Legislature(2015 - 2016)BUTROVICH 205

02/11/2016 09:00 AM Senate STATE AFFAIRS

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         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                                                               
     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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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.                                                                                         

Document Name Date/Time Subjects
SB 127 Sponsor Statement.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Sectional Analysis by Sponsor.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Fiscal Note - DCCED-DOI 02-05-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Backup Document - Credit-Based Insurance Scores Consumer Brochure - American Insurance Association.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Email - Brenda Pearce 2-4-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Email - Bob McVitty 2-9-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Email - Stan Tebow 2-8-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Letter - NAMIC 1-25-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Letter - Win Fowler GEICO 2-5-16.pdf SSTA 2/11/2016 9:00:00 AM
SB 127
SB 127 Support Letter - State Farm.pdf SSTA 2/11/2016 9:00:00 AM
SB 127