Legislature(2015 - 2016)BELTZ 105 (TSBldg)
02/25/2016 01:30 PM LABOR & COMMERCE
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SB 127-INSURER'S USE OF CREDIT HISTORY/SCORES 1:55:25 PM CHAIR COSTELLO reconvened the meeting and announced the consideration of SB 127. She noted this is the first hearing. 1:56:00 PM SENATOR CHARLIE HUGGINS, Alaska State Legislature sponsor of SB 127, said the bill relates to renewing insurance for an auto or home mortgage. He explained that Alaska is the only state that allows credit scoring to be used when the initial insurance policy is written, but not upon renewal. SB 127 very simply allows credit scoring to be used on renewal, which is more convenient for the policyholder. 1:57:50 PM LAUREN RASMUSSEN, Staff, Senator Charlie Huggins, provided an overview of SB 127 on behalf of the sponsor, speaking to the following sponsor statement. When Alaskans apply for personal auto and homeowners insurance, there are several variables of which companies take into consideration to assess risk. Factors such as motor vehicle record, good student discount, marital status, age, and credit history are allowable by statue; however, when an Alaskan consumer considers renewing a policy with the same company, the business is not allowed to use credit history. Under current law, insurers must strip out credit information after two years and may only include it with request from the policy holder. By not being able to include credit when it benefits consumers, increases in renewal rates can often be significant, causing unnecessary market disruption and consumer complaints. This occurrence leads consumers to seek new insurance companies which means they may not secure the benefits of being a long-term policy holder. Senate Bill 127 would allow for insurance companies to include credit history at the time of policy renewal. The passage of Senate Bill 127 would also require insurers to make exceptions to a consumer's rate when the consumer's credit is unfavorably impacted by extraordinary life circumstances. This applies to the time of policy inception and policy renewal. An extraordinary life circumstance clause is a safeguard for consumers. Unforeseen circumstances include incidents such as death of an immediate family member, military deployment, suffering a catastrophic event, and divorce. 2:01:13 PM LORI WING-HEIER, Director, Division of Insurance, Department of Commerce, Community and Economic Development (DCCED), Anchorage, Alaska, described credit scoring as an emotional topic and said this bill is written to be neutral and that is the administration's position on it. She confirmed that Alaska is the only state that removes the use of credit scoring to effect a discount or lower insurance rate upon renewal. A policyholder can, however, receive a discount by applying for one through their insurance agent or company representative. Because some people may suffer from the use of credit scoring, the bill is written so that it cannot impact someone who might have a lesser credit score than as if credit scoring were not used at all. She noted that provision was added when the bill was redrafted last year. MS. WING-HEIER reported that the division receives complaints from consumers whose renewed homeowner or auto policy had increased as much as 70 percent. Their option is to find a new agent or broker. The consumer got into this situation because they either didn't understand that for renewals credit scoring is not automatically allowed in the underwriting practice or they didn't agree with the use of credit scoring and didn't complete the form. She clarified that credit scoring is not based on income, but how the consumer uses credit and how timely they pay their bills. She said there is a statistical correlation between a credit score and the number of claims a person is likely to have, and that provides an underwriting guideline. SENATOR GIESSEL asked if a consumer could pay the higher premium one year and sign the form to use credit scoring for the next renewal. MS. WING-HEIER said the consumer would probably be better off looking for a new insurance company to get started back on using a credit score in their portfolio. 2:06:01 PM CHAIR COSTELLO opened public testimony. 2:06:10 PM KRISTIE BABCOCK, State Farm Agent, Kenai, Alaska, testified in support of SB 127. She described the impact of the current law on her customers and why SB 127 offers a solution. Current law allows the agent to use certain credit components in the original rate, but after two years those characteristics are stripped out. The result is a significant increase in the premium unless the agent is able to get the policyholder's written permission to use their credit. If the customer doesn't sign the form in time for the annual renewal, existing law prohibits the use of credit for subsequent renewals on that policy. She shared the experiences of several customers that are all paying more than they should. SB 127 will alleviate the dramatic swing in rates; eliminate the frustration and cumbersome process of getting a manual waiver signed at each renewal; and allow consumers to shop with confidence, knowing that there is stability in the rating factors. 2:11:40 PM SENATOR STEVENS asked how someone is affected if their credit rate fluctuates. MS. BABCOCK explained that the policy will be written based on the consumer's credit at the time. If their credit has improved when the policy is due for renewal they may see a better premium. If their credit doesn't improve or worsens, they may want to do more shopping. 2:12:52 PM GARY STRANNIGAN, Safeco and Liberty Mutual Insurance, testified in support of SB 127. He shared Safeco's experience conforming to the current statute. He related that the cost to program software to comply with the current statute was $1.25 million. That becomes a barrier to entry in the broader marketplace given the size of the market. 2:14:32 PM MARK CHOATE, representing himself, Juneau, Alaska, testified on SB 127. He questioned why credit scoring should be used for something that is mandatory. He further questioned why, after two years of proven use, the policyholder's credit score has anything to do with the risk the insurance company is taking in terms of their driving or maintaining their home. He claimed that the insurance companies are creating a false paradigm to create the situation. They factor in credit scores on buying the policies and then pull that out of the algorithm for renewal, but they don't consider anything else. What they should do is reweight other factors, he said. He suggested the Division of Insurance should look at the algorithm because there's no reason that two years of driving history shouldn't be the basis for calculating the premium. 2:18:24 PM DANIEL LYNCH, representing himself, Kenai, Alaska, testified in support of SB 127. He is completely opposed to using credit scores to determine insurance rates at any time. He shared his personal story of having no credit score. Through choice he has had no credit cards or loans for 40 years. He maintains his old vehicle and is a good driver, yet his auto rates go up every renewal. He urged the committee to go old school and base insurance rates on driving history, vehicle value, and distance driven, not a credit rating. 2:21:25 PM TIM MAUDSLEY, President, Alaska USA Insurance Brokers, Anchorage, Alaska, testified in support of SB 127. He said the change embodied in SB 127 will provide consumers with a fair and accurate rate on insurance renewals and eliminate the confusion due to policy cancellations and the burden of changing carriers to maintain insurance and rate discounts. He opined that this legislation will likely open the door for more insurance carriers to come to Alaska. This means lower premiums for consumers. 2:23:20 PM ARMAND FELICIANO, Property Casualty Insurers Association of America, California, testified in support of SB 127. This legislation will allow consumers to receive the full benefit of credit scoring. He suggested the committee look at what has happened in Arkansas since it started allowing credit scoring. Over 40 percent of policyholders have seen their premiums decrease. The number of policyholders that have seen their premiums increase has held steady at about 14 percent. A good number of policyholders have been unaffected since 2011. 2:24:54 PM CINDA SMITH, Geico, Maryland, echoed previous testimony and stated support for SB 127. 2:25:44 PM JEFFERY KINSEY, State Farm Insurance, Bloomington, Illinois, testified in support of SB 127. He said State Farm insures 1 in 4 autos in Alaska and 1 in 3 homes. He leads a team of predictive modelers that develop insurance risk scores using credit-related information. Their analysis and other studies show that certain credit-related variables are highly predictive of future insurance losses. Using this information benefits consumers but neither adds to nor reduces an insurer's profit. Because it is such a proven effective tool, credit information is allowed in 47 states including Alaska. He clarified that the credit information that insurance companies use is not a FICO score. Those were developed to estimate a person's ability to repay debt. An insurance risk score uses credit related variables that have been shown to be predictive of future insurance losses. He further clarified that current Alaska law requires all insurance companies to consider the absence of credit history as rate neutral. MR. KINSEY said many low-income policyholders benefit from the use of credit-related information initially, but based on current Alaska law they are not allowed to continue to enjoy those benefits after two years with a company. Approximately 60 percent of State Farm personal auto and homeowners policyholders entering their third year of coverage would receive a rate increase if their credit information is stripped out at renewal. State Farm supports SB 127 because it will lead to a healthier insurance market and increase the affordability of insurance for Alaskans, he said. 2:29:12 PM CHAIR COSTELLO asked if he heard Mr. Lynch's testimony. MR. KINSEY said yes. CHAIR COSTELLO asked if current law allows the absence of credit history to be considered rate neutral. MR. KINSEY said that's correct; existing law requires insurers to treat the lack of credit history as rate neutral. CHAIR COSTELLO asked for clarification that a person's credit is considered when the initial policy is written, but upon renewal it's absent from the analysis. MR. KINSEY confirmed that without the waiver, insurance companies are required to strip out any credit variables that were used as new business. He recalled that requirement was the result of a court case. SENATOR STEVENS asked for help understanding risk and credit score in the context of insurance. MR. KINSEY explained that a credit score is oftentimes geared toward banking and whether or not an individual will repay debt, whereas an insurance risk score is geared toward insurance and the likelihood an individual will file a future claim. CHAIR COSTELLO asked him to put that into an email and send it to her office. MR. KINSEY agreed. SENATOR STEVENS asked if he's saying that a poor credit rating is predictive of a future insurance claim. MR. KINSEY said the credit score itself isn't predictive of future losses, but individual elements from a credit report are predictive of future losses. SENATOR STEVENS asked what elements are predictive of future losses. MR. KINSEY said they vary by company but generally fall into four broad categories: performance on credit obligations, credit seeking behavior, consumer's use of credit such as outstanding balance to available credit, and length of the credit history. 2:34:47 PM At ease 2:35:22 PM CHAIR COSTELLO reconvened the meeting and asked Ms. Wing-Heier if she had any comment on the testimony today. MS. WING-HEIER said the comments have all been valid including those from Mr. Lynch. SENATOR MEYER asked if it matters to the division that the bill has no effective date. He would prefer it became effective immediately. MS. WING-HEIER said it makes no difference to the division. SENATOR MEYER asked about the process for an insurance company to consider a consumer's extraordinary life circumstances. MS. WING-HEIER said the onus would be on the consumer to explain to the insurer why their credit score was impacted. 2:38:25 PM SENATOR MEYER asked if this covers more than auto and home insurance policies. He mentioned his wife's lost diamond ring. MS. WING-HEIER replied this is for all personal lines, not commercial. It would be auto, home, and could extend to watercraft, equipment, artwork, the loss described, and umbrellas. SENATOR MEYER asked about discrimination. He noted that his insurance increased when his daughter started driving. MS. WING-HEIER said insurers are not allowed to discriminate and their research has found it has not been a factor in credit scoring. 2:40:36 PM CHAIR COSTELLO closed public testimony and held SB 127 in committee.