Question of Principles

The Insurance Bureau of Canada (IBC), Canada’s trade organization for home, business and auto insurers, has waded into the credit scoring debate, posting its Code of Conduct for Insurers’ Use of Credit Information in late January 2010.

The code represents more than six or seven months of work at the IBC committee level, and reflects a diverse cross-section of IBC membership, some members of which support the use of credit for underwriting insurance, and some that do not.

“The purpose of this Code of Conduct is to provide insurers who use credit information in their underwriting and rating activities for personal insurance with guidelines on the use of credit information in accordance with principles of consumer protection and applicable federal and provincial laws,” the Code of Conduct reads. “These guidelines are voluntary.”

A 2009 survey by the Canadian Council of Insurance Regulators (CCIR) shows that, out of 34 insurers surveyed, 19 (representing almost 55% of the market share in the country) currently use credit-based insurance scores as a factor in underwriting personal property insurance. Of those 15 companies that said they didn’t use credit scoring, six (representing about 6% of market share) said they planned to at some point during the next three years.

Based on the results of its survey, the CCIR plans to discuss credit scoring at its Spring 2010 meeting in late March. Noting that its published principles reflect existing laws across the country, IBC does not believe there is any further need for regulatory responses around credit scoring.

“We would hope there is no need to prescribe [the IBC’s document of principles] as regulation,” said Mario Fiorino, senior counsel at IBC. “The document is basically an enshrinement of principles of consumer protection that reflects the obligations that insurers have under provincial and federal legislation. It is hoped that to the extent that the document is not only reflective of consumer interests, but also responsive to [insurers’] obligations, that it would be welcomed [by regulators].”

In total, the document outlines 10 principles:

• Comply with provincial and federal laws;

• Ensure credit information is current and accurate;

• Gathering prior consent to collect and use credit information (written or verbal);

• Keeping customers’ credit information confidential and private;

• The insurer cannot use credit as a sole variable, and thus, as the Code states: “must not refuse to quote or base an insured’s renewal rates, or deny, cancel or not renew a policy of personal insurance solely on the basis of credit information without consideration of other noncredit underwriting or rating variables;”

• The insurer must ensure that its use of credit is legitimate and that credit-scoring models do not penalize consumers for inquiring about their own credit, or discriminate against consumers based on characteristics such as income, gender, address, ethnic group, religion, marital status or nationality;

• Consumer complaints about an insurer’s use of credit are to be addressed by the insurer according to applicable Canadian laws;

• The insurers must treat consumers fairly when taking adverse action as a result of credit information, including, “upon the request of the consumer,” disclosing any adverse action taken as a result of credit;

• The insurer must not refuse to provide a quote or insurance to a consumer who refuses to consent to the use of his or her credit score; and

• The insurer should grant exemptions to the use of credit-scoring when consumers are undergoing “extraordinary life circumstances,” such as a state of emergency declared after a catastrophic event, serious illness or injury to the consumer (or an immediate family member), death of a spouse, child or parent, divorce (or interruption of alimony or support payments), identity theft, military deployment overseas, “loss of permanent (non-seasonal) employment for over three months,” or other events.

Thus far, the CCIR has described the IBC’s voluntary Code of Conduct for Insurers’ Use of Credit Information as “a good place to start a conversation.”

Jim Hall is chairing a CCIR sub-committee on insurers’ use of credit-scoring. He indicated the CCIR has studied the IBC’s principles in its recently released Code of Conduct.

“We’re very interested in whatever the industry’s thoughts are on how to bring forward some standards, so we’re looking at them with interest,” Hall replied, when asked if some of the IBC’s principles might find their way into the CCIR’s deliberations. “And we’re also doing some research of our own with respect to other jurisdictions, primarily American, to see what the various states have done. We’re just trying to get some background information now and we’ll be discussing credit scoring further at our spring meeting, principally in respect to what the IBC is suggesting. I think it’s a good place to start a conversation.”

The CCIR’s spring meeting was held in Quebec City on March 25 and 26.

The discussion included deliberations with the Insurance Brokers Association of Ontario (IBAO), which supports a ban of credit-scoring use across all lines of personal insurance. The IBAO says it finds three main faults with the IBC’s Code of Conduct.

“IBAO is encouraged that the CCIR continues to look at the issue of credit and its impact on consumers,” says IBAO president Bryan Yetman. “We would suggest however that the CCIR proceed extremely cautiously when considering the IBC’s Code of Conduct for three reasons.

“First, a voluntary code offers little consumer protection as it is not binding.

“Second, it is our understanding that IBC does not yet have a formal position on credit, and relying on this document could bring further confusion to the issue.

“Third, and perhaps most important, the code as presented completely contradicts what is happening in the market-place today. Consider, for example, Item 10 of the code, which allows for an insurer to grant exemption for extraordinary life circumstances. We are not aware of any insurer who is granting exemption for any reason. They either use credit as a rating factor or they don’t.”

In general, Yetman added: “In the past, IBC has developed voluntary codes of conduct and, because they are voluntary, there is no guarantee that members will adhere to them nor any consequence if they do not. For these reasons, we believe this will do little but create a false sense of security to the regulator and the consumers.”

Fiorino says several circumstances dictate that the IBC Code of Conduct could not be anything more than voluntary. “First of all, when it comes to guidelines, typically best practices guidelines [issued by] a trade association have to be voluntary by nature,” he says. “We do not impose compulsory business standards on our members. Not all insurers use credit history. That very fact also mitigates against developing a mandatory code.”

Having said that, Fiorino adds: “You’ve got to recognize that, although we say the principles in the document are voluntary, to the extent that the document reflects, for example, privacy law, there’s no voluntary component to that. All insurers have to subscribe to it. So a good part of the backbone of this particular document rests upon privacy principles [and existing laws governing the use of credit scoring].”

Fiorino says further: “We would hope that [the Code of Conduct] is a reflection of what is happening in the market. It is something that, if you look at the document, I think it’s a balanced document from the standpoint of reflecting good business practices for insurers, but also respecting the fact that we have many members who believe that credit history has some probative value and some commonality with respect to risk, and that ultimately it’s in the consumers’ best interests that they understand in a very transparent manner how that informatio n is used.”

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The document is basically an enshrinement of principles of consumer protection that reflects the obligations that insurers have under provincial and federal legislation.