In Alaska, legislators Tuesday held a hearing for a bill that insurers are saying would streamline discount offers and business operations in a state that has a uniquely complex take on how credit can effect what you pay for insurance.
SB 55 would expand insurers’ consideration of a consumer’s rates based on their credit history. Currently, the credit backgrounds of new shoppers often net them discounts on their insurance rates. But any such discounts disappear after two years because state law requires insurers to reunderwrite policies after two years and cannot use credit information when they do, a one-of-a-kind practice in the U.S. that insurers say roil the market and make business difficult. In cases where credit information got a consumer a discount, the rerating would mean an increase in prices.
The bill would also define the process through which the state distributes its “adverse action notices” that notify policyholders of the impact of credit on their insurance rates, narrowing those notifications to only those whose rates were harmed by their credit history.
SB 55 was heard in the Senate Labor & Commerce Committee. The bill was held for further consideration that will occur at the committee’s next meeting, according to Sen. Jerry Mackie (R-Craig), the committee’s chair.
Insurers Stand by Credit’s Use in Insurance Scoring
Kenton Brine, an assistant vice president with the Property Casualty Insurers Association of America (PCI), testified in support of the bill, saying that it would “clarify” a rule that “has been costing Alaska consumers money.”
A PCI survey released in 2010 showed that 40 percent of personal auto insurers surveyed saw premiums jump between 11 and 20 percent because of the required rerating at the two-year period. More than a quarter of auto policyholders saw the largest increases of over 20 percent, according to Brine.
At the rerating period, insurers are barred from rerunning credit info that they would use to construct an insurance score.
The rerating process—which Brine dubbed the “Alaska Experience”—highlights common misconceptions about the use of credit in determining how much a policyholder pays, Brine said. The insurance scores that are used in rating models of consumers compile a number of factors, including credit, but the industry has found that many believe considering credit jacks up what they pay for premiums.
“I think there’s a myth about how credit information is used,” he said. “It’s used generally to provide discounts to people considered to be the best risks.”
Credit’s role in insurance scoring is crucial in predicting future loss, according to Brine, and has been proven to be accurate in “study after study,” Brine said, citing several reports including one released by the Federal Trade Commission in 2007.
“People will say, ‘You don’t know because my credit score is bad that I’m going to crash my car.’ No, we don’t,” Brine said. “We also don’t know if you’re 17 that you’re going to go crash your car. But, statistically, odds are you’re going to go crash your car. So we have to rate policies based on that, based on the probabilities of certain things happening.”
Insurers Say Distinct Rule Complicates State’s Markets
Alaskan insurers at the hearing said that the unique system they face can get complicated to the point that companies have turned away from the state.
Elizabeth Moceri, director for state and legislative affairs at Allstate—which she said was Alaska’s third-largest car insurer—called entering the state for business a “very expensive endeavor for us” that entailed creating three different companies that shuffled renewal auto customers with customers in others.
Alaska’s low population, harsh weather and need to ship car parts from afar make for a hard business climate for insurers, according to Moceri, who added that the state’s unique credit-related scoring procedures lead companies to believe “it’s not an attractive place … to do business.”
Brine agreed with the sentiment, saying that a major insurer with a reliable underwriting tool like credit background would be frustrated with the complexities of Alaska’s unique system.
“This is such a unique state where a tool that is used across the country cannot be used here consistently over time,” Brine said. “And those that do write here probably do not offer all the same products, price points and policy options that they offer in other states … And it’s difficult to put all that effort in a filing, and then get policies signed up for that and then have to change them after two years.”
In addition, Brine said, the end of the two-year credit-rating window often leads to sudden surcharges and premium hikes simply because that credit-based discount disappears.
Riled up policyholders can ditch their company, according to insurers at the hearing, and the result is a volatile marketplace with “a lot of churn and disruption” that looks even more disagreeable to prospective companies.
Even worse, Brine said, is that the shopping policyholders often lose out because they lose other discounts they gathered with their insurer.
“Other discounts they might have qualified for because they had multiple types of policies with the same insurer, or they had a certain longevity with an insurer, all those things go away because they’re out on the market looking for a new policy with a new company,” he said.
GEICO said that the requirement to reunderwrite a consumer at the two-year period without considering credit proved to be “so fundamentally unfair” to consumers that the insurer stopped using credit altogether in its ratings.
“This further places an insurer at a competitive disadvantage with other insurers for any consumer whose credit history qualifies the customer for a better rate,” Anchorage-based GEICO agent H.W. Fowler said in a statement to the committee.
Other States See Credit-Based Bills
In Maine, a lawmaker’s attempt to expand disclosure of how insurers use credit-based insurance scoring models fell short in a committee hearing last week.
In Rhode Island, Texas and Nebraska, there have been recent attempts to nix the entire usage of credit in scoring.
Rhode Island’s H 5028 was introduced last month and would have barred insurers from considering credit at all. It was held for further study that same month.
Texas lawmakers discussed credit-based issues in insurance scoring at length recently, with a bill to bar insurers from considering credit left pending in a committee.
Nebraska’s similar attempt to nix credit-based scoring drew bare support in a committee hearing this week. No action was taken on that bill.