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