MINUTES OF THE meeting

of the

ASSEMBLY Committee on Commerce and Labor

 

Seventy-Second Session

March 5, 2003

 

 

The Committee on Commerce and Laborwas called to order at 2:08 p.m., on Wednesday, March 5, 2003.  Chairman David Goldwater presided in Room 4100 of the Legislative Building, Carson City, Nevada, and, via simultaneous videoconference, in Room 4406 of the Grant Sawyer State Office Building, Las Vegas, Nevada.  Exhibit A is the Agenda.  Exhibit B is the Guest List.  All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

 

 

COMMITTEE MEMBERS PRESENT:

 

Mr. David Goldwater, Chairman

Ms. Barbara Buckley, Vice Chairman

Mr. Morse Arberry Jr.

Mr. Bob Beers

Mr. David Brown

Mrs. Dawn Gibbons

Ms. Chris Giunchigliani

Mr. Josh Griffin

Mr. Lynn Hettrick

Mr. Ron Knecht

Ms. Sheila Leslie

Mr. John Oceguera

Mr. David Parks

Mr. Richard Perkins

 

COMMITTEE MEMBERS ABSENT:

 

None

 

GUEST LEGISLATORS PRESENT:

 

None

STAFF MEMBERS PRESENT:

 

Vance Hughey, Committee Policy Analyst

Diane Thornton, Senior Research Analyst

Wil Keane, Committee Counsel

Patricia Blackburn, Committee Secretary

 

OTHERS PRESENT:

 

Birny Birnbaum, Consulting Economist

Samuel Sorich, Vice President, Western Regional Manager, National Association of Independent Insurers

Frank Palmer, Progressive Insurance

Mike L. Cleveland, Assistant Vice President, Fire Product Management, Farmers Insurance Group

C. Joseph Guild, III, Legislative Advocate, State Farm Insurance

Michael C. Derloshon, citizen

Jinny Anderson, citizen

Gail Burks, Executive Director, Nevada Fair Housing Center, Inc.

Larry L. Spitler, Legislative Advocate, American Association of Retired Persons

Robert Crowell, Nevada Trial Lawyers Association

John Frook, citizen

Janice Busé, citizen

George A. Ross, Vice President and Chief Operating Officer, The McMullen Strategic Group

Brian Woodson, Intern to Speaker Richard D. Perkins

Jim Werbeckes, Government Affairs Representative, Farmers Insurance Group

Berlyn Miller, Legislative Advocate, representing Nevada Contractors Association

Steve Holloway, Executive Vice President, Associated General Contractors, Las Vegas Division

Daryl E. Capurro, Legislative Advocate, representing Nevada Motor Transport Association, Inc.

John P. Sande, III, Legislative Advocate, AON Risk Services

Dan Musgrove, Director, Office of the County Manager, Intergovernmental Relations, Clark County, Nevada

Cliff King, CPLU, Chief Insurance Examiner, State of Nevada, Department of Business and Industry, Division of Insurance

Gary Milliken, Legislative Advocate, representing Associated General Contractors of America 

 

Chairman Goldwater called the meeting to order at 2:08 p.m.  A quorum was present.  Chairman Goldwater stated the need to introduce BDR 54-912 before the items on the agenda were discussed.

 

BDR 54-912 - Revises provisions relating to cosmetology.  (A.B. 258)

 

ASSEMBLYMAN PARKS MOVED FOR COMMITTEE INTRODUCTION OF BDR 54-912.

 

ASSEMBLYMAN BEERS SECONDED THE MOTION.

 

THE MOTION CARRIED UNANIMOUSLY.

 

Chairman Goldwater stated the BDR would be introduced on the Floor of the Assembly on March 6, 2003.

 

Chairman Goldwater opened the hearing on A.B. 194.

 

Assembly Bill 194:  Prohibits insurer from using information included in consumer report of applicant or policyholder for certain policies of insurance. (BDR 57-1114)

 

Assemblywoman Sheila Leslie, District No. 27, Assemblywoman Dawn Gibbons, District No. 25, Assemblyman Kelvin Atkinson, District No. 17, and Assemblyman Marcus Conklin, District No. 37, took their places at the witness table in order to introduce A.B. 194. 

 

Assemblyman Atkinson explained the bill would prohibit insurance companies from using credit reports to develop an individual's insurance premium.  He thought this bill was important.  Nevada thrived on tourism, and because of the tragedies of September 11, 2001, and the resulting effects from them, a record number of hard-working Nevadans had been laid off work.  Families, he explained, had lost their health insurance, and many had to live off their credit cards and incurred other debt as well.  Insurance premiums should not be increased due to unforeseen circumstances. 

 

Insurance companies, Mr. Atkinson noted, could show no direct correlation between credit reports and a person's driving record, yet policies could be denied, cancelled, or not renewed based solely on credit information.  The practice of using credit reports hurt everyone in all income groups.  There were consequences for lower-income groups, mostly the elderly and people on fixed incomes.  Those individuals were adversely affected most often, creating an unfair burden on those who could least afford it.  Mr. Atkinson explained that the practice could be an indirect method of discrimination against minorities because of the higher percentage of low-income minority population.  He went on to explain that there were similar consequences for middle and higher income groups. 

 

Many individuals did not look at their credit reports on a regular basis and when they did, they found errors.  With increasing threat of identity theft, no one was safe anymore, Mr. Atkinson explained.  Some insurers stated that a person's credit-worthiness was an indication of how they would pay insurance premiums.  In fact, Mr. Atkinson continued, nonpayment of an insurance premium would result in cancellation of coverage.  Auto insurance, Mr. Atkinson noted, had little to do with credit-worthiness.  A person's insurance rate should be based on his or her driving record.  When investigating the mysterious connection between insurance premiums and credit reports, people should listen to the old saying, "follow the money." 

 

Assemblyman Atkinson explained that A.B. 194 was a consumer bill and he felt the use of credit reports was nothing more than profiling.  General public policy, he reminded the Committee, required the Legislature to protect the consumer.  He believed this bill was another tool in the effort to accomplish that.  He urged the Committee to support this bill.

 

Assemblyman Marcus Conklin, District No. 37, reviewed A.B. 194 for the Committee.  He noted three primary components to this bill.  Subsection 1, he noted, clearly established that it was unlawful to request or require an applicant or policyholder to provide a consumer report.  Additionally, such information provided in a consumer report could not be used as a basis for determining whether an applicant or policyholder was eligible for rate increases, decreases, cancellation, renewal, or issuance of an insurance policy.  Subsection 2 provided an exemption for surety insurance and any other commercial or business policy.  Finally, Mr. Conklin stated, subsection 3 described in detail what a consumer report was for purposes of this statute.  It noted that regardless of the means of transmission, any communication of information that concerned financial standing, character of an individual, or standard of living, which was intended to be used by an insurer as a basis for any decision related to insurance transactions, was a consumer report. 

 

Assemblywoman Dawn Gibbons, District No. 25, complimented the other presenters of A.B. 194 and expressed her support for this bill.

 

Assemblywoman Sheila Leslie, District No. 27, explained to the Committee that when this bill was first brought to her attention, she was unaware of credit scoring.  She stated she had an expert in credit scoring with her who would explain.  Ms. Leslie stated that this bill touched consumers more quickly than any other.  There had been one small mention in the newspaper that they were working on this bill and her office had been flooded with e-mails about stories of how credit scoring had affected their lives.  She explained that she was unaware of the fact that the number of credit cards a person had would affect their credit scoring.  If a person had lost their employment, often due to unforeseen circumstances, that affected their credit scoring and subsequently affected how much a person would pay in homeowners insurance and auto insurance.  The insurance companies, she noted, would be giving their side of the story.  She thought they would speak about the fact that credit scoring was only one factor they used to determine premiums.  Ms. Leslie noted that she was sure the Committee would be very interested in hearing both sides. 

 

Assemblywoman Leslie introduced Exhibit C, an e-mail from Eric Berry explaining his situation.  Copies would be made and distributed at a later time to the Committee members.  Ms. Leslie next asked their expert to come up to the witness table and testify.  She introduced to the Committee Mr. Birny Birnbaum, who was a consulting economist whose work focused on community development, economic development, and insurance issues.  He had served as the economic advisor to and Executive Director of the Center for Economic Justice, a Texas-based nonprofit organization.  His company's mission was to advocate on behalf of low-income consumers on issues of availability, affordability, and accessibility of basic goods and services such as utilities, credit, and insurance.  Mr. Birnbaum, she continued, had authored many reports.  He had worked on credit scoring issues for over eleven years as both an insurance regulator and a consumer advocate.  He had been involved in similar Ohio legislation, served on the Florida Commissioner's Task Force on credit scoring, and just the day before had testified in the Texas legislature on this same topic.  Mr. Birnbaum, Assemblywoman Leslie continued, had been educated at Bowdoin College and the Massachusetts Institute of Technology.

 

Chairman Goldwater welcomed Mr. Birnbaum to Nevada and to the Commerce and Labor Committee.

 

Birny Birnbaum, Consulting Economist, stated he appreciated the opportunity to testify before the Committee.  His exhibits (Exhibit D, Exhibit E and Exhibit F) were distributed to the Committee members.  He apologized for misnaming the Committee on one of his exhibits, noting he had used the name of the Texas committee he had previously testified before.  Mr. Birnbaum asked the Committee to view all the arguments very critically and to challenge not only his arguments but also those of the witnesses in opposition to A.B. 194.  He was confident that his arguments could all be supported by facts and figures.  Mr. Birnbaum wished to explain to the Committee why the insurance industry's use of credit scoring should be prohibited, and why it could not simply be fixed with some consumer safeguards.  He also wished to spend some time talking to the Committee about the arguments that insurers had made in the past and would make in the future in support of the use of credit scoring and why those arguments were either unsubstantiated or incorrect.  Finally, he told the Committee he had some minor suggestions for strengthening the bill.

 

Mr. Birnbaum first addressed why credit scoring should be prohibited.  One reason was because it was inherently unfair.  He explained how people were victims of the September 11, 2001 attacks, even though they did not live in New York, because of layoffs and reductions in staff.  Those people were not only laid off, but also further penalized by higher auto and homeowner insurance rates because of their credit scores. 

 

Mr. Birnbaum used as an example a person who experienced bankruptcy.  Insurers would argue that credit scoring only identified people who were financially responsible versus people who were not.  The presence of a bankruptcy would indicate that the person was not financially responsible.  In fact, Mr. Birnbaum continued, the major causes of bankruptcy were an economic or medical catastrophe or divorce.  People running up their credit cards because they could not control themselves did not cause most bankruptcies.  Bankruptcy was caused by some event in their lives.  Mr. Birnbaum referenced Exhibit F, Insurers’ Use of Credit Scoring, which had been presented to the Ohio Civil Rights Commission.  This document addressed the causes of bankruptcy and what types of people filed for bankruptcy.  He advised the members that bankruptcy was not a lower-income problem but rather a middle-income problem.  That study showed that medical or economical catastrophes could push someone into bankruptcy. 

 

Mr. Birnbaum next explained the other reasons why credit scoring was unfair.  He noted that the number of credit cards a person had would be reflected in that person's credit scoring.  If one applied for a variety of credit cards in order to avail themselves of a ten percent discount for their initial use, that person would consider themselves a smart consumer for having received that ten percent and never using that card again.  In fact, Mr. Birnbaum stated, that would not make one a smart consumer because the credit models used that information to penalize you.  He told of a woman who opened an account in order to receive the discount, wrote out a check to cover that purchase, and was unaware that she would be penalized for auto and homeowners insurance rates.  Credit card companies solicited approximately four billion credit applications per year.  The offers for credit had quadrupled in a decade. 

 

Mr. Birnbaum noted that there were organizations of insurance agents who were opposed to the use of credit scoring.  Those organizations included the National Association of State Farm Agents, the National Association of Allstate Agents, and a number of other agent groups that were opposed to their use of credit scoring.  If credit scoring was the tool that enabled insurers to write more business than they would otherwise write, then Mr. Birnbaum inquired why agents would be against it.  Mr. Birnbaum asked why agents had been fired when they spoke in opposition to the use of credit scoring.  It was critical, he continued, to know that one might have a good credit history and a bad credit score.  One could have no bankruptcies, no delinquencies, no late payments, and a twenty-year history of paying on time and still have a bad credit score because the score was not derived solely from the presence of negative factors, but also from the presence of positive factors.  One received a certain number of points in the score for positive attributes, without which one did not get a good score.  The notion that consumers who were financially responsible would benefit from credit scoring was a myth.  If it were only a case of bankruptcies, then 99 percent of consumers would have received better scores. 

 

Credit scoring, Mr. Birnbaum noted, undermined the basic insurance mechanism.  He referred to risk classification.  Society as a whole would not be charged the same rate for insurance.  There was no average pricing.  Also there was no "pay as you go."  There was some grouping of risk.  Consumers who posed greater average risk as a group were charged more than others.  Mr. Birnbaum asked how the insurers devised the factors associated with higher or lower premiums.  Insurance companies made those determinations along with public policy issues.  For example, they could not use race to determine what a premium would be or whether insurance would be offered.  There was a correlation between race and risk of loss, but, as a matter of public policy, race could not be used to determine eligibility or rates for insurance. 

 

Credit scoring, Mr. Birnbaum stated, lacked key attributes of a good rating factor.  There was no loss prevention associated with risk classification.  The reasons for the use of risk classifications were to promote less risky behavior.  If one had speeding tickets, a higher rate would be charged.  This would discourage speeding.  Discounts were offered to consumers who installed anti-theft devices in their vehicles because they paid for themselves.  The more people who got that discount, the lower the overall claim costs would be.  Credit scoring, he pointed out, had no loss prevention associated with it.  It was only the shifting of premium from one group of consumers to another.  There was no loss prevention with the use of credit scoring, because consumers were unaware of how such scoring was being used and were thus unable to modify their behavior.  Even if they did, Mr. Birnbaum asked if anyone would want to spend hundreds of dollars to manipulate their credit score, or would they rather they spend that money on an anti-theft device for their vehicle.  Credit scoring undermined some of the basic insurance mechanisms because there was no loss prevention and it raised the overall costs to consumers.  The number of claims was not reduced, only the shifting of premiums occurred. 

 

Credit scoring, Mr. Birnbaum suggested, could not be fixed with a few more consumer protections.  It was inherently unfair and undermined basic insurance principles.  

 

Insurers offered reasons why credit scoring was acceptable.  First, they explained that credit scoring rewarded consumers who were financially responsible.  If they managed their financial assets well, they would be more likely to manage their vehicles or homes more responsibly; therefore, they would be less likely to be in accidents.  The industry was "blaming the victim."  Credit history was only a small part of a person's overall financial management.  It had nothing to do with the dollar amount of one's assets, whether or not one owned life insurance, and it did not capture all credit transactions.  For instance, Mr. Birnbaum explained, there were some companies who did not report to the credit bureaus; therefore good payment records meant nothing.  An inquiry, however, from a cell phone company or another company before they offered a person service did go onto that credit history and was used against that person. 

 

The insurers claimed that most consumers benefited from credit scoring.  Mr. Birnbaum refuted that claim.  The whole idea that most consumers would benefit from the use of that tool, and therefore it should be used, he called an anti-American position.  It said a majority should rule regardless of the fairness of the issue.  That assertion was unsubstantiated, undocumented, and provided no rationale for the use of credit scoring.  It was clear, Mr. Birnbaum continued, the largest insurance companies would be the ones most able to use credit and analyze credit.  They could develop their own models.  Credit scoring was just a way, he believed, for the largest companies to increase their distance from the smaller companies. 

 

Insurers argued that a prohibition against credit scoring would raise rates.  It might shift premiums from one group to another, but it would lower overall rates because it would eliminate a cost that insurers now added into their premium mix.  Insurers also argued that more education was needed so that consumers and legislators could understand the benefits and the fairness of credit scoring.  The industry refused to explain their models to the public and reveal the factors that went into those models.  The only people in the dark were consumers.

 

Insurers argued, Mr. Birnbaum continued, that consumers thought it was fair based on a 1994 survey.  He urged the Committee members to take their own survey with their own constituents to find out what they thought about credit scoring, especially when their rates could be raised because they had "too many" credit cards.  He said the one study insurers referenced was not conclusive because of how the questions had been worded.  The insurers spoke about subsidies without credit scoring, that bad drivers would subsidize good drivers.  He said that the most risky group might have 4 bodily injuries in a year out of 100, versus the least risky group, which had 2 out of 100.  There had been no complaints about subsidies when credit scoring was not being used, so why was it a subsidy now.  Prohibiting credit scoring, Mr. Birnbaum asserted, would level the playing field. 

 

Mr. Birnbaum explained that insurers would offer a model bill produced by the National Conference of Insurance Legislators and would say that bill was a compromise.  It was only a compromise between agents and the insurance companies, not a compromise that included the consumers.   

 

Mr. Birnbaum referred the Committee to his written testimony (Exhibit D), pages 3 and 4 for some suggestions for strengthening the bill and referred to some issues where the bill might not be narrow enough.  He stated he would be happy to answer any questions.

 

Chairman Goldwater thanked Mr. Birnbaum for his comprehensive presentation.  He asked if there were questions and saw none.  Chairman Goldwater asked the next speaker to come forward.

 

Samuel Sorich, Vice President and Western Regional Manager, National Association of Independent Insurers, spoke to the Committee and explained that his organization was an association of property casualty insurance companies.  He stated there were approximately 100 of their member companies doing business in Nevada; some used credit information and others did not.  Those companies represented about 47 percent of the homeowners and auto insurance written in Nevada. 

 

The business of insurance, Mr. Sorich explained, was unlike other businesses because the pricing of insurance was different than the pricing of manufactured products.  He went on to state that when a television store sold a television, they knew the cost of the elements that made up the television and the cost of the labor to produce that television.  Insurance was a promise to pay, not a manufactured product.  When an insurance company sold a policy it would not know the ultimate cost of that promise to pay.  The company could not predict if a loss would occur or what the cost would be.  He noted that the companies could simply estimate all costs and require everyone to pay one average price.  Good public policy, Mr. Sorich continued, required that a person should pay an insurance premium that would be commensurate with that person's risk of loss.  He explained that consumers with a low risk of loss should not be required to pay more for insurance than they should be paying.  Mr. Sorich explained that insurance companies measured loss by looking at data.  Data showed that persons with past accident history were more likely to have future accidents.  Data also showed that older homes generally had more claims than newer homes.  If the companies would stop there, it would not be fair.  Through the years the companies had introduced other characteristics; for example, age of the driver, gender of the driver, where the car was garaged, the type of car, where the car had been driven, and other factors to determine risk of loss.  Mr. Sorich explained that credit information was another tool they used, and the companies that used that information believed it afforded them a higher level of fairness to their customers. 

 

Mr. Sorich went on to note that credit characteristics were an indicator of potential loss.  Forcing insurance companies to ignore that evidence would force the majority of consumers to pay more than they should. 

 

Three issues needed to be addressed, Mr. Sorich stated.  The first issue was the underlying legal authority for insurance companies to use credit information; second, a general description of what an insurance score was and how they had been developed; and finally, an explanation of why insurance companies had used that rating and underwriting tool.

 

In 1970, Mr. Sorich explained, Congress passed the Fair Credit Reporting Act that listed six or seven permissible uses of credit report information.  One of the express permissible uses of that information was insurance underwriting.  Federal law, therefore, recognized the use of this tool.  Obligations were attached to the use of that credit information.  An insurance company that took an adverse action based on credit information had to provide the consumer with a notice that explained the adverse action taken and how that consumer could get a free copy of his credit report. 

 

Mr. Sorich noted that states had the authority to regulate insurance companies' use of credit information.  Those regulations were to achieve a greater degree of consumer protection; however, the action that a state took had to be consistent with the Fair Credit Reporting Act.  There was a question whether a state could completely prohibit the use of credit information. 

 

Mr. Sorich noted that even though the use of credit information had been permissible for the past 30 years, the practice had become more common over the last five or six years because of the development of credit-based insurance scores.  The analysis of a credit report, he explained, was difficult.  It took a high level of expertise to analyze, and most companies did not have the personnel to examine a report and make an underwriting decision.  About eight years ago, the Fair, Isaac and Company developed its first credit-based insurance score.  They had looked at millions of automobile and homeowners insurance policies and examined the loss history of those policies after they had been issued.  They then went back and looked at what the credit history of those millions of policyholders was.  Fair Isaac discovered that there was a correlation between elements in the credit report and the subsequent loss experience of those policyholders.  That analysis had served as the basis for credit-based insurance scores.  The score combined a number of predictive credit characteristics and assigned a value based on their predictive power.  The combining of those factors produced an insurance score. 

 

Typically, Mr. Sorich explained, an insurance company that used an insurance score did not look at a person's credit report.  Their insurance score was based on analysis in the insurance scoring model that had been developed by individual insurance companies or by third party vendors like Fair Isaac.  The score indicated good, average, or poor credit history.  The company then made a decision on how to use that insurance score.  Mr. Sorich went on to emphasize that the companies used "insurance scores," not "credit scores," and there was a difference.  Banks, credit card companies, and department stores used "credit scores."  Insurance companies did not use "credit scores," they used "insurance scores."  The methodology for producing a credit score was different than that used to produce an insurance score.  A bank, he explained, used a credit score to predict whether a person would repay a loan.  An insurance company used an insurance score to predict whether or not a person would file an insurance claim.  The underlying analysis, he stated, was completely different. 

 

Finally, Mr. Sorich explained how insurance companies used credit information and insurance scores.  The reasons were basically the same reasons traditionally used.  They tried to make decisions that were efficient, economical, fair, and equitable to the customers and to make insurance more available and more affordable to the customers.  He explained that the use of insurance scores was "objective."  Such scores did not consider a person's race, income, gender, residence, or income.  The insurance companies attempted to use complete information.  The use of insurance scores was the insurance companies' attempt to make their decisions more equitable and more available to the public.

 

Mr. Sorich admitted there were controversies.  The insurance companies felt that the approach taken in A.B. 194 was the wrong approach.  By sweeping aside the use of all credit information, most consumers would find it more difficult to find and afford insurance. 

 

Chairman Goldwater thanked Mr. Sorich for his thorough testimony and asked the members for any questions.

 

Assemblywoman Buckley asked Mr. Sorich for details of how an insurance score was obtained.  As an example, Ms. Buckley stated, she might have a constituent who had never been in an accident and was laid off after September 11.  Their credit temporarily went bad and she wondered how the insurance companies determined the score.  She also inquired how auto insurance rates were determined.  Mr. Sorich stated the factors were well-known and that representatives from various insurance companies were present and would be more than willing to explain how their models were developed and applied. 

 

Frank Palmer, Product Manager, Progressive Insurance in Nevada, explained his job was to attract new customers and maintain the current customers.  He explained that, prior to his current job, he had been in the research and development group and was the statistician who had created Progressive's credit score model.  He stated that Progressive had made their formula publicly available.  They looked at characteristics on the credit report and assigned customers a particular score.  They then combined that with other information such as age, gender, driving record, type of vehicle, and location.  Finally, they combined all of those factors into the final rate. 

 

Assemblywoman Buckley asked what weight was given to the insurance score part of that equation and what the percentage was.  Mr. Palmer stated there was not an overall weight; however, he stated, other factors such as driving record, age and type of vehicle all were weighted more than the credit score.  Ms. Buckley asked if there was a range depending on the person.  Mr. Palmer stated he did not know how to answer because it would vary depending on the customer's other characteristics.  Ms. Buckley asked if there was a model that could be supplied to the members.  Mr. Palmer stated he did not have that with him but that all those figures had been filed with the Department of Insurance. 

 

Assemblywoman Buckley asked, if someone in her district had no accidents, had been laid off after September 11, had good credit up until then, and had no tickets, but, just by virtue of them being laid off and having had a temporary financial setback, how would it be fair that they had to pay a higher auto insurance rate when they were just as good a driver as they had been before they were laid off. 

 

Mr. Sorich answered that the data obtained from the analysis of millions of auto and homeowner policyholders showed that people with certain credit characteristics were more likely to have a lower or higher rate of loss.  If insurance companies were denied the use of credit information, there would be inequities because the companies would be forced to ignore the evidence that people with poorer credit histories did tend to have poorer loss records.  He admitted it was not the only consideration, but it was one that had been backed up with analysis. 

 

Assemblywoman Buckley stated she would like to see the evidence, not just hear it being said.  Mr. Sorich replied that the data was available.  Ms. Buckley requested that the data be given to the members of the Committee. 

 

Chairman Goldwater asked Mr. Palmer if the Department of Insurance filings were public information.  Mr. Palmer of Progressive Insurance stated they were public records. 

 

Assemblyman Arberry wondered, if the Committee conducted random testing of some of the agents and subpoenaed their records, would the Committee see how an individual's credit scores, race, and where they lived were used to "redline."  He stated nothing had changed since he first was elected to the Assembly in 1985, and he found it ironic that they could state profiling did not occur when he knew from his own knowledge that it did. 

 

Assemblywoman Sheila Leslie stated that Mr. Sorich had testified how unfair it would be if the Legislature banned credit scoring because it was such a useful tool, yet AAA and American Family did not use that tool.  She asked if not using credit scoring was so inherently unfair, why those companies were not using it.  Mr. Sorich stated that what he intended to say was that prohibiting companies that chose to use that tool from using it would be unfair.  He went on to speak of the value of the open market to allow companies to compete.  If some companies felt that credit information was not a useful tool for them, they were free to not use it.  He noted consumers who felt they were being treated unfairly were certainly able to go elsewhere for their insurance needs. 

 

Mrs. Leslie asked if he had any information that showed why those companies chose not to use it and if, when they decided not to use such information, did rates go up for all their customers or did they go down.  Mr. Sorich stated neither AAA nor American Family ever used that information so it would be hard to show a "before and after" scenario.  Mrs. Leslie stated that at least it was not such an important tool that every company needed to use it.  She felt it was interesting that some major companies were not using the credit information and still seemed to be doing well. 

 

Assemblywoman Leslie next asked about Mr. Sorich's statement that if the Legislature banned the use of credit scoring there would be a legal challenge, and she noted that such use had been banned already in Maryland and asked if he was aware of any challenges.  Mr. Sorich stated he was not aware of any challenges, but noted that Maryland had not quite closed the door entirely.  Although close to a ban, auto insurers in Maryland were allowed to use credit information at the initial writing of a policy.  Mr. Sorich explained he was not threatening a lawsuit, just pointing out the possibility of such challenges.

 

Mrs. Leslie next asked Mr. Sorich for clarification about a "credit score" and an "insurance score."  Mr. Sorich stated both scores were based on the credit report but the analysis was different.  Mrs. Leslie asked if someone actually looked at the credit reports.  Mr. Sorich agreed that someone did and stated that the computerized model analyzed the credit report. 

 

Assemblywoman Leslie also asked how many credit cards were permissible in order not to affect a credit score.  Frank Palmer of Progressive Insurance noted that not all insurance companies used the same model, so one could not state that "such and such characteristic" would ruin someone's credit score.  Progressive, he stated, did look at the number of credit cards one had but there was no negative weight assigned to that.  Rather, he noted, the relationship between the number of delinquencies and the number of credit cards on the credit report was analyzed.  If one had one delinquency and one line of credit, it would receive a harsher weight than if one had one delinquency and five credit cards. 

 

Assemblyman Griffin asked if there was a penalty for bad credit or a discount for good credit.  He also asked about the effect of bankruptcies or foreclosures on the credit score.  Mr. Sorich stated that, using the typical model he was aware of, both positive and negative elements were looked at.  He stated that some insurance companies only gave discounts because of a person's credit but did not give a surcharge for bad credit.  They were only rewarding people with good credit. 

 

Mr. Palmer answered he could only speak for Progressive scores, not all credit scores.  Because did not have income data from customers, he could not speak on that issue.  In relationship to bankruptcies, it would be possible for a customer to have a bankruptcy and still receive the company's best credit score. 

 

Assemblyman Hettrick wondered what other tools had been banned by law that could not be used in determining rates for a customer. 

 

Mr. Sorich explained that a person's race, ethnicity, national origin, and religion were all prohibited.  Mr. Hettrick asked if anything else had been banned.  Mr. Sorich stated that whatever the basis for their decisions had to have a statistical, objective backup.  Whatever information was used needed to be substantiated, and the criteria had to be filed with the Department of Insurance. 

 

Mr. Hettrick stated that in Mr. Birnbaum's testimony, he noted that credit worthiness and the price of one's automobile could be a factor.  He wondered if that was true.  Mr. Sorich noted that it was one factor.  Mr. Hettrick asked how it was weighted as far as credit-worthiness was concerned.  Mr. Palmer stated he did not have an exact answer for the price of the car, but that automobiles had been grouped and value was one element.  Vehicle symbols carried more weight than credit scores for Progressive Insurance.

 

Assemblyman Beers asked if the vehicle symbol was a factor in determining the risk or was it the cost of replacement.  Mr. Palmer stated it was based on both frequency and cost.  More expensive cars would be more expensive to repair or replace.  Mr. Beers asked if there were statistical information that Yugos, for instance, were involved in more accidents than Camaros.  Mr. Palmer stated that Progressive did not rate specifically on the make and model of the vehicle, but looked at different characteristics of the vehicle.  Cost of repair or replacement would be one factor, or it could be that the type of vehicle tended to be involved in more accidents. 

 

Chairman Goldwater thanked the speakers for the information concerned with rate-making.  He explained to Mr. Palmer that he was a Progressive customer and he had recently discovered that on two of the three major credit reports he had been listed as deceased.  He explained that his father, who was deceased, had the same name.  He stated the misinformation about him being deceased had lowered his credit score.  That erroneous information had been on his credit report for the past two years.  He asked Mr. Palmer if he might be paying a higher rate because of this erroneous information.  Mr. Palmer could not answer specifically.  Chairman Goldwater stated he was asking a direct question.  He had asked for a rate and it was given to him.  His question was, would that erroneous information be reflected in his insurance rate.  Mr. Palmer stated that if the erroneous information led to a poorer credit score, then he would have paid more.

 

Mike L. Cleveland, Assistant Vice President, Fire Product Management, Farmers Insurance Group, offered to help answer the question from his company's perspective.  If the credit report resulted in a person having received less than the most favorable discount, they would have been required to send a notice that adverse action had been taken against that policy.  That notice, he continued, would include instructions to contact the consumer reporting agency, and the customer would have a right to request that report within sixty days.  A customer could receive a free copy of that credit report.  The notice would encourage a customer to make contact with the credit-reporting agency to get that information corrected.  If that information were corrected, then the credit-reporting agency would be required to give that information to the insurance company.  The insurance would then re-rate the policy based on the correct information. 

 

Chairman Goldwater stated that sounded simple.  He then asked if there were further questions.

 

C. Joseph Guild, III, Legislative Advocate, representing State Farm Insurance, stated there were a few more items he felt the Committee should hear.  His company used its own model for credit scoring.  He stated the public was concerned about how an insurance company would assess their driving record with their credit history.  That was not, he stated, what the credit models did.  State Farm Insurance only used models to assess new business and did not use the model to re-evaluate existing customers.  A good analogy might be the "good grade" discount given for students.  A correlation had been found between school grades and good driving records.  The credit scoring was the same thing, more complicated and harder to understand, but just another tool to develop a way to predict future insurance loss experience. 

The only other point Mr. Guild wanted to make was the misinterpretation that poorer people were discriminated against because of their income level.  He distributed three charts (Exhibit G) that showed no significant correlation between credit scores and income.  The insurance companies, he stated, were not discriminating against lower-income people, and he hoped the charts dispelled that impression.  Mr. Guild offered to answer any questions.

Chairman Goldwater asked for questions.  He stated that Mr. Guild had testified that State Farm did not use credit scoring for established customers and then noted that Mr. Guild stated that those credit scores were such a high predictor.  He wondered if they were such a high predictor, then why did State Farm not use the scores.  Mr. Guild stated perhaps he had misspoken.  State Farm did use credit scores, but only for new business assessment.  He reiterated that those credit scores were a high predictor of future loss.  Insurance companies, Mr. Guild continued, were in business to make money, but also to provide a service, and if they lost money in providing that service, then they were not doing their job well. 

Mike Cleveland, Farmers Insurance Group, wished to interject a few points.  He felt the Committee should understand how many customers today benefited from the use of insurance scoring in Nevada.  Currently, he noted, 72 percent of their customers with automobile policies received some level of discount based upon their insurance scores.  With regard to the homeowners, 85 percent of their customers received some level of discount because of the insurance scores.  He next spoke of the disparate impact on insurance bureau scores.  A study had been done in Virginia researching the data by zip codes.  That study had shown that the distribution of high to low insurance scores was similar across all zip codes and had concluded that there was no correlation to race or any other discriminatory factor. 

Chairman Goldwater asked for any questions and saw none.  He then asked Mr. Birnbaum to resume testifying.

Mr. Birnbaum explained that he had asked the Committee to look at the statistical data he had provided, which could be verified against what the insurance companies presented, and which required one to take their testimony as an article of faith.  He stated that whenever he had tried to get the data to do an independent analysis he was unable to get that information.  The Committee was basically looking at studies done by the industry or credit scoring vendors themselves with no independent, disinterested analysis.  He asked the Committee to examine a chart he had previously provided  (Exhibit E), which was entitled "Statistical Abstract of the United States."  Those charts showed that the factors most heavily weighted in credit scores had a tremendous relationship to income.  For example (page 3 of Exhibit E), if one's income were less than $10,000, then one would be ten times as likely to have a payment past due 60 days than if the income were $100,000 or more.  If one's income were under $10,000, one was 15 times as likely to have a ratio of debt above 40 percent than if the income were $100,000 or more.  Here, Mr. Birnbaum stated, was data one could actually verify for the factors that the industry acknowledged were the most heavily weighted.  The insurance companies referred to charts that were unavailable to anyone. 

 

Mr. Birnbaum stated that Mr. Sorich had testified that at any time they found a factor that was correlated to risk, they had to use that factor.  It would be unfair not to.  The logical extension of that argument was that if companies could predict risk perfectly, they would institute a "pay as you go" system.  The companies would charge everyone else nothing and the people who had claims would be charged $20,000 a year.  That, he explained, was not insurance.  The notion that an insurance company had to use every factor that was correlated to risk was ridiculous.  If that were true, why were all insurance companies not using credit scoring, he asked in terms of the argument that most people benefited and that Farmers only offered discounts, with all due respect, Mr. Birnbaum stated, that was a disingenuous argument.  A business simply could not only offer discounts. 

 

Mr. Birnbaum noted there was no loss prevention with the use of credit scoring.  If a company offered a discount to a customer, it would take in less premium but would not have reduced claim costs, which meant it would have to charge another customer more money.  The base rate would have had to be raised in order to give everyone a discount.  He cited a Michigan study in which a company stated that 85 percent of their customers received discounts.  It was shown that 51 percent were charged more and 49 percent were actually charged less than before the use of credit scoring. 

 

Mr. Birnbaum once again urged the Committee to look at the underlying data and if it was not provided to them, ask the insurance companies what the secret was.

 

Mr. Birnbaum spoke to Chairman Goldwater concerning his credit reports; depending upon which credit bureau he got his credit information from, his score could vary 100 to 150 points, which could mean the highest rate or the lowest rate.  He said that practice showed why credit scoring was such an arbitrary and capricious tool that undermined the risk mechanism.

 

Assemblyman Knecht asked Mr. Birnbaum if he had misspoken or if he did not understand the fundamentals of risk, because he had testified that if something were predictive of risk, one could use it to predict exactly when an event would happen and that insurance could be put on a so-called "pay as you go" basis.  To say something was predictive of risk did not mean that an event would take place.  Mr. Knecht noted that his understanding of risk was that of a probability of occurrence, not a guarantee that a given event would happen at a given time.  He asked Mr. Birnbaum to clarify that for the Committee.

 

Mr. Birnbaum replied that his point had been in response to Mr. Sorich's argument that if the industry found something that was predictive of risk or was correlated to risk, the industry would be irresponsible not to use it.  His point, Mr. Birnbaum continued, was that the logical extension of that argument was that one would always use every possible factor that was predictive to the point where one could perfectly predict risk.  It would lead to a "pay as you go" system because that would be the ultimate predictor.  His response, he continued, was that would undermine the insurance mechanism, and society had made numerous decisions about certain factors not being appropriate.  Mr. Birnbaum stated he disagreed with the presumption that bad credit would mean higher risk for loss. 

 

Assemblyman Knecht asked about Mr. Birnbaum's logical extension and stated that it did not follow a logical extension.  Mr. Knecht remarked that Mr. Birnbaum had talked about the idea that public policy did not use certain risk factors for certain purposes, and agreed he that was true.  It did not follow, Mr. Knecht believed, that all factors should be discarded, leaving nothing legitimate for the insurance companies to use. 

 

Mr. Birnbaum responded that he agreed with Mr. Knecht's point and asserted that was not what he had said.  He stated he did not want to discard all factors; he encouraged the use of rating factors that promoted loss prevention and encouraged less risky behavior.  The reason he was opposed to credit scoring was the fact that it was arbitrary, inherently unfair, and added nothing to the overall loss prevention capabilities of the system. 

 

Assemblyman Parks asked Mr. Birnbaum if, in his judgment, there was a difference between a credit score and an insurance score.  Mr. Birnbaum answered there was a difference based on the model.  A credit score was a score developed to predict the likelihood of default, but methodologically it was identical to an insurance score, which analyzed information in a credit file and came up with a number to predict subsequent risk of loss.  In fact, Mr. Birnbaum continued, it looked at the same information, and used the same methodology of putting a weight on various characteristics or factors.  The only difference would be that the weights were different and some of the factors might be different because they were trying to predict something else. 

 

That brought up a key issue, Mr. Birnbaum stated.  If he had a database of credit history, he could predict very accurately income, race, religion, and geographic location.  There was so much information in a credit file and the database was so rich that one could use it to predict almost anything and companies were doing that at the present time.  Banks used this database to predict who would pay back their loans early, because those people were less profitable than those who did not pay back early.  Mr. Birnbaum asked where the line should be drawn in the whole risk classification process.  What about using genetic information: eye color, hair color, the length of one's fingernails.  There was a correlation between all of those factors and risk of loss, but should it be used, Mr. Birnbaum asked.  He noted that he thought the answer was what more did the rating factor offer beside a correlation.  Did it promote less risky behavior; did it promote the things that one would want to see in insurance:  broad coverage and loss prevention.  Credit scoring did not accomplish those things. 

 

Chairman Goldwater thanked Mr. Birnbaum for his testimony and asked for testimony from the audience and urged brevity.

 

Michael C. Derloshon read from written testimony (Exhibit H).  He urged the Committee to pass A.B. 194.  Mr. Derloshon went on to explain he had spent 22 years in banking, being one of the authors of the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.  He felt there was no reason to allow credit information to be available to the insurance companies.  He relayed a short story about his wife and himself.  In June 2000, they had good income and good credit, and both were employed by the state of Nevada.  In July 2000 he had medical problems.  The state's disability insurance company refused to pay the claim.  Subsequently, they had had no income for the past 30 months.  Their credit had been ruined; he admitted he was a bad risk.  They were in bankruptcy, were doing all they could to save their home, and worried that their automobile insurance or their homeowners insurance premiums would rise. 

 

Assemblyman Hettrick asked Mr. Derloshon if, in fact, his premiums had risen.  Mr. Derloshon stated they had not as yet.  Chairman Goldwater asked what insurance company Mr. Derloshon had.  Mr. Derloshon stated it was Geico since last September.  Chairman Goldwater wished him well in his recovery.

 

Jinny Anderson read from prepared testimony (Exhibit I).  She stated she had been a 40-year resident of Nevada and currently resided in Storey County.  She wished to speak about the receipt of an adverse action notice from her insurance company.  They had advised her to contact her credit reporting company.  She phoned them and obtained her and her husband's credit reports.  Her insurance company allowed 90 days to refute any determination they had made regarding raising her rates.  She noted she had been working approximately 150 days to rectify the errors and had made no progress with the credit-reporting agency.  Her issue, she stated, concerned the credit reporting companies.  They provided information that was inaccurate, inconsistent, and incomplete. 

 

Ms. Anderson went on to explain that she and her husband had basically the same credit cards and the same mortgages.  Her credit report, she stated, was much higher than her husband's.  When she had spoken to her insurance company, they suggested that the Andersons switch a vehicle to her name since she had a higher score than her husband, and it had reduced her premium by 20 percent.  She stated that it was the principle.  If the credit scoring could be used in this manner with her, she wondered what happened to the person who had terrible credit and how were those people being treated.  She urged consumers to check their credit reports.  Ms. Anderson said she would like the Committee to pass A.B. 194 and that she would like the insurance companies to have to explain their rating system.

 

Chairman Goldwater asked if there were questions, and there were none.

 

Gail Burks, Executive Director of the Nevada Fair Housing Center, Inc., read from prepared testimony (Exhibit J).  She used a slide to show an actual credit report, which would show what a consumer in Nevada who applied for insurance went through.  She noted there was no standard for what a median acceptable credit score was.  In the year 2000 the acceptable median credit score was 600, in 2001 it was 620, and in 2002 it went up to 640.  Many lenders today considered 660 to be acceptable.  The credit report was run using a series of systems such as Fair Isaac.  If a consumer did not score high enough they would not receive insurance.  Some agents today could not write insurance because of the problems with consumers. 

 

Ms. Burks pointed out three examples on the last page of Exhibit J.  Those examples showed similar age, had credit for similar lengths of time, had good driving records and no accidents.  The cost for the separated female was $1,896.  The cost for the single male who had poorer credit and more delinquencies was $894.00.  The cost for the single female who had three delinquencies of 30 days or more was $1,272.  The chart showed the discrepancies.

 

Ms. Burks said there was no correlation between the driving record and the risk that was being considered and the consumers that were being provided insurance.  Unless consumers could understand how they could improve their scores, Ms. Burks stated, it was inherently unfair.  She asked the Committee to put in place standards that would require the insurance companies to disclose to the Insurance Commissioner what had been included in their calculations and how those calculations were made and allow consumers to get information in order to improve their scores. 

 

Vice Chairwoman Buckley asked Ms. Burks about the average time it took to correct a credit history.  Ms. Burks had stated in her written testimony that it had taken eight months.  Ms. Burks stated it was based on the caseload.  Files had been pulled in 2002 and they had been working with them since then to get corrections made.  She noted that if one were dissatisfied with the lack of correction, the only alternative was to write a statement to attach to the credit report or to sue under the Fair Credit Reporting Act. 

 

Vice Chairwoman Buckley thanked the speakers for their testimony and recognized a speaker from Las Vegas.

 

Larry L. Spitler, Legislative Advocate, representing the American Association of Retired Persons (AARP), spoke from written testimony (Exhibit K).  He explained about AARP and the services they rendered.  He was testifying in order to lend general support to the passage of A.B. 194.  He noted that AARP supported research to establish risk classification systems that would accurately and fairly reflect the risks associated with the individual characteristics of each insured person.

 

Mr. Spitler explained the need for consumers to know the criteria used in determining their scores.  He stated that no compelling evidence had been presented to show that a review of all the information contained in a credit report indicated whether that individual should be accepted or denied. 

 

Vice Chairwoman Buckley thanked Mr. Spitler for his testimony.  She asked if anyone else in Las Vegas wished to testify and there was no one.  She asked if there was anyone in Carson City who wished to speak in favor of A.B. 194.

 

Robert Crowell, Nevada Trial Lawyers Association, spoke in favor of the bill and wished to relay a personal story of a client of his.  He described that this person had an excellent credit rating, had 30 years of prompt payment with one insurance company, and had no claims history except for one claim ten years prior.  When he attempted to renew his policy in Arizona for a second home, he was told the premium would increase from $500 to $900, a 75 percent increase.  He was told he had an adverse credit report.  There was one credit agency that was used by this insurance company who had picked up on their credit report four unpaid tax liens for real property that had been transferred ten years prior.  He was given an opportunity and a notice to correct that information, which he did.  He stated he wished to testify today to explain to the Committee the angst his client went through with the 75 percent increase and adverse action notice, even though his premium had been subsequently reduced. 

 

Chairman Goldwater thanked Mr. Crowell for his testimony and stated he felt the anecdotal evidence was more powerful than the statistical analysis.

 

Mr. John Frook, a citizen, next spoke in favor of A.B. 194.  He had received a notice of adverse action from Farmers Insurance Company a few weeks previously.  He was opposed to the use of credit reports to rate his insurance premiums.  His credit report went back to 1986 and showed 21 financial transactions; 19 of them were summarized "never late," and two were summarized "paid or paying as agreed."  That report earned him a "B."  He complained that Sears had looked at his credit history six times in the last year and three months.  He had never had a Sears credit card and wondered why they looked at his report.  Eventually, he stated, Farmers Insurance adjusted his credit rating and he received an 18 percent reduction in premium. 

 

Chairman Goldwater interrupted the testimony and stated that A.B. 144 would not be heard today. 

 

Assembly Bill 144:  Prohibits employer of pharmacist from disciplining pharmacist for refusing to fill or refill prescription under certain circumstances. (BDR 54-210)

 

Chairman Goldwater stated that one would think it would be inexpensive to prove one was not dead as had happened in his case, but it had cost him close to $500 to prove to the credit reporting agencies that he was not deceased.  Poor people, he explained, would not be able to spend that amount of money to correct their credit reports.

 

Janice Busé next spoke to the Committee from prepared testimony (Exhibit L).  She explained that she was testifying on her own behalf.  The use of credit for insurance purposes, she stated, had spread to all states and was being addressed by them.  She noted that she had been an agent for 24 years in both property-casualty and life insurance.  She noted that the company she had worked for believed in the use of credit information.  She started asking questions about the studies that showed that people with excellent credit had lower numbers of claims filed, as well as lower frequency and severity.  No one could find such a study.  She noted that the insurance companies would not reveal how those formulas were determined.  She distributed "IFS Scoring Factors and Point Values" (Exhibit M), which detailed credit factors.  She believed the companies used those credit scores to unfairly receive higher premiums from their customers. 

 

Ms. Busé next spoke of an acquaintance of hers who had always had perfect credit.  He applied for credit to purchase a computer and was told that his application had been declined.  He requested a copy of his credit report and found that 66 companies had inquired about his credit within the previous 12 months.  He wondered how those companies could inquire without his knowledge. 

 

Ms. Busé continued that the consumer could understand if they would pay higher rates if they had tickets or accidents.  Those consumers, however, could not understand the higher rates or being non-renewed or cancelled simply because of their credit rating.  She asked the Committee to pass A.B. 194.

 

Chairman Goldwater thanked Ms. Busé and asked for questions from the Committee.

 

Assemblywoman Buckley questioned Ms. Busé about her background in the industry and whether she had spoken with other agents about their feelings concerning credit scoring.  Ms. Busé stated she had and the majority of agents were against using credit scoring.  Their companies, however, convinced the newer breeds of agents that credit scoring was predictive of future loss.

 

George A. Ross, Vice President and Chief Operating Officer of The McMullen Strategic Group, representing AIG Claims Services, Inc., next spoke in opposition to A.B. 194.  He spoke of a study in Michigan published in 2002.  He stated this study proved a correlation between a person's insurance credit score and the likelihood that a claim would be filed.  He stated that the elimination of credit scoring would force the insurance companies to charge higher premiums to those persons who had perfect credit. 

 

Secondly, Mr. Ross continued, was the matter of discrimination.  Lower income persons had not been denied coverage and were not forced to pay higher premiums.  Credit scoring was a mechanism whereby insurance companies could make insurance available to people who might not otherwise receive it. 

Chairman Goldwater asked if Mr. Ross could provide the Michigan study and Mr. Ross stated he would.  (Exhibit N).

Assemblyman Knecht asked Mr. Ross if the insurance companies were not allowed to use risk factors in determining rates, then would those with low risk factors be subsidizing others.  Mr. Ross answered that people with less risk in their lives received lower rates; if those factors could not be used then subsidization would occur. 

Chairman Goldwater asked if there were any more questions or anyone else who wished to testify.  There were none, and the hearing on A.B. 194 was closed.

Chairman Goldwater opened the hearing on A.B. 172.

 

Assembly Bill 172:  Revises provisions relating to premiums for motor vehicle insurance. (BDR 57-407)

Assemblyman David Parks, District No. 41, presented this bill.  He brought this bill forward in an effort to protect consumers from arbitrary insurance rates and practices and to ensure that automobile insurance was fair, available, and affordable for all Nevadans.  He believed that insurance rates should be determined by application of a driver's driving record, the type of automobile driven, the number of miles driven, the number of years of driving experience, and other factors the Insurance Commissioner might adopt by regulation that had a direct relationship on risk of loss. 

Mr. Parks introduced Brian Woodson, intern for Speaker Richard Perkins, who had assisted Mr. Parks on this bill.  Mr. Woodson explained he was a student at the University of Nevada, Las Vegas.  He explained that insurance companies placed a high priority on where one lived when determining premiums.  Rates, he noted, had been raised simply because a person lived in an area where accidents frequently occurred.  This practice was called "redlining," which he believed to be wrong, unfair, and discriminatory.  Bills had been introduced to outlaw those practices but had not passed.  Mr. Woodson noted that A.B. 172 did not go as far as to prohibit the use of territories altogether, but limited the number of territories to be used by insurance companies.  The difference between rural residents and urban residents should not change significantly, he stated.  Rural residents would still be able to pay significantly less than urban residents.  The result of the passage of A.B. 172 would even out the rates in Clark County.  A.B. 172 would take the task of defining territories out of the hands of insurance companies and put it under the jurisdiction of the Insurance Commissioner. 

Mr. Woodson communicated examples of how rates would change if one lived in a given area instead of three blocks away.  Residents of more affluent neighborhoods were charged significantly less for premiums than those in less affluent areas. 

Mr. Woodson explained that AAA Insurance had 23 separate Nevada territories, 13 of which were in Clark County.  State Farm had 9 territories, 5 of which were in Clark County.  He would like to see an amendment to limit the territories to no more than 10. 

The second area A.B. 172 would address concerned the good driver discount.  Such discounts encouraged continued good driving and were an incentive to others to improve their driving.  Mr. Woodson then discussed Proposition 103 in California, which had passed in 1988.  Between 1989 and 1996, despite the need to reduce premiums, California insurance companies ranked among the highest for profits and competition actually increased, and California drivers received the highest reductions in their insurance premiums in the entire nation. 

Mr. Woodson urged the Committee to pass A.B. 172.  He offered to provide detailed analysis of Proposition 103.  California insurance companies were compelled to use the following factors, in decreasing order to determine rates:  driving record, annual mileage, and number of years driving experience.  Mr. Woodson placed Exhibit O into the record, which was the "Nevada 2002 Consumer's Guide to Auto Insurance,” a 76-page booklet issued by the Nevada Department of Business and Industry, Division of Insurance.

Chairman Goldwater thanked Mr. Woodson for his outstanding presentation and asked the Committee if there were questions.

Assemblywoman Chris Giunchigliani stated two of the areas Mr. Woodson had spoken about were in her district and she had always suspected "redlining," and she stated she appreciated his research. 

Assemblyman David Brown asked about Section 2, paragraph 2, of the bill, which described the ten geographic service regions and wondered if it were as clear as it could be.  His particular issue dealt with subparagraph C that stated the geographic service regions could be geographically noncontiguous.  He asked if there were "islands" or ten risk grade regions.  Mr. Woodson stated he was not an expert on how the Insurance Commission would define the regions but understood it would be a percentage of accidents matched up with other zip codes with similar statistics, and all those rates would be in a separate territory.

Mr. Brown asked if they would get that information from the Insurance Commissioner.  Mr. Woodson stated he did not know, but if the Commissioner testified he assumed that information would be available. 

Chairman Goldwater asked for any more questions and, seeing none, acknowledged the next speaker.

C. Joseph Guild, III, Legislative Advocate representing State Farm Insurance, spoke in opposition to A.B. 172.  He stated that he had missed some of the testimony but wished to let it be known that a fiscal note would be attached to this bill.  He wished to reserve comment on that part of the bill until some point in the future.  In Section 2, he noted, there were some particular problems, one of which would go to a fiscal question, and that would be the actual creation of the territories by the Commissioner of Insurance.  There were, he explained, hundreds of companies that did business in Nevada, and each one of those would have significant reasons why the territories should be one way or another.  He wondered if agreement could be reached.  It also occurred to him that there might be a problem with "fleet rating."  He noted that large casino companies had many vehicles that were based in different counties; large construction companies and ranchers might also have vehicles registered in many locations.  Mr. Guild wondered how those territorial problems would be reconciled.

Section 3 of the bill, Mr. Guild continued, listed the criteria by which a 20 percent reduction in cost would be mandated if the person met those criteria.  The bill, he noted, was silent on property damage claims.  He stated there were some inconsistencies in the drafting of the bill.  He offered to answer any questions.

 

Jim Werbeckes, Government Affairs Representative, Farmers Insurance Group, concurred with Mr. Guild's testimony.  With regard to the 20 percent mandatory reduction portion of the bill, he noted that Farmers gave a 15 percent to 32 percent good driver discount now.  His concern was with Section 3, subsection 2, the actuarial basis for the reduction.  He spoke of young drivers receiving the 20 percent reduction when that group of drivers were high risk.

 

Sam Sorich, Vice President and Western Regional Manager, National Association of Independent Insurers, spoke about the fundamental of insurance pricing.  Pricing should be based on cost, he noted.  Different territories had different costs.  It was not just the number of accidents, he explained, but a variety of items including the number of auto thefts, the number of uninsured drivers, the density of a territory, and the local repair costs.  Because of those different cost factors, territories had to be established to reflect those cost differences.  Mr. Sorich stated that taking a county that had five or six different territories today and only using two territories could make the difference between the territories greater than the current territorial differences. 

 

Mr. Guild wished to make the point that "redlining" did not exist.  It was only the public's perception that redlining occurred, and it was against State Farm's corporate policy.

 

Chairman Goldwater asked if there were additional questions and found none.  He closed the hearing on A.B. 172.

 

Chairman Goldwater opened the hearing on A.B. 157. 

 

Assembly Bill 157:  Revises provisions relating to consolidated insurance programs. (BDR 53-370)

 

Assemblywoman Chris Giunchigliani, District No. 9, presented the bill.  She explained that the Associated General Contractors had requested this bill.  The bill focused on consolidated insurance programs.  It was called an "Owner Controlled Insurance Program," or OCIP.  Those programs were also referred to as "wrap-arounds" or "wrap-ups."  The intent of the bill was to allow groups sponsoring construction projects to purchase worker's compensation and general liability policies for all contractors and subcontractors that were working on the building project.  The bill defined a construction project, fixed work and structures in Sections 3 through 7.  Section 6 defined the cost and the diameter of the site, but she felt the issue was the policy of how OCIPs were utilized, and she turned the explanation over to the experts.

 

Berlyn Miller, Legislative Advocate, representing Nevada Contractors Association, spoke in favor of A.B. 157.  He noted because of the length of the previous testimony, he would change his presentation.  The intent of this legislation, he noted, was to prohibit a consolidated insurance program from covering more than one construction project.  His concern was with safety.  Each construction project, he explained, was different and had its own safety issues.  He felt each construction project needed its own safety inspector and should not be consolidated with more than one project. 

 

Mr. Miller noted that he had some problems with Section 6, lines 20 and 21, on page 2, which spoke of the diameter of the construction project not being more than one mile.  The same language appeared in Section 8, lines 42 and 43.  He stated that some opponents of this bill had concerns about this language and the Nevada Contractors Association had no objections to removing that language. 

 

Acting Chairman Parks asked if there were questions and there were none.

 

Steve Holloway, Executive Vice President, Associated General Contractors, Las Vegas Division, supplied his written testimony (Exhibit P) and noted he had just a few remarks in support of A.B. 157.  He stated they were not trying to ban consolidated insurance programs by this bill; they would be permitted for a threshold amount of $150 million or more in Nevada.  Their wish was to prohibit the combination of a number of smaller projects over an indefinite period of time.  The federal government and 35 states either prohibited or severely limited those types of "wrap-ups" for many reasons.  He distributed a summary of revisions to consolidated insurance programs (Exhibit Q).  He explained the injury rates for "wrap-ups" were three times the national average and he provided the Committee members with four studies (Exhibit R, Exhibit S, Exhibit T and Exhibit U).

 

Acting Chairman Parks asked if there were any questions.  Assemblywoman Giunchigliani commented about safety issues and asked Mr. Holloway for an opportunity to speak to him at a later date. 

 

Daryl E. Capurro, Legislative Advocate, representing Nevada Motor Transport Association Inc., spoke in support of A.B. 157.  He noted the history of "wrap-ups" in other states and the problems that had occurred.  He explained to the Committee that "wrap-ups" should be eliminated.  Determining where an employee had been injured was difficult on "wrap-ups."  An employee, Mr. Capurro noted, might work at two or three job sites in one day.  His main concern was to be sure the employees were covered.  It became a battle between the employer and the employee. 

 

Assemblywoman Giunchigliani asked whether any airports used "wrap-ups."  Mr. Holloway answered that there were no "wrap-ups" in public works projects; however, the airport had considered them.  The airport had an objection to the "one mile" portion of the bill because some runways were longer than one mile.  That was one reason the sponsors of A.B. 157 were willing to drop that provision.  There had only been a few private "wrap-ups" in Clark County; the Venetian, the Aladdin, and the Regency were the main ones.  Ms. Giunchigliani asked if the purpose of this bill was to close a loophole and Mr. Holloway agreed. 

 

Assemblyman Parks asked if there were any more questions and there were none.  He thanked the witnesses and asked that the individuals who wished to speak in opposition to A.B. 157 come forward.

 

John P. Sande, III, Legislative Advocate, representing AON Risk Services, spoke about "wrap-ups."  This was the third time this type of legislation had come before the Legislature.  There were some problems with "wrap-up" policies in the past and specific legislation was passed to reconcile those problems.  One of the past concerns had been the safety.  NRS 616B.725 required any policy OCIP to have two persons serve as primary and alternate coordinators for safety.  Those individuals had to be certified by the Board of Certified Safety Professionals or the Insurance Institute of America.  They also needed to be approved by the Department of Industrial Relations.  Furthermore, any project had to have an administrator of claims.  Mr. Sande's client, AON, which had been involved in the state of Nevada, stated that since that program had gone into effect, there had been no major problems with worker's compensation.  He stated that if more people were needed for safety that should be addressed.  Mr. Sande stated his belief that this was a financial problem.  The "wrap-up" projects had the potential to save millions of dollars. 

 

Finally, Mr. Sande continued, the limit set in 1999, $150 million, was supposed to be increased each year based on the construction cost index.  The bill removed the value of the land and certain design expenditures, so basically the bill raised the threshold even higher than the $150 million.  

 

Mr. Ross stated that AIG concurred with Mr. Sande's testimony. 

 

Dan Musgrove, Director, Intergovernmental Relations Department, Office of the County Manager, Clark County, Nevada, spoke in opposition to this bill.  He stated he was there on behalf of McCarran Airport and explained that this bill took away the flexibility from local governments' ability to do large public works projects.  Their interest was in saving money for the citizens.  If the costs rose, those costs must be passed on to the airlines, which passed it on to the passengers or they stopped using Clark County and McCarran Airport as heavily.  They needed the flexibility of using "rolling wrap-ups."

 

Chairman Goldwater asked for questions.  Assemblywoman Giunchigliani asked Mr. Sande how many projects were currently under an OCIP.  Mr. Sande stated he did not know.  There were none in northern Nevada that he knew about, but would get that information for the Committee. 

 

Cliff King, CPLU, Chief Insurance Examiner, Nevada Department of Business and Industry, Division of Insurance, was asked if he could answer Assemblywoman Giunchigliani's question regarding the number of projects.  He stated that ten OCIPs had been approved, all in Clark County, and there was one approved for the McCarran Airport. 

 

Chairman Goldwater asked if he had a highlight of those projects and Mr. King stated he could give the Committee a list, but he did not have it today. 

 

Assemblyman Griffin asked if the number of OCIPs was ten.  Mr. King stated a number of them had been completed.  He noted the first was Turnberry Place and that Green Valley Ranch was completed and was open and running.  There was one that had been approved but then decided not to use an OCIP and that approval had been withdrawn.  Mr. Griffin asked if the Division of Insurance would send someone out to check safety compliance.  Mr. King stated that before the OCIP was approved, the entire safety program, including the safety individuals, had to be submitted.  The statutes mandated that if one person was on the jobsite that would be the safety person.  If two people were on the job, the second one would be the claims administrator, and then other people could be on the job. 

 

Assemblyman Griffin asked about what would be done if there were violations.  Mr. King stated he knew of no violations, but that would fall within the jurisdiction of the Division of Industrial Relations. 

 

Assemblyman Hettrick asked for clarification; if there were multiple jobsites, were there also multiple administrators on every jobsite.  Mr. King stated that the statute allowed "rolling wraps," which had been interpreted to mean that there would be one safety person per jobsite.  Mr. Hettrick asked then if there were ten jobsites there would be ten safety persons.  Mr. King agreed. 

 

Mr. King explained that if the bill were approved the way in which it was written, there would be zero approved OCIPs.  Chairman Goldwater asked if the Venetian jobsite had been an OCIP and Mr. King stated it had been, but because if was done before July 1, 1999, that job did not fall within the provisions of this law.  It was Mr. King's understanding that this law arose because of the problems that were experienced in the Summerlin and the Venetian projects. 

 

Based on his experience with OCIPs, Assemblyman Hettrick asked Mr. King if he had seen additional losses or higher accident rates on the OCIPs in the state of Nevada.  Mr. King said that would be handled by the Division of Industrial Relations not by the Division of Insurance.  His division was only involved in the initial part of the approval of the OCIP.

 

Assemblywoman Giunchigliani asked Mr. King to clarify that if there were eight jobsites, would there be eight safety officers.  Mr. King stated that was correct.  She asked if that was what had happened, and Mr. King stated they would have to find out from the Division of Industrial Relations. 

 

Gary Milliken, Legislative Advocate, representing the Associated General Contractors of America, wanted to correct Mr. Sande on a comment he had made about the history of previous legislation which, he said, had, in fact, passed out of this Committee and was sent to the Senate, where it had died on the Secretary's desk. 

 

Chairman Goldwater asked if there were any other testifiers and seeing none closed the hearing on A.B. 157.  He stated that this was one bill where the parties needed to get together and schedule a work session in the future. 

 

Chairman Goldwater remarked to the Committee members that they would notice that agendas were getting larger and that work session would be started on Fridays and there would be votes taken on Fridays and intermittently during the weeks on the bills.

 

Chairman Goldwater adjourned the meeting at 5:15 p.m.

 

 

RESPECTFULLY SUBMITTED:

 

 

 

                                                           

Patricia Blackburn

Committee Secretary

 

 

APPROVED BY:

 

 

 

                                                                                         

Assemblyman David Goldwater, Chairman

 

 

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