05/18/2003 11:05 AM House L&C
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ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
May 18, 2003
11:05 a.m.
MEMBERS PRESENT
Representative Tom Anderson, Chair
Representative Bob Lynn, Vice Chair
Representative Nancy Dahlstrom
Representative Norman Rokeberg
Representative Harry Crawford
Representative David Guttenberg
MEMBERS ABSENT
Representative Carl Gatto
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 13(JUD)
"An Act relating to using credit history or insurance scoring
for insurance purposes; and providing for an effective date."
- MOVED HCS CSSB 13(L&C) OUT OF COMMITTEE
HOUSE BILL NO. 227
"An Act increasing the jurisdictional limit for small claims and
for magistrates from $7,500 to $10,000; increasing the
jurisdictional limit of district courts in certain civil cases
from $50,000 to $75,000; and amending Rule 11(a)(4), Alaska
District Court Rules of Civil Procedure, relating to service of
process for small claims."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: SB 13
SHORT TITLE:INSURANCE DISCRIMINATION BY CREDIT RATING
SPONSOR(S): SENATOR(S) ELTON, COWDERY
Jrn-Date Jrn-Page Action
01/21/03 0017 (S) PREFILE RELEASED 1/10/03
01/21/03 0017 (S) READ THE FIRST TIME -
REFERRALS
01/21/03 0017 (S) L&C, JUD
01/29/03 0077 (S) COSPONSOR(S): FRENCH
03/03/03 0323 (S) COSPONSOR(S): LINCOLN
04/08/03 (S) L&C AT 2:00 PM BELTZ 211
04/08/03 (S) Heard & Held -- Time Change -
04/08/03 (S) MINUTE(L&C)
04/22/03 (S) L&C AT 1:30 PM BELTZ 211
04/22/03 (S) Heard & Held
04/22/03 (S) MINUTE(L&C)
05/01/03 (S) L&C AT 2:15 PM BELTZ 211
05/01/03 (S) Moved Out of Committee --
Time Change --
05/01/03 (S) MINUTE(L&C)
05/02/03 1100 (S) L&C RPT 2DP 1NR 1AM
05/02/03 1100 (S) AM: BUNDE; DP: FRENCH,
SEEKINS;
05/02/03 1100 (S) NR: STEVENS G
05/02/03 1100 (S) FN1: ZERO(CED)
05/06/03 (S) JUD AT 8:00 AM BELTZ 211
05/12/03 (S) JUD AT 1:00 PM BELTZ 211
05/12/03 (S) Moved CSSB 13(JUD) Out of
Committee
MINUTE(JUD)
05/13/03 1358 (S) JUD RPT CS 5DP NEW TITLE
05/13/03 1358 (S) DP: SEEKINS, ELLIS, FRENCH,
05/13/03 1358 (S) OGAN, THERRIAULT
05/13/03 1358 (S) FN1: ZERO(CED)
05/14/03 1390 (S) RULES TO CALENDAR 5/14/2003
05/14/03 1390 (S) READ THE SECOND TIME
05/14/03 1390 (S) JUD CS ADOPTED UNAN CONSENT
05/14/03 1391 (S) ADVANCED TO THIRD READING
UNAN CONSENT
05/14/03 1391 (S) READ THE THIRD TIME CSSB
13(JUD)
05/14/03 1391 (S) PASSED Y19 N- A1
05/14/03 1391 (S) EFFECTIVE DATE(S) SAME AS
PASSAGE
05/14/03 1408 (S) TRANSMITTED TO (H)
05/14/03 1408 (S) VERSION: CSSB 13(JUD)
05/15/03 1675 (H) READ THE FIRST TIME -
REFERRALS
05/15/03 1675 (H) L&C
05/16/03 (H) L&C AT 3:15 PM CAPITOL 17
05/16/03 (H) -- Meeting Canceled --
05/17/03 (H) L&C AT 12:00 PM CAPITOL 17
05/17/03 (H) -- Meeting Postponed to Sun.
5/18/03 --
05/18/03 (H) L&C AT 11:00 AM CAPITOL 17
WITNESS REGISTER
ANNETTE SKIBINSKI, Staff
to Representative John Cowdery
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: As staff to one of the sponsors of SB 13,
explained the changes encompassed in HCS CSSB 13, Version X.
SENATOR JOHN COWDERY
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke as one of the sponsors of SB 13.
JESSE KIEHL, Staff
to Senator Kim Elton
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Spoke on behalf of Senator Elton, one of
the sponsors of SB 13.
RUSSINA SGOUREVA, Product Manager
Progressive Insurance - Alaska
POSITION STATEMENT: Expressed Progressive Insurance's support
for Version X.
MICHAEL LESSMEIER, Attorney at Law
Lessmeier & Winters
Lobbyist for State Farm Insurance Company
Juneau, Alaska
POSITION STATEMENT: Expressed the need for SB 13 to allow the
[insurance industry] to use [credit scoring] for re-underwriting
and re-rating.
JOHN GEORGE
National Association of Independent Insurers
Juneau, Alaska
POSITION STATEMENT: Testified on Version X of SB 13.
LINDA HALL, Director
Division of Insurance
Department of Administration
Anchorage, Alaska
POSITION STATEMENT: Testified on Version X of SB 13.
ACTION NARRATIVE
TAPE 03-54, SIDE A
Number 0001
CHAIR TOM ANDERSON called the House Labor and Commerce Standing
Committee meeting to order at 11:05 a.m. Representatives
Anderson, Lynn, Dahlstrom, Crawford, and Guttenberg were present
at the call to order. Representative Rokeberg arrived as the
meeting was in progress.
SB 13-INSURANCE DISCRIMINATION BY CREDIT RATING
CHAIR ANDERSON announced that the only order of business would
be CS FOR SENATE BILL NO. 13(JUD), "An Act relating to using
credit history or insurance scoring for insurance purposes; and
providing for an effective date."
REPRESENTATIVE DAHLSTROM moved to adopt HCS CSSB 13, Version 23-
LS0207\X, Ford, 5/17/03, as the working document. There being
no objection, Version X was before the committee.
Number 0161
ANNETTE SKIBINSKI, Staff to Representative John Cowdery, Alaska
State Legislature, noted that the committee [packet] should
include a list of the changes encompassed in Version X. She
informed the committee that the sponsors, the insurance
industry, and the Division of Insurance have all worked endless
hours to develop a strong piece of legislation that everyone can
work with while providing consumer protection. She clarified
that this legislation only addresses personal insurance, not
commercial insurance. Although credit scoring would be allowed
to write new business, there would be a list of factors that
can't be considered, such as medical claims, the absence of
credit, and the age at which credit is established.
Furthermore, credit [scoring] can't be used when a person is
renewing a policy, unless the consumer requests that [the credit
scoring] be used at the time of renewal.
Number 0336
CHAIR ANDERSON related his understanding that the sponsor's
intent is to not allow the review of a policyholder's credit
when going through a renewal process.
MS. SKIBINSKI explained that Version X specifies that when an
individual has his/her policy renewed, the insurance company has
to review the individual's driving record, payment history, and
the number of filed claims rather than the individual's credit
score. However, if an individual wants to have his/her credit
[score] used in the renewal process, the individual can request
it.
Number 0433
SENATOR JOHN COWDERY, Alaska State Legislature, spoke as one of
the sponsors of SB 13. Senator Cowdery indicated that [he has
been working on this legislation] for two years and he has
negotiated down as far as he is willing. He urged the committee
to pass the legislation.
MS. SKIBINSKI continued by pointing out that Version X outlines
[the process] when an insurer takes an adverse action due to the
insured's credit, the insured has to be notified. Version X
provides for a dispute resolution process in which the
individual signs an affidavit and that information can't be
included in determining the credit score. The legislation also
includes an indemnity clause to protect the agents.
Furthermore, Version X changed the effective date so that as of
June 1st insurance companies are able to file their scoring
models and that information is kept confidential. In January
the restrictions on the use of credit information will actually
go into effect.
Number 0597
REPRESENTATIVE CRAWFORD turned to the absence of credit history
and the fact that it can be used if it's neutral.
MS. SKIBINSKI deferred to Senator Elton's staff who worked on
that matter.
Number 0617
JESSE KIEHL, Staff to Senator Kim Elton, Alaska State
Legislature, spoke on behalf of Senator Elton, one of the
sponsors of SB 13. Mr. Kiehl explained that the industry
requested the neutral factor due to some of the technical
detailing of the models used by the companies. He related the
explanation from the Division of Insurance's property/casualty
actuary and one of the vendors who creates these credit scores
as follows. In essence, the absence of credit is believed to be
one of the most predictive factors within the insurance scoring
models. Therefore, the industry felt that it was extremely
important to put [the absence of credit] into the mix of
factors, in part to isolate it such that it doesn't serve as
"noise or feedback" in some of the other factors. Therefore,
the neutral factor language allows the tiniest use of [the
absence of credit]. He explained that if someone has no credit
history, a neutral score is assigned to that element. In
further response to Representative Crawford, Mr. Kiehl said that
the definition of "neutral" will have to be worked out with the
companies that file the models. However, in some cases
"neutral" has been interpreted to mean the average credit score
while in others it has been interpreted to mean that its pulled
out of the model for mathematical reasons. Mr. Kiehl suggested
that it's possible that through the administrative process, the
interpretation will be such that an individual with no credit
history can't qualify for the absolute best rate possible.
However, this individual can't be downgraded due to the lack of
credit history.
Number 0839
REPRESENTATIVE CRAWFORD remarked that the above didn't seem to
answer his question at all. If the [absence of credit] is
included then it isn't neutral, specifically because it could
keep someone from obtaining the best rate they could.
Representative Crawford related his belief that the reason the
industry wants to keep this absence of credit information is
because it would usually point to young, inexperienced drivers.
He opined that the aforementioned really drives this credit-
scoring model.
MS. SKIBINSKI said Representative Crawford is correct with
regard to the lack of credit, which has been a concern [with the
sponsors]. She noted that a considerable amount of compromises
have been made with this legislation and treating the absence of
credit as neutral is one such compromise. Although [the
sponsors] aren't completely satisfied with it, the question
becomes does legislation that brings things closer to the
[original legislation] pass or does no legislation at all pass
this session.
Number 0941
MR. KIEHL pointed out that those, who for religious reasons,
don't use credit are also hurt by the absence of credit factor.
Furthermore, those who have had credit problems in the past and
have ceased to use credit because they can't effectively manage
it are also hurt by this factor. In the aforementioned case,
the sponsor wanted to remove this disincentive to do the
responsible thing [and cease to use credit]. Under the current
situation, the absence of credit is one of the most heavily
weighted factors in these models. Mr. Kiehl highlighted that
this legislation started as a ban, which the sponsors weren't
able to accomplish. However, [Version X] is believed to provide
very strong consumer protection even if it isn't exactly what
was sought.
SENATOR COWDERY echoed earlier comments regarding the compromise
that has occurred with SB 13, and his and the insurance
industry's desire to pass legislation this year.
Number 1064
REPRESENTATIVE LYNN questioned why [the absence of credit, which
generates a neutral score] wouldn't merely be taken out of the
[equation].
MR. KIEHL said that was the original intention and was in the
earlier language of the legislation. However, the insurance
industry felt extremely strong about this matter. Therefore,
the sponsor intended to minimize or neutralize this [absence of
credit] factor entirely.
Number 1147
RUSSINA SGOUREVA, Product Manager, Progressive Insurance -
Alaska, expressed Progressive Insurance's support for Version X,
which it believes to be legislation with which the industry can
work. However, she noted that it will require a fair bit of
effort of the industry to make the systems complaint with the
requirements in this legislation, but the industry is prepared
to do so. Ms. Sgoureva characterized [Version X] as fair; it
provides protections for consumers and insurance agents in
Alaska and allows the insurance industry to do business
successfully in Alaska.
Number 1224
MICHAEL LESSMEIER, Attorney at Law, Lessmeier & Winters,
Lobbyist for State Farm Insurance Company, urged the committee
to review the merits of this legislation, which has undergone a
lot of work and compromise. Unfortunately, most of the work has
occurred over the last 10 days when [the insurance industry] was
able to negotiate a compromise. From State Farm Insurance
Company's point of view, every issue was worked out save one.
The one issue that remains is important. Mr. Lessmeier related
that credit scoring is the most predictive tool that the
[insurance industry] has to predict the risk of loss.
Therefore, in order to use this tool, [the insurance industry]
attempted to develop protections for the consumer to address
concerns by various members. Now, this legislation probably
embodies the most extensive set of consumer protections anywhere
in the country. In exchange, the [insurance industry] wanted to
be able to use [credit scoring] to write new business, to which
Senator Cowdery agreed. Furthermore, the [insurance industry]
also wanted to use [credit scoring] for re-underwriting and re-
rating, the industry agreed with Senator Cowdery that it
wouldn't be used to not renew any customer. Therefore, the only
matter for which no agreement has been reached is regarding
whether [credit scoring] can be used to re-underwrite and re-
rate.
MR. LESSMEIER specified that there are three pieces to this
[legislation]. First, there is the consumer disclosure.
Second, there are the restrictions upon the ability to use
[credit scoring] and the process if there is inaccurate
information. For example, if the consumer believes there is
inaccurate information, the consumer certifies that to the
company. For purposes of denial or cancellation within the 60-
day window, the industry can't use [credit scoring] but rather
has to re-underwrite that consumer based on traditional data.
Mr. Lessmeier related his belief that the aforementioned
provides considerable consumer protection. If there is
inaccurate information used for purposes of rating, again the
consumer has the ability to challenge that information and
receive a retroactive correction to their rate. Mr. Lessmeier
emphasized, "The thing that is very important for everybody to
understand is that this tool right now, the way it is right
here, is being used under the approval, under the supervision,
under the guidance of the Division of Insurance." He opined
that every professional person involved in the industry or from
the regulatory side believes it would be prudent to allow the
insurance industry to use [credit scoring] for re-rating and re-
underwriting as well. He recalled the compromise reached last
year, which allowed the insurance industry to use [credit
scoring] for re-rating and re-underwriting. Mr. Lessmeier
pointed out that one small correction would allow the insurance
industry to use this for re-rating and re-underwriting, which he
said is a matter of fairness to the policyholders. If an
insurance company has the ability to identify an individual who
presents a higher risk of loss and that individual's premium is
subsidized artificially, someone else is paying more. The
aforementioned is an issue of fairness, he said. Therefore, he
urged the committee to reconsider that. He recalled that there
were discussions regarding allowing the use of [credit scoring
for re-rating and re-underwriting] for a limited period of time;
a period of three years would be a good start.
MR. LESSMEIER highlighted that [the industry] has negotiated and
compromised on various provisions of this legislation because if
this isn't done right at this level, there could be years of
problems and litigation. This solution [encompassed in Version
X] works for the consumer who decides he/she wants to be re-
rated, but it doesn't allow a broader form of re-rating and re-
underwriting. In conclusion, Mr. Lessmeier acknowledged that
everyone has worked in good faith to reach a compromise and
although this legislation isn't quite there, it could easily be
achieved.
Number 1603
CHAIR ANDERSON turned to the renewal process and inquired as to
what someone's credit would matter regarding driving.
MR. LESSMEIER said it is a mistake to say that the scoring
models this legislation addresses deals solely with the issue of
credit because that's not the case. The legislation is required
to be used with credit as well as other substantive underwriting
factors.
CHAIR ANDERSON surmised that Mr. Lessmeier is saying that [these
models] are a science and that an individual wouldn't be renewed
merely because he/she didn't pay a bill.
MR. LESSMEIER agreed that it's a definite equation and specified
that the language is on page 2, lines 28-30. Under this
legislation, these models will have to be reviewed by the
director of the Division of Insurance. Therefore, to the extent
that the models don't achieve what they are supposed to achieve
or they achieve a discriminatory result, these models won't be
allowed. So, it isn't a fair statement to say that the only
thing that will be reviewed is credit. For example, State Farm
Insurance Company's model looks at a combination of factors and
the company has found [credit scoring] to be the most predictive
tool it has. Therefore, State Farm Insurance Company believes
it should be used in rating. He noted that State Farm Insurance
Company doesn't currently use [credit scoring] to re-underwrite
and re-rate, rather it's used only for new business. [State
Farm Insurance Company] doesn't believe that the use of [credit
scoring] should be restricted.
Number 1708
REPRESENTATIVE CRAWFORD acknowledged that in the legislation he
introduced on this last year, it did include [the use of credit
scoring for re-rating and re-underwriting] as well as the
consumer's ability to opt out [of credit scoring being used].
However, the latter has been taken out of this legislation and
he opined that [Version X] is a compromise with which he can
live. Although he expressed his continued dislike with the use
of the absence of credit as part of any factor, he said he would
rather have legislation than not.
Number 1782
REPRESENTATIVE GUTTENBERG turned to the impact of a neutral
rating and pointed out that if rating is based on obtaining a
[score] of 100 and something is rated neutral or zero, it
suppresses [the rating]. Representative Guttenberg mentioned
that he doesn't have to be happy with this legislation because
it's just another step.
Number 1862
JOHN GEORGE, National Association of Independent Insurers
(NAII), noted that he has the interesting job of representing a
trade association with hundreds of members. He noted that
virtually every company uses credit scoring differently, and
therefore the problems with [legislation such as SB 13] vary.
Mr. George said that Mr. Lessmeier has testified to [the
insurance industry's] position. With regard to earlier
comments, Mr. George clarified that "we" requested that the
additional language regarding the ability of credit to be used
at the request of the consumer. He explained that if an
insurance company is unable to use credit to re-underwrite and
re-rate a current consumer, a consumer whose credit has improved
greatly would have to change companies in order to receive the
benefit of their improved credit.
CHAIR ANDERSON agreed that it's a good provision.
MR. GEORGE related that the industry would prefer to re-
underwrite and re-rate anyone, and therefore that provision
wouldn't be necessary.
MR. GEORGE turned to the fact that Alaska is unique, which might
not necessarily be a benefit when trying to write insurance in
the state. For instance, there isn't much [the insurance
industry] can do regarding the high cost of doing business and
low volume in Alaska. Furthermore, nothing can be done about
Alaska's remoteness or extreme conditions. Because of the
aforementioned, it's important that Alaska doesn't make itself
more unique with things such as Civil Rule 82, the highest
uninsured/underinsured motorist limits in the U.S., and a unique
credit model. He noted that early on [the insurance industry]
had proposed the National Conference of Insurance Legislators
(NCOIL) model and although it was a compromise, it is going to
be the national standard. This legislation should only impact
about seven insurance companies because that many are actually
writing auto and homeowner's business in Alaska. Because of
Alaska's unique conditions, Alaska isn't a good place to write
insurance and "we" aren't making it any friendlier. Therefore,
for the future he urged legislators to think about what is being
done to the market. He related that it isn't healthy for two
major companies to have the vast preponderance of the market.
He mentioned the possibility of [encouraging new insurance
companies] by treating them as other states do.
Number 2170
REPRESENTATIVE DAHLSTROM announced that she would be voting for
the legislation because she believes it to be a good compromise.
However, she said she believes that any company not making money
in Alaska will leave. She said she further believes that all
insurance companies are making money.
MR. GEORGE stated that over the last few years insurance
companies have lost substantial amounts of money, particularly
with auto insurance. Furthermore, even when insurance companies
in Alaska make money, they don't stand to make as much money as
they would under the same profit margin in virtually any other
state. He pointed out that there are companies that are direct
writers that don't use agency forces and their rates are
competitive with the rates of companies that use agents.
REPRESENTATIVE DAHLSTROM, upon Chair Anderson's question,
clarified that she believes if it's not in the insurance
company's best interest to do business in Alaska, the company
will leave Alaska.
CHAIR ANDERSON posed a situation in which the insurance
companies in Alaska have to insure people of a higher risk and
that causes rates to increase, those companies would also have
to leave Alaska.
Number 2229
MR. GEORGE remarked that the insurance industry is a competitive
and highly regulated industry. All rates have to be filed and
approved by the Division of Insurance, which doesn't allow great
margins for profit. Furthermore, it's prospective. If a
competitor cuts its rates in half, writes all of the business,
and goes broke, the insurance companies that remain would pay
for that. He explained that insurance companies pay into the
Guaranty Association to cover such things so that the
policyholder doesn't suffer. For those individuals that no one
wants to write, the state mandates that these individuals have
insurance. These individuals go into a pool and all of the
companies doing business [in the state] write them based on the
portion of business the company does. Therefore, State Farm
Insurance and Allstate Insurance write most of the assigned risk
plan. Mr. George related that it would be healthy if there
could be several companies writing about 20 percent of the
business in Alaska rather than the current situation.
SENATOR COWDERY explained that when someone buys a policy, the
[premiums] are invested to try to get a return. The insurance
company is no different [than any other investor] in that it has
lost money. He highlighted that the states of California and
Hawaii have banned credit scoring as well as Maryland for home
purchases.
Number 2371
LINDA HALL, Director, Division of Insurance, Department of
Administration, echoed earlier comments regarding the large
amount of work that went into this legislation.
TAPE 03-54, SIDE B
MS. HALL related that the Division of Insurance has two fairly
difficult roles to play. One role is to protect and educate the
consumer and the other is to enhance the insurance business
environment. This legislation goes a long way toward the
aforementioned. She informed the committee that in a Senate
hearing she requested five things in [this] legislation; most of
those dealt with regulatory tools, such as the ability to have
the scoring models filed with the division so that it could
review them. With regard to consumer protections, she pointed
out that there is a lengthy list that she would categorize as
being among the most stringent in the country. She noted that
the mechanism for dispute resolution is very important and is
addressed in this legislation. Furthermore, [this legislation]
makes it clear that credit can't be the sole factor in any
rating or underwriting mechanism but may be used in combination
with other substantive factors. Ms. Hall informed the committee
that she also requested for the ability for insurance companies
to be able to use a very valid predictive tool. This
legislation doesn't go as far as she or the industry would've
liked. However, it does allow credit scoring and at this point,
the legislation seems to be a good compromise.
REPRESENTATIVE GUTTENBERG asked if there is a factor when a
consumer says he/she doesn't want his/her credit history built
into the ratings.
MS. HALL pointed out that nothing in this legislation requires
consent from new business. Credit can be used [in scoring] new
business and going forward the consumer can request credit be
used at the renewal stage.
The committee took an at-ease from 11:58 a.m. to 11:59 a.m.
CHAIR ANDERSON said that he agrees with Mr. Lessmeier that the
renewal language should be included, however he said he wasn't
going to offer it at this time.
Number 2160
REPRESENTATIVE DAHLSTROM moved to report HCS CSSB 13, Version
23-LS0207\X, Ford, 5/17/03, out of committee with individual
recommendations and the accompanying zero fiscal note. There
being no objection, HCS CSSB 13(L&C) was reported from the House
Labor and Commerce Standing Committee.
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
12:00 p.m.
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