have more  than doubled because  of credit                                                              
scoring. Insurance companies were  saying they were promoting good                                                              
driving.  He thought  the problem  was there is  no motivation  to                                                              
drive decently.  He really has good  credit but was told he had to                                                              
submit it to  an underwriter who  would look at it but  there were                                                              
no guarantees. State Farm and Allstate  would not even write him a                                                              
policy.  Geico would  write  a policy  but  the  price was  really                                                              
outrageous.  He  thought  it  was  an  unfair  and  discriminatory                                                              
MS. TARA DRENNON,  Fairbanks resident, explained she  was a victim                                                              
of identification (ID) theft. They  found out about the theft last                                                              
year and  notified her  insurance company  when she renewed  their                                                              
auto policy.  The insurer  was not  sure he  could renew  her auto                                                              
insurance.  They  had  life  insurance,  homeowner  insurance  and                                                              
renter  insurance through  that company  for four  years and  were                                                              
told that  could work  for her.  Her credit  check came  back bad.                                                              
The only reason  they stayed with that company was  because of the                                                              
three other policies.   They now pay an increased  rate because of                                                              
her ID  theft on her  credit report. ID  theft is becoming  one of                                                              
the number  one criminal offenses.  She does not see  how insurers                                                              
can single  people out  by their credit  report not knowing  these                                                              
people had an ID theft.  There are  individuals that don't know an                                                              
ID theft occurred.                                                                                                              
MR. STEVE  CONN, Alaska Public  Interest Research  Group (AkPIRG),                                                              
said he had attended meetings on  credit scoring with national and                                                              
local consumer groups.   He was glad they were  addressing it head                                                              
on in Alaska.                                                                                                                   
     The principle  reason why many  questions raised  by the                                                                   
     Senators could not be answered  by the representative of                                                                   
     the insurance  industry and, in fact, can't  be answered                                                                   
     by any insurance agent when  these crazy rate hikes come                                                                   
     up is  because they are based  on computer models  - not                                                                   
     just  the credit  report but  computer  models that  the                                                                   
     companies will not share. In  other words, the result in                                                                   
     these little  black boxes cannot be verified  and cannot                                                                   
     be replicated.  And we're just supposed to  believe that                                                                   
     you feed in  information into this little  black machine                                                                   
     and  on the other  end comes  an answer  that even  your                                                                   
     local agent  who's known  you all his  life or her  life                                                                   
     cannot change.                                                                                                             
     Bob Hunter,  who is  the Director  of Insurance for  the                                                                   
     Consumer Federation,  said it's like a black  box and he                                                                   
     says they haven't verified that  minorities, people with                                                                   
     disabilities and  the poor aren't discriminated  against                                                                   
     by this system.  I mean what  you're left with wondering                                                                   
     Senator,  is whether or  not this  new proposal that  is                                                                   
     now sweeping the country is  going to be used as a cover                                                                   
     for illegal discrimination that  has already taken place                                                                   
     or   will   be  used   as   a  cover   for   prospective                                                                   
     discrimination that might take  place.  And I think many                                                                   
     of  the Senators  reached  that in  their  - with  their                                                                   
     Personal  information,  real  life information  about  a                                                                   
     person  is   better  than  laying  them  up   against  a                                                                   
     statistical  model.  This  very clearly  will lead  to a                                                                   
     kind  of  discrimination  that  works  directly  against                                                                   
     Alaska public policy not only statutorily.                                                                                 
     But we  have easily 14,000  licensed drivers  that don't                                                                   
     have insurance.  If we move, if we allow  this to happen                                                                   
     here,  to what degree  are we  going to discourage  them                                                                   
     from getting  insurance and  have to carry uninsured  on                                                                   
     our own.                                                                                                                   
MR. CONN maintained the only correlation  he saw is on the part of                                                              
the insurance companies  between their greed and  their ingenuity.                                                              
Insurance  companies know  they are  not  getting the  investments                                                              
they used  to in the stock  market so they  are trying to  take it                                                              
out of the customers with a pig in  a poke that can't be verified.                                                              
MS.  SUZANNE KELLEY,  owner Alaska  Tab &  Bind Printing  Company,                                                              
said  when she  heard  about this  issue she  talked  to about  50                                                              
people who were unaware their rates  were based on a credit score.                                                              
Everyone she had talked with was shocked.                                                                                       
She found out when she got an annual  rate increase of about $600,                                                              
which  was well  over a  40% increase.  She  called the  insurance                                                              
company and  asked what the  rate increase was  about. Progressive                                                              
told her  the State  of Alaska  required a  credit check  every 36                                                              
months.  They told her it was in  statute.  She asked them for the                                                              
law and they could not cite it for her.                                                                                         
She called other  insurance companies and received  quotes and all                                                              
were  based on  credit scoring.  Premiums  were not  based on  her                                                              
driving ability. She  had not been in an accident  or made a claim                                                              
on her policy.                                                                                                                  
MS. KELLEY  said her  homeowner insurance  doubled so she  changed                                                              
companies. She  said the only thing  that had changed was  she had                                                              
purchased a home and expanded her  business. She uses her own line                                                              
of credit and is self-employed and pays her bills on time.                                                                      
MS. KELLEY said this is discrimination.  There are people that are                                                              
poor  and young  who  are not  going  to pay  $3000  per year  for                                                              
insurance just  because they  don't have  credit while  working at                                                              
Wal-Mart.  "This is discrimination.  I can pay, they can't."                                                                    
She checked  rates everywhere  and talked to  every agent  she had                                                              
received a quote from and the agents  had an issue with this.  The                                                              
agents are  working for companies  they are not in  agreement with                                                              
but have  no choice  because those  are the laws  and they  do not                                                              
even understand the laws.                                                                                                       
CHAIRMAN COWDERY  pointed out the  agents are agents  of insurance                                                              
companies  and  do not  set  the  rates.  They  are working  on  a                                                              
MS. KELLEY said the agents are not  aware of the rates or how they                                                              
are set.  The agents are not in agreement  with credit scoring and                                                              
have seen many areas where it appears  to be discriminatory.  They                                                              
will admit that.                                                                                                                
MS. DEE  HUBBARD, Sterling  resident,  was in  support of SB  320.                                                              
She  found  out about  credit  scoring  from  a friend  two  years                                                              
earlier and  began exploring it. She  found no one who  could tell                                                              
her whether  credit scoring was being  used or not. Last  year she                                                              
talked to a gentleman at the National  Consumer Insurance Hotline.                                                              
He told her  in his 40 years  of working in the  insurance company                                                              
business he had never heard of anyone using credit scoring.                                                                     
She  was surprised  the legislature  had three  bills relating  to                                                              
credit scoring and hoped one of the  bills would pass. She said SB
1408,  which is  being  considered  in Idaho,  goes  a little  bit                                                              
further than  SB 320.  It will not  allow an  insurer to  charge a                                                              
higher premium  and in  addition the  insurer cannot cancel,  non-                                                              
renew  or  decline to  issue  a  property  or casualty  policy  or                                                              
coverage  based  primarily on  an  individual's  credit rating  or                                                              
credit  history.   With  SB  1408,  a  person   cannot  be  denied                                                              
insurance, be told their policy will  not be renewed or have their                                                              
insurance cancelled  strictly because  of credit rating  or credit                                                              
scoring. She  thought that might  be something the  Transportation                                                              
Committee  would  consider as  an  amendment  that would  make  it                                                              
stronger. She would back anything that would make it stronger.                                                                  
MS. HUBBARD said as a consumer she  is tired of being the one that                                                              
has to prove she has done nothing  wrong.  When Wells Fargo bought                                                              
her bank, four checks bounced due  to bank error and it took seven                                                              
hours to  get it  squared away. She  said people  who think  it is                                                              
easy to  get a credit  report changed should  try it one  time and                                                              
they would change their tune.                                                                                                   
CHAIRMAN COWDERY  said they had a  copy of the  Idaho legislation.                                                              
He told her the bill would be heard in other committees.                                                                        
SENATOR ELTON said in one way Chairman  Cowdery's bill is stronger                                                              
than the Idaho bill. The Idaho bill  provides that insurers cannot                                                              
charge  a higher  premium or  cancel  a policy  or coverage  based                                                              
primarily  upon  credit scoring.  They  define base  primarily  as                                                              
meaning that  the weight given by  the insurer to  an individual's                                                              
credit rating or credit history exceeds  the other weight given by                                                              
the insurer. The Idaho bill would  allow credit scoring as long as                                                              
it  doesn't  count  for  more than  49%  of  the  decision  making                                                              
MS. HUBBARD said Senator Elton was  right. She did not necessarily                                                              
like the  wording that was  used in the  Idaho bill but  she liked                                                              
the thrust  of not  allowing a  cancellation or  a non-renewal  or                                                              
someone being declined insurance.                                                                                               
MS.  SARAH MCNAIR-GROVE,  Property/Casualty  Actuary, Division  of                                                              
Insurance,  said  the Alaska  Division  of Insurance  agrees  with                                                              
Chairman Cowdery that additional  regulation in the area of credit                                                              
scoring by  insurance companies is  appropriate. However,  how far                                                              
to go,  including whether  it should be  a total prohibition  they                                                              
believe is a policy  call but they did support the  efforts in the                                                              
area.  She told members:                                                                                                        
     The  Division's   responsibility   is  to  review   auto                                                                   
     insurance  rates and to  approve them  if they meet  the                                                                   
     statutory    requirements.     And    those    statutory                                                                   
     requirements  are the rates  not be excessive,  they not                                                                   
     be   inadequate   and   that  they   not   be   unfairly                                                                   
     discriminatory. As has already  been mentioned here, one                                                                   
     of the first approvals of the  use of credit information                                                                   
     in a rate filing occurred approximately  four and a half                                                                   
     - five  years ago  with Progressive's  filing. We  spent                                                                   
     over   a  year   looking  at   that  filing,   gathering                                                                   
     information, looking at the  statistical support for its                                                                   
     use, asked  many of  the same  questions that have  been                                                                   
     asked  here and  felt that by  the time  that was  over,                                                                   
     they had provided the information  necessary to meet the                                                                   
     statutory requirements and so we approved the filing.                                                                      
     Since  then   we  have  approximately   seven  insurance                                                                   
     companies  who have  specific  filings  approved to  use                                                                   
     credit   information  in  the   rating  process.   Since                                                                   
     December of  2000, we have also received  another eleven                                                                   
     filings  requesting  to use  credit information  in  the                                                                   
     rating   process.   Those    have   been   significantly                                                                   
     questioned.  Four, actually  six of  those filings  were                                                                   
     withdrawn or the insurer removed  the credit information                                                                   
     because they  could not provide the information  that we                                                                   
     needed. Two of  the filings were approved  and those are                                                                   
     the USAA filings that were also  just recently mentioned                                                                   
     here. The  other filings are  still either under  review                                                                   
     or  were  disapproved  because  we  could  not  get  the                                                                   
     supporting  information  that we  needed.  We have  also                                                                   
     four  homeowner filings  but  since we  weren't  dealing                                                                   
     with those I won't mention those.                                                                                          
CHAIRMAN COWDERY said this bill covers all insurance.                                                                           
MS. MCNAIR-GROVE said they have four  homeowner filings.  Three of                                                              
those removed  the credit information  because they could  not get                                                              
the credit information needed.                                                                                                  
     An  insurer   may  also  use   credit  scoring   in  the                                                                   
     underwriting  process  and the  division  does not  have                                                                   
     prior  approval  over  the underwriting  process  so  we                                                                   
     don't  see that criteria  before insurers  use it.   But                                                                   
     other insurers  besides these  that have rate  filings I                                                                   
     believe are using it.                                                                                                      
     As the  use of credit  scoring has increased  in Alaska,                                                                   
     the  division   has  continued  to  receive   questions,                                                                   
     inquiries  and complaints from  consumers regarding  the                                                                   
     use of  credit information similar  to the ones  that we                                                                   
     have just heard.  And it has been very difficult  for us                                                                   
     to get  good answers from  the insurance companies  that                                                                   
     consumers  can understand as  to why credit  information                                                                   
     is an  appropriate rating tool  and how it  has affected                                                                   
     their rates.                                                                                                               
CHAIRMAN  COWDERY asked  if there  was effort  by the Division  of                                                              
Insurance  to  verify  the  accuracy   of  the  credit  references                                                              
insurers use.                                                                                                                   
MS. MCNAIR-GROVE said they do not.  One of the questions they have                                                              
asked insurers that use credit scoring  is what opportunities they                                                              
provide  consumers  to get  information  corrected.  Most of  them                                                              
responded that they follow the Fair Credit Reporting Act.                                                                       
CHAIRMAN  COWDERY  said  on  his   own  credit  report  there  was                                                              
something that was absolutely false.  He was completely unaware of                                                              
it until he applied  for a loan. The loan was  approved but he did                                                              
not  accept  it   because  he  was  not  happy   about  the  false                                                              
information. A person  could get a traffic ticket  driving another                                                              
person's  car.  The owner  is  unaware  of it  and  it  goes to  a                                                              
collection agency and enters the system.                                                                                        
SENATOR ELTON said  they heard testimony that a  consumer was told                                                              
state  law or  state  regulations require  that  Progressive do  a                                                              
credit  score  periodically.  He asked  if  there  is any  law  or                                                              
regulation that requires an insured's carrier to do that.                                                                       
MS. MCNAIR-GROVE said there is no  law or regulation. She believed                                                              
the  testifier  was referring  to  an insurance  company's  rating                                                              
plan.  When  an  insurance  company files  with  the  Division  of                                                              
Insurance and  details how they are  going to use the  rating plan                                                              
and  list the  criteria they  are going  to use  to determine  the                                                              
appropriate  rate, they  must follow  that  plan. Progressive  has                                                              
said how they are going to use credit  information and people with                                                              
a certain credit  score get placed in a certain tier.   So in that                                                              
sense they are  following their approved rating plan  but there is                                                              
no requirement that they use credit information.                                                                                
SENATOR ELTON said it would probably  be an insurer's choice to do                                                              
that because that  would give them the opportunity  to raise rates                                                              
if in fact there has been a change in credit history.                                                                           
He asked if the  Division of Insurance reviews  the credit scoring                                                              
formulas used by insurance carriers in the State of Alaska.                                                                     
MS. MCNAIR-GROVE  said they  had tried  to do  that. That  was the                                                              
reason why some of the recent filings  were withdrawn because they                                                              
could not get  that information. When they  reviewed Progressive's                                                              
filing Progressive did their own  in-house model and there was not                                                              
a  third  party   although  they  had  the   same  confidentiality                                                              
concerns. The division required them  to list all of the pieces of                                                              
information  they used  off of  the  credit report.  They did  not                                                              
require  them to  give the  division the  specific weighting,  for                                                              
example where this piece of information  gets two percent and this                                                              
piece of  information gets minus  five percent.  The  division did                                                              
not require that.                                                                                                               
SENATOR ELTON said one of the reasons  he liked SB 320 was because                                                              
the Division of Insurance feels they  may have some authority over                                                              
the  setting of  rates  because of  statutory  language that  says                                                              
unfairly  discriminatory.  But the  division  feels  they have  no                                                              
authority over the underwriting component  when it comes to credit                                                              
scoring.  He asked if that was true.                                                                                            
MS.  MCNAIR-GROVE  explained  she   would  not  say  they  had  no                                                              
authority.   They did not have  prior approval authority  and they                                                              
would  have to  look  at the  underwriting  process through  their                                                              
Unfair Trade Practices  Law and it would be a  market conduct type                                                              
SENATOR TAYLOR  thought the Division  of Insurance was  to protect                                                              
the public  from outrageous  gouging being  done by the  industry.                                                              
To do that they would go through  and review claims and the amount                                                              
paid out  in the  form of claims,  defense of  claims and  cost of                                                              
handling  claims would  be a  number and  that would  be how  much                                                              
money they  took in from  premiums. Then  there would be  how much                                                              
money  they paid  out  in claims.  There would  also  be how  much                                                              
profit they made  off of investing in a bull market  like the last                                                              
ten years. The Division of Insurance  would look at that and would                                                              
say that  is a  reasonable new  rate the  insurance companies  are                                                              
applying for or  it is not a reasonable rate.  Apparently there is                                                              
something else  figured in  there, which is  some level  of profit                                                              
margin  the division  believes  the  insurance companies  have  to                                                              
He  said  they  went  through all  that  during  the  tort  reform                                                              
movement when he  found out his personal insurance  as an attorney                                                              
on malpractice had  gone up about three or four  thousand percent.                                                              
There had  been no increase in  claims in a five-year  period. His                                                              
insurance commissioners had approved  all those increases. At that                                                              
point he had lost faith in how much protection he was getting.                                                                  
     On this issue  of credit as a factor in  the process I'm                                                                   
     concerned  that we seemed  to have  drifted a long  ways                                                                   
     away  from evaluating  an appropriate  level of  premium                                                                   
     based on  claims. And now we  seem to determine  that an                                                                   
     appropriate  level of  premium  is based  on a  person's                                                                   
     sex, their  gender, based on  their age, based  on their                                                                   
     marital  status and  now based on  their credit  report.                                                                   
     None of  which have  anything to do  with driving  a car                                                                   
     but have  correlations statistically that may  show that                                                                   
     they're a greater  risk or a smaller risk.  Is that what                                                                   
     we're turning into now is we're  going to go to a system                                                                   
     where you'll be pigeon holed  and the amount you have to                                                                   
     pay for insurance will depend  upon what your credit is,                                                                   
     how  old  you  are,  whether or  not  your  married  and                                                                   
     whatever other  things that they  may want. Is  that the                                                                   
     kind of system we're moving into now?                                                                                      
MS. MCNAIR-GROVE responded:                                                                                                     
     I would  say that  we do  look at  exactly the kinds  of                                                                   
     things  that you look  at. And  you heard discussion  of                                                                   
     loss ratios  earlier and that  is a relationship  of how                                                                   
     much you  take in  in premium compared  to how much  you                                                                   
     pay out  in losses. So  we do look  at those. We  do not                                                                   
     ignore  those  and look  strictly  at these  models  and                                                                   
     various other  things. That is  part of the  process and                                                                   
     we try  to be sure that  that those match as  closely as                                                                   
     In terms of  the other factors, we have been  using them                                                                   
     and  they  have -  are  what  traditionally  acceptable,                                                                   
     should  we say  that, the  gender  and the  age and  sex                                                                   
     those have been used for a long  time. The credit report                                                                   
     is a new one that's just added to the pot.                                                                                 
SENATOR TAYLOR asked the following questions.                                                                                   
     When you said  you were unable to get  information about                                                                   
     credit reports  and how they  compile them whether  they                                                                   
     verified it was  good information or not and  so on, how                                                                   
     do you know  as a - as a insurance commissioner  in this                                                                   
     state, how do  you know that they are not  utilizing any                                                                   
     other  aspect in determining  whether  or not to  either                                                                   
     sell a  policy or not to sell  one or what rate  or what                                                                   
     pigeon hole to  put someone in?  How do I  know that the                                                                   
     insurance industry isn't racially  profiling.  How did I                                                                   
     know that  they're not  using religion?   How do  I know                                                                   
     they're  not using sexual  preference as  a guide?   How                                                                   
     would I be assured of that?                                                                                                
MS.  MCNAIR-GROVE  said  they  review  the filings  in  which  the                                                              
insurance company tells  them the criteria they are  going to use.                                                              
The insurance  company must then  follow the filing as  filed with                                                              
the division.  As the  division approves the  filing if  there are                                                              
questions or consumer  complaints saying the company  is not doing                                                              
the right  thing then the division  has a market  conduct process.                                                              
They actually go  out and review what the companies  are doing and                                                              
see if they are doing what was approved for them to do.                                                                         
SENATOR  TAYLOR asked  if  they sent  somebody  out that  actually                                                              
pretended they  were a  buyer and  went to an  agent and  sat down                                                              
with them or do they just go out and audit.                                                                                     
MS. MCNAIR-GROVE said probably more  of an audit process. We audit                                                              
their claim files and look at various pieces of information.                                                                    
SENATOR TAYLOR  said he was  very concerned about  identity theft.                                                              
The legislature  may need to  address that if  it is a  factor and                                                              
component. He  said he passed a bill  that made it a  more serious                                                              
offense.  He  had  not realized  how  that  information  might  be                                                              
misused and  abused by  people within  the insurance industry.  He                                                              
wanted to talk with Ms. McNair-Grove about that at another time.                                                                
SENATOR  TAYLOR said  each of his  children decided  to live  with                                                              
someone for  a couple  of years before  they were married.  During                                                              
the period of  time when they were living with  someone they would                                                              
have been classed  as single and  paid a higher rate. He  asked if                                                              
the Division of Insurance approved that.                                                                                        
MS. MCNAIR-GROVE said it was possible.  Whether they paid a higher                                                              
rate  could  depend  upon  the  definition  of  marital  in  their                                                              
company's  filing.  If  a  company  would choose  to  say  a  long                                                              
relationship would  fall under the marital category  and provide a                                                              
statistic that showed they would  have the same characteristics as                                                              
someone who  is married  the Division  of Insurance could  approve                                                              
that. It would be  the company's choice as to whether  or not they                                                              
would want to do that.                                                                                                          
SENATOR TAYLOR asked  if those people who choose  not to marry but                                                              
live together  for a lengthy  period of  time are paying  a single                                                              
rate and the  Division of Insurance approved that  as a factor the                                                              
insurance company could use.                                                                                                    
MS. MCNAIR-GROVE answered yes.                                                                                                  
SENATE  TAYLOR  said  the  division does  not  ask  the  insurance                                                              
company to do these  things.  They wait for the  companies to come                                                              
in and volunteer.                                                                                                               
MS.  MCNAIR-GROVE said  it was  the  companies' responsibility  to                                                              
make rate filings and set the rating plan.                                                                                      
SENATOR ELTON  said it is important  to note that a  credit report                                                              
is different  than a credit  score.  It  is relatively easy  for a                                                              
consumer  to  have   access  to  their  credit   report  and  make                                                              
corrections  but they don't  know how  those corrections  affect a                                                              
credit score. The  credit score is a proprietary  tool used by the                                                              
insurance companies and they don't  tell the Division of Insurance                                                              
what that formula is. He asked if that was correct.                                                                             
MS. MCNAIR-GROVE response was inaudible.                                                                                        
MS.  ELIZABETH   MOCERI,  Regional  Counsel,   Allstate  Insurance                                                              
Company,  testified in opposition  to SB  320.   She said  she was                                                              
there  to  talk about  the  benefits  of  credit scoring  and  why                                                              
Allstate Insurance Company uses credit  scoring. She said they had                                                              
heard a lot of negatives.                                                                                                       
MS. MOCERI said  their goal is to use credit scoring  in rating in                                                              
Alaska. With credit  scoring, Allstate will provide  lower prices,                                                              
lower  rates and  accept  more  policyholders into  their  market.                                                              
They  currently  use credit  scoring  in underwriting  in  Alaska.                                                              
Credit information  is predictive  of loss  history and  it's very                                                              
accurate.  They  saw  a  predictive   correlation  between  credit                                                              
scoring information and future loss.                                                                                            
TAPE O2-12, SIDE A                                                                                                            
MS. MOCERI  said Allstate was one  of the companies  that withdrew                                                              
their filing as Ms. McNair-Grove  had indicated. They withdrew not                                                              
because  they did  not want  to share  their  algorithms with  the                                                              
Division of  Insurance but  because they  could not guarantee  its                                                              
confidentiality.  They  are still  working  with  the Division  of                                                              
Insurance  and would  like  to have  some  requirement that  their                                                              
algorithms  would be  confidential  so the  Division of  Insurance                                                              
could review it.                                                                                                                
     In our  states that we do  use credit scoring  in rating                                                                   
     our policy prices are, our rates,  are very competitive.                                                                   
     In the  states of  Washington and  Idaho and Oregon  our                                                                   
     agents are  - have  increased their productivity,  their                                                                   
     writing   more  insurance  policy   and  offering   very                                                                   
     competitive  rates.  And,  for  example,  you  mentioned                                                                   
     Idaho.  We  recently,  an Allstate  agent  testified  in                                                                   
     support of  credit scoring at  the Idaho Senate  hearing                                                                   
     and  she gave  examples, she's  marketing to  Lithuanian                                                                   
     and  Russian and  Hispanic immigrants.    This group  of                                                                   
     policyholders has  credit and are receiving  - receiving                                                                   
     our best  rates.   And she feels  that she's being  very                                                                   
     competitive  with  State Farm  and Progressive  and  the                                                                   
     other carriers.                                                                                                            
MS. MOCERI said two Allstate agents  testified in Washington State                                                              
in  support of  credit  scoring. They  gave  examples where  using                                                              
credit   scoring   allowed   janitors  and   some   medical   care                                                              
professionals  to  receive  the  best  rate  while  other  medical                                                              
professionals did not receive their  most favorable tier. She said                                                              
those  were examples  that you  can't tell  a book  by its  cover.                                                              
There   had  been   evidence   where   some  people   were   being                                                              
disadvantaged  by   credit  scoring  but  with   Allstate  70%  of                                                              
policyholders  benefit by  credit  scoring. Allstate  gave a  very                                                              
good  discount with  credit  scoring  and was  able  to give  that                                                              
discount because of the confidence  they have. Not allowing credit                                                              
scoring  would deprive  the majority  of  policyholders of  having                                                              
this discount.                                                                                                                  
CHAIRMAN COWDERY asked  if in her opinion the  majority of people,                                                              
if they understood credit scoring, would approve of it.                                                                         
MS.  MOCERI said  she did.  She thought  the industry  had done  a                                                              
terrible job  explaining the use of  credit scoring. It  is a very                                                              
emotional issue and  the assumption is that it  is negative. Their                                                              
scoring  model  looks at  positives  and  negatives  but it  is  a                                                              
holistic approach.                                                                                                              
She said they  were not going to show the committee  the algorithm                                                              
because it  is proprietary  and makes  them more competitive.  She                                                              
said it was not  that she didn't want Chairman Cowdery  to see it,                                                              
she did not want State Farm and Progressive  to see it because she                                                              
is able to offer a lower rate because  of its predictive value. It                                                              
is more predictive than tickets.                                                                                                
MS. MOCERI said  she wanted to talk about Hawaii.  She said Hawaii                                                              
is a great  place to visit but  it is a terrible place  to emulate                                                              
on legislation. The insurance commissioner  asked all the carriers                                                              
to voluntarily  cease using credit  in underwriting and  they did.                                                              
Allstate  agents'  production is  down  12%  because they  had  to                                                              
tighten other underwriting guidelines.  If someone has a ticket in                                                              
Hawaii they  cannot get insurance  with Allstate for  three years.                                                              
That is what  would happen in Alaska. Allstate would  have to turn                                                              
more people away and they want to bring in more people.                                                                         
SENATOR  WARD said  Hawaii  doesn't allow  weighing  rates by  bad                                                              
credit so  Allstate's rates  have gone  up. He  asked if  that was                                                              
MS. MOCERI said their rates have  not gone up but they are turning                                                              
people away. It is an availability issue.                                                                                       
SENATOR WARD  said Mr. Harrold had  said because of  an initiative                                                              
they  can  no  longer  use  credit  in  California.  He  asked  if                                                              
Allstate's rates had gone up in California  since that proposition                                                              
MS.  MOCERI  believed  they  were filing  for  rate  increases  in                                                              
SENATOR WARD asked if it had gone up.                                                                                           
MS.  MOCERI said  Allstate Insurance  Company had  filed for  rate                                                              
increases in California.                                                                                                        
SENATOR WARD asked  if that was because of not being  able to have                                                              
credit weighed into rates.                                                                                                      
MS. MOCERI said  she could not speak to California.   She said she                                                              
was not familiar  with the laws.   She knew California  was a very                                                              
unique  and   complicated  situation.   Because  each   state  has                                                              
different  guidelines  and different  requirements  and there  are                                                              
56,000  insurance regulations,  it  is very  difficult to  compare                                                              
SENATOR WARD  asked what percentage  of people in  Hawaii applying                                                              
for insurance  are being  denied since they  did away  with credit                                                              
MS.  MOCERI  said it  was  too  early  to tell.  She  thought  the                                                              
carriers would  have to tighten down the  underwriting guidelines.                                                              
Credit  is  a  very  valid and  predictive  tool.  When  they  are                                                              
deprived  from  using  that  tool  they have  to  use  other  less                                                              
reliable tools.  Hawaii is  a very unique  state and has  a unique                                                              
take  all  comers  history.  Several years  ago  Hawaii  had  tort                                                              
reform. She said  she only remarked on Hawaii  because the Senator                                                              
talked about  it. Hawaii  had a mandatory  roll back of  rates. It                                                              
was not  voluntary by  the carriers  it was  required by  law. She                                                              
said there were other reasons why rates went down.                                                                              
CHAIRMAN  COWDERY  reiterated there  were  about  25 other  states                                                              
currently  considering  banning  the  use of  credit  scoring.  In                                                              
Hawaii  they have  had about  15 years  of this  practice and  the                                                              
premiums are  currently some  of the lowest  rates in  the states.                                                              
Hawaii not only  banned credit they banned almost  everything else                                                              
to use in rating. He asked if that was correct.                                                                                 
MS. MOCERI  said they were also  considering a law that  would not                                                              
allow  certain  traffic  tickets   to  be  reported  to  insurance                                                              
SENATOR ELTON said  he could understand the witness's  aversion to                                                              
talking about Hawaii. He asked if  Allstate had lost any judgments                                                              
in Hawaii  in the  last two  years. He  asked if  they had  lost a                                                              
judgment where a court affirmed and  ordered them to cease using a                                                              
person's length of driving experience in premium calculations.                                                                  
MS. MOCERI said they do not comment  on pending litigation.  There                                                              
is pending litigation regarding the  use of credit in underwriting                                                              
in the State of Hawaii.                                                                                                         
SENATOR ELTON said the information  he had was that they had lost.                                                              
A judge had ruled against Allstate.                                                                                             
MS. MOCERI said  there was a pending case with  the Hawaii Supreme                                                              
SENATOR ELTON  asked if a judge  had also ruled that  Allstate had                                                              
violated  Hawaii's  provision that  prohibits  the  use of  credit                                                              
rating in setting premiums.                                                                                                     
MS. MOCERI  said there was  a pending  case in the  Hawaii Supreme                                                              
Court of Allstate vs. Metcalfe. They do have pending litigation.                                                                
SENATOR ELTON  said he  could understand  her aversion  of talking                                                              
about  Hawaii because  it  seemed  her company  might  have a  few                                                              
problems there.                                                                                                                 
CHAIRMAN  COWDERY said  in defense  of Allstate  he had been  with                                                              
Allstate for 40  years or more. He has a good  agent, is satisfied                                                              
with him and receives good rates.                                                                                               
He said  his daughter is  47 years old and  in the last  ten years                                                              
she had  driven 187,000  miles in her  pickup truck.  She recently                                                              
got insurance through Progressive  and he believed her premium was                                                              
set  at $2400  or $2700.  He thought  that was  ridiculous so  she                                                              
cancelled her  policy and  he asked  his agent to  put her  on his                                                              
policy, which cost approximately $700.                                                                                          
MS. MOCERI  said the  distinction there is  again using  credit in                                                              
the underwriting side and the rating  side. Allstate would like to                                                              
resubmit their filing  with the state if their  algorithm would be                                                              
confidential. Under  that scenario they have a  rate for everyone.                                                              
Allstate has  a rate for people  who don't have a  credit history.                                                              
In their algorithm  people with bankruptcies in  their past record                                                              
still are eligible  for some of their best rates.  Seventy percent                                                              
of people  are getting  a credit  discount. When  they ban  credit                                                              
they  are banning  the  ability to  give  that  discount to  those                                                              
people.  Those are  people that  do  not cause  losses. Credit  is                                                              
predictive of losses.  The people  who benefit from banning it are                                                              
the people who cause the majority of the losses.                                                                                
CHAIRMAN COWDERY said  his daughter is a single parent  and owns a                                                              
home worth  $180,000  to $200,000.  She doesn't  owe money  on her                                                              
home and  is current on  her credit cards  and her  insurance rate                                                              
was  a  total  shock.  He  couldn't  understand  the  differential                                                              
between that rate and adding her to his policy.                                                                                 
SENATOR TAYLOR  said Chairman Cowdery's  daughter had  some credit                                                              
problems  and it  was  the credit  problems  that Progressive  was                                                              
using to  figure out  her rate. That  is why  her policy  rate was                                                              
almost  $2000 higher.  He said  that was  the concern  he had.  He                                                              
     I love the  positive approach you know. It's  you really                                                                   
     want to do this because if we  get to credit rate people                                                                   
     we'll gouge the heck out of  the guy with the bad credit                                                                   
     rating but  we're going then to  be able to give  70% of                                                                   
     the people a discount off of  that. Because on the other                                                                   
     side of your  coin you just said 70%. The  other 30% are                                                                   
     paying through the nose aren't they?                                                                                       
MS.  MOCERI said  the  30% that  are paying  through  the nose  as                                                              
Senator  Taylor coined  it  are the  people  who  are causing  the                                                              
SENATOR TAYLOR said she had no evidence  of causation. He said she                                                              
had  a whole  lot of  evidence and  a  lot of  computer runs  that                                                              
statistically  show there  is a  correlation. He  said she  didn't                                                              
have anything on causation.                                                                                                     
MS.  MOCERI said  in states  where  they use  credit scoring  they                                                              
know  by tiers  who  causes losses.  "The  people  with the  least                                                              
favorable,  in our least  favorable tier  do cause in  homeowner's                                                              
rates 100% of the losses are caused  by the least favorable tier."                                                              
They  see a  very  strong  correlation  and the  information  they                                                              
received was information  based on their own studies.  She thought                                                              
the people who  benefit if they ban credit scoring  are people who                                                              
cause  the claims.  They are  trying  to predict  for the  future.                                                              
They  are trying  to  look at  how they  can  be competitive.  The                                                              
insurance  market  is a  very  competitive  environment.  Allstate                                                              
wants to provide the most competitive price.                                                                                    
SENATOR TAYLOR said  the only way they can pass on  any savings to                                                              
anyone is if  they get more money  from the other people.  He said                                                              
her numbers  are 70%/30%.  Mr. Harrold's  numbers were  around 50%                                                              
getting a  benefit of $180  by using  this system. He  thought Mr.                                                              
Harrold  had  agreed  that 9%  of  the  people  would see  a  $900                                                              
increase in  their premium  all based  on the correlation  between                                                              
credit rating,  not the causation,  the correlation.  He  said Ms.                                                              
Moceri wanted to  keep using those terms interchangeably  and they                                                              
certainly  are not  interchangeable either  through statistics  or                                                              
through the rating schedules and systems they are working under.                                                                
SENATOR TAYLOR was  reminded of an old establishment  in Anchorage                                                              
and it operated  on the basis:   "We cheat the other  guy and pass                                                              
the savings on to you."  He thought  that was happening.  They are                                                              
going to define  who the higher risk is through  this obtuse thing                                                              
called credit rating and then they  are going to make certain that                                                              
group  will  pay  enough  money   so  Allstate  can  become  "more                                                              
competitive in  the market  and be excited  about having  12% more                                                              
sales." They can charge less than  the other company that probably                                                              
isn't invading somebody's  privacy to get their  credit rating but                                                              
is charging  rates based  upon other  factors.  He said he  didn't                                                              
think the  law went  far enough  and suggested  they amend  it and                                                              
eliminate  age,  gender,  marital  status and  length  of  driving                                                              
experience just  like Hawaii did and  maybe they will have  as low                                                              
of premiums as Hawaii.                                                                                                          
SENATOR ELTON  said he  should have  checked to  see who  his auto                                                              
insurer was before the hearing. He  was pleased to hear Ms. Moceri                                                              
believed  if allowed to  use credit  scoring Allstate  anticipated                                                              
the  net effect  would  be  directly  opposite the  experience  of                                                              
Progressive where rates went up 19%.   Allstate would expect rates                                                              
to drop below what they are charging now.                                                                                       
MS. MOCERI  said under their  rating plan  they are able  to offer                                                              
very competitive rates  because they are able to  predict how that                                                              
group will perform  in the future. Because of  their confidence in                                                              
that prediction, they are able to offer a very competitive rate.                                                                
SENATOR ELTON said  he understood the competitive  nature of their                                                              
formulas.  He  asked  if it  was  true  that  a lot  of  insurance                                                              
companies just  buy a formula from  Fair, Isaac Company  and there                                                              
is  no competitive  advantage  because  they  are using  the  same                                                              
MS. MOCERI said  some companies do use a company  like Fair, Isaac                                                              
Company to do  their own models and they run  different models for                                                              
different companies. Allstate has  its own model and is big enough                                                              
to do studies  and research. They  spent a lot of time  looking at                                                              
this  issue because  their  competitors were  doing  it. If  their                                                              
competitors  were doing  it  and it  wasn't  predictive then  they                                                              
would  not  use  it.  Allstate found  from  their  studies  it  is                                                              
CHAIRMAN COWDERY asked who paid for their studies.                                                                              
MS. MOCERI said they have a planning and research center.                                                                       
CHAIRMAN COWDERY  said the outcome  is not influenced by  who paid                                                              
for the studies.                                                                                                                
MS.  MOCERI said  they  had a  billion  dollars  in premiums  from                                                              
policyholders  in the United  States. They did  a blind  study and                                                              
compared  credit  information against  loss  history.  They saw  a                                                              
strong correlation.                                                                                                             
Insurance looks at  groups and how they perform as  a group. It is                                                              
fair  discrimination.   When   they  look   at  groups  there   is                                                              
correlation.  There always will  be exceptions  to the  group just                                                              
like an exception  to a ticket. Not  all 16 year old  boys are bad                                                              
drivers.  They  would think a 16  year old might be a  good driver                                                              
because  they  are  young,  have good  eyesight  and  have  better                                                              
reflexes  but they  are  worse drivers.  They  offer good  student                                                              
discounts  and someone  could argue that  might be  discriminatory                                                              
but it is something they offer.                                                                                                 
SENATOR ELTON  moved CSSB 320  (TRA) from committee  with attached                                                              
fiscal  note  and  individual  recommendations.   There  being  no                                                              
objection, the motion carried.                                                                                                  

Document Name Date/Time Subjects