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Alaska Looking To Change Policy Regarding Credit Ratings And Insurance Rates

Alaskan legislators recently held a hearing in regards to a bill which would streamline discount offers for insurers. Alaska currently has a very complex and unique way for determining how credit ratings affect insurance premiums.

The bill SB 55 would allow insurers to expand their consideration of a consumers credit history when setting rates. The current law lets insurers use consumer credit ratings to offer discounts on their rates but the discounts vanish after two years due to a state law that requires Alaskan insurers to re-rate policies after two years. When they re-rate it they are not allowed to use credit ratings.

This Alaskan law is the only one in the country. Insurers claim the law makes doing business in Alaska very difficult. In most cases, when the policy is re-rated with out the credit information, the rates go up. Bill SB 55 would also change the process through which the state sends out “adverse action notices” which notify policyholders concerning the impact that their credit rating had on their insurance rates. If the bill passes only customers whose premiums were affected by their credit rating would be sent a notice.

Insurers Endorse the Usage of Credit Reports

Insurers testified that the new bill would provide clarity to a rule that has proved costly to Alaskan consumers.

A survey done by PCI in 2010 found that 40 percent of personal auto insurers in the Alaskan market recorded premium jumps between and 11 and 20 percent due to the required re-rating after the initial two-year period. According to the report, a whopping 25 percent of consumers saw increases of 20 percent.

When re-rating the policyholder, car insurers are barred from checking credit information, making it hard to offer the best premium rates.

Industry experts say that Alaska has proven a common misconception wrong. Instead of raising rates, taking a consumers credit rating into account often lowers premiums instead of raising them as commonly thought.

According to industry experts, credit scores are crucial when it comes to predicting future claims. Credit scores have shown to be extremely accurate according to a number of studies, including one that was released by the Federal Trade Commission in 2007.

Insurers Say Rule Complicates Insurance

Insurers who testified at a hearing claim that the unique Alaskan system can make rating policies so complicated that some insurance companies have abandoned the state.

The harsh weather combined with a low population and the need to ship car parts in from distant suppliers makes insuring vehicles difficult which when combined with a law that requires them to re-rate customers after two years often makes it not worth the effort, forcing some insurers to leave the market.

Insurers who have established systems for underwriting and rating policies often have to revamp their system to deal with the uniqueness of the Alaskan market. This often leads to a limited selection of products, price points and options on the policies that they would offer in other states.

Policyholders who suddenly see their rates climb when credit ratings cannot be used often dump their current insurer and look for a new one. This is not only inconvenient for customers but creates a very volatile marketplace which makes it hard for insurers to justify the trouble and costs of writing policies in the market.

Insurers point out that consumers often miss out on discounts offered to long-term customers due to the churn in the Alaskan insurance market. In addition, the fewer insurers there are willing to write policies in Alaska, the less competition which usually makes for higher premiums all the way around.