SB 127-INSURER'S USE OF CREDIT HISTORY/SCORES  9:02:28 AM CHAIR STOLTZE announced the consideration of SB 127. SENATOR CHARLIE HUGGINS, Alaska State Legislature, bill sponsor, explained that SB 127 proposes that the component of credit history be a factor in determining what an individual pays. He revealed that Alaska is the only state that allows credit scoring for initializing a policy, but credit scoring cannot be used for renewal. 9:04:18 AM LAUREN RASMUSSEN, Staff, Senator Huggins, Alaska State Legislature, Juneau, Alaska, provided an overview of SB 127 follows: When Alaskan consumers apply for a new auto or homeowner's insurance policy, companies take several variables into consideration to assess risk. A few examples are your motor vehicle record, good student discount, age, marital status, and credit history. Now this is not your FICO credit score, your credit history can look at payment history, credit utilization, and bankruptcies. Insurers do not look at the consumer's income, so it doesn't matter if you are low or high income. Under current law, credit history is included in underwriting new policies, but must be removed, as Senator Huggins had mentioned, when calculating a rate for policy renewal, which usually happens about every two years. It should be noted that consumers can elect to include their credit history at the time of policy renewal, but as you will hear in later testimony, this is an extremely time consuming process and ultimately confusing for the consumers. The process of removing credit history often results in consumers seeing an increase in their rates and further leads to market disruption known as "churning," where a consumer will go from one company to another looking for lower rates; they in turn would not have the benefits of long term policyholders. SB 127 will also require insurers to make exceptions to a consumer's rate when the consumer's credit is adversely effected by extraordinary circumstances. 9:06:33 AM SENATOR HUGGINS pointed out that requiring exceptions due to extraordinary circumstances was an important consideration for SB 127. MS. RASMUSSEN explained that the extraordinary circumstances clause would apply to both new insurance policies and renewal policies, acting mostly as a safeguard for consumers. She noted the examples of the extraordinary life circumstances were in Sec. 3 of SB 127 and included: serious illness, injury to the consumer or immediate family member, death of a family member, military deployment overseas, divorce, or involuntary unemployment. She summarized that SB 127 simply fixes a discrepancy in the law. She noted that Alaska was the only state to require insurers to remove the credit history when rewriting a policy. She added that SB 127 has no fiscal impact on the State of Alaska. 9:08:36 AM LAURIE WING-HEIER, Director, Division of Insurance, Alaska Department of Commerce, Community, and Economic Development, Juneau, Alaska, asserted that SB 127 was an emotional bill where its intent would provide a "fix." She said her office receives numerous phone calls from the industry and consumers. She revealed that consumers are most often surprised when they receive their second billing with a rate increase from an insurance company. She noted that some rate increases were up to 100 percent. She explained that the rate increases were not due to anything like having an accident, covering a teenage driver, buying a car, or buying a new home. She specified that the rate increase were due to the way that Alaska's law reads in the application of credit score. She explained that many consumers resort to "churning" by either going to a new insurance company or signing a form to order their credit history and score again. She revealed that business relationships are often destroyed due to the rate increases. 9:10:35 AM CHAIR STOLTZE asked if "churning" was a pejorative term for overcharging people for fees. MS. WING-HEIER explained that the term "churning" is the process of consumers leaving one market for another due to pricing and the pricing being a reflection of the use of credit scoring because it cannot be used on renewal. She specified that "churning" was not because of dissatisfaction with the market or the service being received, but because a consumer cannot use their credit scoring for the preferred rate upon product renewal. SENATOR HUGGINS remarked that "churning" forces consumers to look at other agencies and the downside from the act does not allow individuals to develop relationships with their insurance company or agent. He specified that developed relationships allow consumers to reap the benefits from their positive lifestyle. He added that a provision in the bill takes unforeseen circumstances for consumers into account too. 9:12:37 AM MS. WING-HEIER explained that insurance agents are having their commissions cut due to the added step of renewal because of the law not allowing the automatic use of an individual's credit score. She reiterated that a credit score can be used for new business, but not for renewal. SENATOR WIELECHOWSKI asked what the thinking was for allowing insurance companies credit score access just for the first time and not for renewal. MS. WING-HEIER answered that statistics prove that the use of credit scoring correlates to a better claims history that ultimately leads to a lower premium on auto and homeowners insurance. 9:14:30 AM SENATOR MCGUIRE joined the committee meeting. 9:16:29 AM SENATOR WIELECHOWSKI asked if lower income or wealthy individuals have lower credit ratings. CHAIR STOLTZE asked Senator Wielechowski to define "wealthy." SENATOR WIELECHOWSKI replied that he would like the witness to answer. CHAIR STOLTZE responded that Senator Wielechowski asked the question. He asked how Senator Wielechowski would define "wealthy" in fairness to the witness. SENATOR WIELECHOWSKI replied that he would use $100,000 as the annual income that defines "wealthy." MS. WING-HEIER explained that the credit score does not have anything to do with income. SENATOR WIELECHOWSKI asked if either low income or wealthy individuals tend to have lower credit ratings. MS. WING-HEIER answered that the data was not tracked because income was not part of credit scoring. 9:17:57 AM SENATOR WIELECHOWSKI explained that he was addressing the bill's impact on his constituents. He noted that he has a lot of lower- income constituents in his district. He asked how much more an individual pays if they have a "poor" or "average" credit history. MS. WING-HEIER replied that an individual with a poor credit history would be treated as "neutral." SENATOR WIELECHOWSKI asked Ms. Wing-Heier to verify that an individual with a poor credit history will be paying more than a person with a good credit rating. MS. WING-HEIER answered yes. SENATOR WIELECHOWSKI asked what the rate difference was between an individual with a poor credit rating and a good credit rating. MS. WING-HEIER reiterated that there was a correlation that those with a good credit history, which is estimated to be 80 percent of the population, would receive a preferred rate. She pointed out that the problem occurs when an individual with a good credit history does not receive a preferred rate and pays a higher premium at renewal. She explained that the intent was to focus on the 80 percent that were effected during renewal. She said the 20 percent that were never getting the preferred rate in the first place would not effected. SENATOR WIELECHOWSKI asked what the difference was and how much more do the people with the preferred credit rating pay under the way the law was currently written and how much would be saved from the legislation. MS. WING-HEIER answered that the rates and premiums depend on the underwriting criteria for an individual: age, type of car, home value, and where an individual lives. 9:20:11 AM SENATOR HUGGINS asked how long an initial policy was typically written for auto insurance. MS. WING-HEIER answered six months to a year. SENATOR HUGGINS asked how long an initial policy was written for home insurance. MS. WING-HEIER answered a year. SENATOR HUGGINS explained that his constituents have asked why credit history was used for an initial policy and not for renewal. 9:21:56 AM MS. WING-HEIER called attention to a recent article where Alaska's national insurance ranking was marked down due to the state's credit-score policy for underwriting. 9:23:59 AM CHAIR STOLTZE commented that how much an individual makes should not be used for underwriting insurance. He remarked that some of the most responsible people he knows make less money. MS. WING-HEIER reiterated that insurance companies maintain their concern regarding the state's credit-scoring law pertaining to renewals. 9:25:08 AM SENATOR MCGUIRE stated that when the law was passed by Senator Cowdery eight or nine years ago, her understanding was that credit history could not be used as a means for deciding auto insurance rates. She stated that she understood the notion of unfairness when people shop insurance companies due to the absurd result when renewing. She set forth that if the law were applied evenly in a way that she believed she had voted on where credit was not taken into account, there wouldn't be the disparity at all. She asked how Ms. Wing-Heir interpreted the law and its implementation. 9:27:07 AM MS. WING-HEIER replied that the law as it was written was that credit scores could be used on new business, but not on renewal. She specified that 80 percent of new business policy holders were given a preferred rate because of their credit score and then their rates go up 50 to 60 percent at renewal. SENATOR MCGUIRE replied that she did not know if allowing the use of a person's credit rating was a political compromise. She asked Ms. Wing-Heier to verify that the use of a credit rating was statutory and not regulations that were interpreted. She said Alaskans were right to be angry when entering a contract with an insurance company and unfairly have an increase in their rates six months to a year later. She set forth that a person with a good driving record being penalized due to a poor credit rating was not fair. 9:29:36 AM MS. WING-HEIER replied that the current law applies to new business, not renewal. She added that SB 127 addresses extenuating life circumstances that impacts credit scores as well. SENATOR MCGUIRE explained that she was trying to get at the point of what the statute said versus the regulations that were promulgated to effectuate the statute. MS. WING-HEIER replied that she was not aware of regulations, strictly statutes. CHAIR STOLTZE announced that the bill would not be moved during the meeting and the intent was to hear the public testimony. He said there would be time to explore statutes at the next meeting. 9:31:07 AM TIM MAUDSLEY, President, Alaska USA Insurance Brokers, Anchorage, Alaska, stated that Alaska USA has submitted a letter of support for SB 127. He specified that SB 127 would remove the requirement for insurers to eliminate the credit-based insurance score from the rating process after two years. He specified that the change would provide consumers with a fair and accurate rate on insurance renewals and eliminate confusion due to policy cancellation and burden of changing carriers to maintain preferred insurance rate discounts. He summarized that SB 127 would hopefully open the Alaska insurance market to additional carriers, increase competition, and greatly benefit consumers. He disclosed that Alaska is the only state that with a provision that stripped credit out of renewals, a provision that deterred additional insurance companies from entering the Alaska insurance market. 9:34:09 AM KRISTIE BABCOCK, Agent, State Farm Insurance, Kenai, Alaska, remarked that SB 127 offers a solution to her customers' difficulty with the current law affecting higher insurance rates during renewal. She asserted that certain credit components were a very accurate and high indicator in assessing the risk a client presents to an insurance company. She detailed that credit components have nothing to do with income, past bankruptcy, or foreclosures. She specified that the credit components pertained to certain characteristics that represented a person's current life situation along with dozens of other characteristics, including one's driving record. She noted that clients have paid higher rates due to inadvertently missing a waiver submission during the time of renewal. 9:42:09 AM CHAIR STOLTZE pointed out that the committee had received numerous written testimony from State Farm Insurance. He asked if Ms. Babcock served the purpose of consolidating the testimony of State Farm Insurance. MS. BABCOCK answered that her comments were a good reflection of the frustrations faced by State Farm agents and customers. 9:43:22 AM ARMAND FELICIANO, Vice President-Government Affairs, Property Casualty Insurers Association of America, Sacramento, California, testified in support of SB 127. 9:44:11 AM SENATOR HUGGINS stated that he was proud to hear Alaskans stepping forward to address the state's insurance renewal issue. 9:44:53 AM CINDA SMITH, Senior Counsel, GEICO Insurance, Washington, D.C., testified in support of SB 127. 9:46:12 AM JEFFREY KINSEY, Actuary, State Farm Insurance, Bloomington, Illinois, testified in support of SB 127. 9:47:06 AM CHAIR STOLTZE closed public testimony. SENATOR MCGUIRE asked that a question be answered at a future committee meeting regarding the use of credit scores to assess individual health insurance policies. CHAIR STOLTZE commented that any discussion about the Affordable Care Act should be on the record as well. SENATOR MCGUIRE replied that her question does not pertain to the Affordable Care Act and specified as follows: The point is that each individual line of insurance is a cost to a family unit, they are not discriminatory in their budgeting. If credit is taken into account in a certain couple of lines, I want to know which lines and which lines it isn't, so just kind of a comprehensive overview. 9:48:38 AM SENATOR WIELECHOWSKI referenced a 2007 report by the Federal Reserve that blacks and Hispanics have lower credit scores on average. He said his intent was to try and figure out the impact of SB 127 on his constituents. He noted that East Anchorage and Bartlett are the top two most diverse high schools in the U.S. 9:49:33 AM CHAIR STOLTZE held SB 127 in committee.