Revealing Credit Scores

Alfred Hughes and his spouse had the proof of their loss questioned when they reported a home burglary in 2008. Yet their claim was paid later, and their policy renewed on schedule.

Despite the reasonable outcome, Hughes was upset. He complained to authorities his credit score was searched without his consent. A sympathetic adjudicator in the Office of the Information and Privacy Commissioner for British Columbia, Nitya Iyer, delivered her ruling in May 2011 along with an ultimatum.

Ayer ordered Economical Mutual Insurance Co. to stop using credit scores to rate or reject policyholders until it notifies – to her satisfaction – those affected and gives them a chance to say no to using their credit score for underwriting.

The order would prove costly and cumbersome for The Economical, which is based in Waterloo, Ontario. So it quickly appealed to the Supreme Court of British Columbia. To date, a decision has not been rendered.

Debate on Disclosure

Regulators

Meanwhile, opinions about the amount of information insurers should be providing to inform consumers properly are almost as far apart as eastern and western Canada. While a majority of consumers have been sized up using a three-digit credit score before buying home insurance – and in some provinces, before buying auto insurance – the disclosure they received remains controversial.

The Canadian Council of Insurance Regulators cited in a June 2011 report the lack of informed consent, the lack of awareness and the lack of understanding as three of seven potential risks to consumers when insurers use credit scores for the purpose of underwriting policies.

Newfoundland and Labrador resolved the issue in May by banning the use of credit scores for rating purchasers of personal home and automobile insurance. Ontario and Quebec had already banned the practice for auto insurance. A private member’s bill proposed last year aimed to ban its use for home insurance in Ontario.

The Economical had the support of the Insurance Brokers Association of British Columbia when it argued a disclosure statement on the policy application signed by Hughes’ spouse in 2003 was sufficient notice. It read: “The applicant agrees that reports containing personal, credit, factual record, premium payment or claims history information may be sought or exchanged in connection with this application for insurance or renewal, extension, variation or cancellation thereof.”

But Iyer argued in her ruling that such disclosures should make it clear whether or not the insurer intends to use credit information to set premium rates and to decide whether to renew a policy. A denial of coverage would make it difficult to find replacement coverage, since more insurers make use of credit information for underwriting, she noted.

“In order to meaningfully exercise their right to protect their personal information, individuals need to fully understand the purpose for which it will be used,” Iyer wrote in her order. “A vague or overly general statement of the purpose of collecting information does not allow the individual to make informed decisions. Notice need not be lengthy, but it must be such that a reasonable person would understand that the (credit) information being collected is being used for risk assessment in underwriting, not to assess creditworthiness or ability to make premium payments, or for other insurance-related purposes.”

Iyer notes a consent statement proposed in 2008 by the Centre for Study of Insurance Operations (CSIO), of which Economical is a member, does refer to collecting credit information and later to the use of private information to assess applications, underwrite policies and combat fraud. Hughes’s spouse signed an older, less comprehensive version of the CSIO form in 2003. Iyer does not, however, go so far as to say whether she thinks the 2008 CSIO statement is sufficient, noting that the question was not before her in the case at issue.

Insurers

Ann MacKenzie, ombudsman and privacy officer for The Dominion, does not think it is sufficient disclosure. She notes first The Dominion would not want to use credit scoring for underwriting in any case. “But if it did, my recommendation would be to come up with something more robust (to provide disclosure.)

“I think a normal person is going to think: ‘The insurance company will look at my credit score to decide if I can pay the premiums, or if I eventually have a claim, to see if some kind of fraud is going on.’ People don’t have it top-of-mind that credit score correlates with whether (your home) will be properly maintained or something.”

Also, she said, “I think if an insurance company is asking whether you will let it use your credit score to see if you qualify for a discount, you should have the opportunity to say: ‘I don’t want a discount. Don’t even look at my credit score.'”

The Economical’s lawyer will argue in court, among other things, that no evidence exists showing consumers do not understand how insurers use credit scores, or that they are unaware they are consenting to the use of credit scoring for underwriting.

A voluntary code of conduct published by Insurance Bureau of Canada (IBC) in 2010 proposes that insurers must be specific when seeking to use credit scores. It also calls on insurers to allow the consumer to say no to the use of credit scoring without disqualifying the consumers for coverage or competitive rates (excluding discounts).

“No one can give consent for another person,” the code stipulates. Insurers are urged to maintain a trail of proof of consent, respond quickly to corrections in credit data, provide refunds if errors resulted in over-charging, deal fairly with consumers who have no credit record or who plead for an exception due to an extraordinary life circumstance such as identity theft or catastrophe declared by their provincial government.

Brokers

The code’s provisions appear to satisfy all of criteria enumerated by the B.C. adjudicator and more. But Whitby insurance broker Bryan Yetman thinks more is necessary. A leader in the campaign by the Insurance Brokers Association of Ontario to ban the use of credit scores for underwriting, Yetman says it would be “almost impossible” to allay brokers’ objections to credit scoring by providing adequate disclosure. Yetman further notes that for brokers, disclosure is only one of many issues related to the use of credit scoring.

But on the disclosure issue, Yetman says: “Take an insurance company that does not disclose to its employees how a credit score is used within its (underwriting) algorithm …(for) competitive reasons, (or) for privacy reasons, how could the consumer be well-informed if the people they are engaging with on the phones can’t articulate it to them because they don’t know?”

If credit scoring is not banned in home insurance lines, as the IBAO advocates, then in an ideal world, the consumer would receive two disclosure statements, Yetman says. The first would spell out how credit information will be used in claims investigations. The second would outline how credit information will be used in underwriting, including how it figures in the calculations, what the potential premium increase or discount might be and what is the penalty for refusing to submit a credit score to an insurer.

Also, a consumer should be informed about the sources of credit information and the steps taken to validate accuracy, says Yetman. “He or she should know how to check the information and correct any errors or improve his or her score. By how much will premiums increase if the consumer says no to the use of credit information? What right  (if any) will a consumer will have to change his or her mind? And how will rates be affected if they do?”

Furthermore, he says, “for any meaningful measure to protect consumers, some level of regulatory accountability would have to be put into place. Otherwise, it’s just a bunch of words on paper.”

The B.C. privacy adjudicator accepted that credit information is an effective tool for deciding how much to charge groups of policyholders and reflect their risk of future insurance claims. But she points out that scores such as the Canadian Property Loss Score, developed by Equifax Inc., are calculated using a selection of credit information and a proprietary algorithm that are not even disclosed to insurers such as Economical. This would seem to create a severe impediment to meeting the standard of disclosure that Yetman imagines.

Steven Lingard, a lawyer for IBC, notes the privacy complaint against The Economical “was only partly successful,” and its implications for other insurers is limited. “The order is only against Economical and does not directly affect any other insurer,” he says. “The same would be true after the appeal.”

Yet Toronto lawyer Frank Palmay warned in a recent commentary that insurers are running the risk of further political backlash due to the use of credit scores. He urged them to do more than trumpet the correlation between low scores and a higher frequency of claims. “As more provinces ban the practice, it will become … harder to reverse the tide,” he predicted.