Risking it all on Credit

Ontario brokers have raised concerns about how credit scores are used by some insurance companies, particularly in auto insurance. Although Ontario regulations prohibit access to an individual’s credit history for auto insurance rating and underwriting, the Insurance Brokers Association of Ontario (IBAO) says it has evidence that insurers are, in fact, requesting and collecting credit scores, especially for online quotes. The IBAO is looking to Ontario’s insurance regulator for a response, and perhaps even a broader debate on the issue.

CREDIT HISTORY AND AUTO INSURANCE

The use of credit history to determine a person’s insurance risk has shown an uneven evolution in the Canadian property and casualty market. The practice is widespread among U. S. insurers and has generated significant public controversy and regulatory response, but the ability to use credit scores in Canada depends on the province and the line of business. Sources say there is evidence that insurers are increasingly making use of credit history as a key risk indicator and predictor of claims activity.

Credit history has been allowed in Quebec’s property damage auto insurance market for more than five years. Alberta also permits insurers to use credit scores for optional auto insurance. Yet Ontario and the Atlantic provinces do not allow credit history and other “lifestyle factors” to be used for auto insurance rating and underwriting.

A March 2005 bulletin from the Financial Services Commission of Ontario (FSCO) lists “credit history” as one of the factors of “underwriting and risk classification that are expressly prohibited.” In all provinces, regulations are silent on the use of credit scoring for homeowner insurance, meaning insurers are free to use it in that line of business.

The regulatory inconsistency from product to product and from province to province may allow loopholes of which insurance companies can take advantage in their rating and underwriting practices. When it comes to Ontario auto insurance, the province’s broker association says some insurers may not be living up to the spirit or letter of the regulation.

“We have reports from our members that credit scores are being used to determine rate and access to insurance products,” says IBAO president Rodney Hancock. “We have seen cases where consumers cannot get a quote online unless they are willing to provide the insurer consent to get the credit score. Our concern is that the regulation does not allow that practice in determining an auto rate.”

Hancock says the IBAO provided FSCO in July with a broad sampling of instances that, the association alleges, shows insurers were contravening the regulation on credit scoring. FSCO spokesperson Rowena McDougall declined to speculate on any follow-up or response from the regulator, but did note: “Our responsibility to consumers is to enforce the Insurance Act and to monitor the industry for compliance to the Act. It is very important that there is compliance with this part of the Act regarding lifestyle factors.”

IBAO said in September it is expecting a response from the regulator within the next two months, although Hancock notes that “we will be following up to see where they stand and I am not sure how long that will take.” He makes it clear IBAO does not have a formal position on whether insurer use of credit scoring is a positive or negative practice for brokers and consumers.

“We have no position on whether credit scoring is good or bad, in terms of whether it should be used,” Hancock says. “But if the rule is that you cannot use it, then it should apply to all companies. So let’s make sure the regulation is followed and we are all using the same set of rules.”

WHEN TO USE CREDIT

The situation is also blurred by the fact that insurance companies may already have access to a consumer’s credit history for homeowner coverage. “Right now, they (insurers) can collect credit scores for personal lines property insurance,” Hancock says. “It is likely difficult to ignore that information when they are looking at the other side, especially if an insurer is writing both the home and auto as a joint policy. So maybe the rule at this point in time needs to be looked at. If we can’t draw the line here, then let’s draw the line somewhere else.”

One insurance company that would welcome a revision of the credit scoring line is ING Canada. It has been using credit history for six years, particularly in Quebec’s physical damage auto insurance market. According to Martin Beaulieu, the company’s senior vice president of personal lines, the use of credit scores, or as ING calls it “financial discipline indicator,” is one of many legitimate variables in the underwriting and rating process.

“What is clear is that financial discipline is a good predictor of insurance experience,” says Beaulieu. “It is a very good predictor of driving habits, and what care you take of your belongings. From that perspective, it can help determine what kind of risk a client represents for insurance companies.”

The fact that credit scores can differentiate between higher and lower insurance risks is reinforced in several U. S. studies, according to the Insurance Information Institute (III). In a report released in July 2007, the U. S. Federal Trade Commission found that auto insurers’ use of insurance credit scores leads to more accurate underwriting, in that there is a correlation between insurance credit scores and the likelihood of filing an insurance claim. A 2004 study commissioned by the Texas Department of Insurance on the use of credit information by insurers doing business in the state reported a strong relationship between credit scores and claims experience. And a June 2003 study by EPIC Actuaries conducted for the American insurance industry also discovered that, overall, insurance scores significantly increase the accuracy of the risk assessment process.

ING Canada uses credit scoring only where permitted by regulation, such as in Quebec and for Alberta’s optional coverage auto insurance market. Beaulieu says ING is piloting a residential program for credit history across Canada. There is growing evidence of insurance companies in Canada using credit scoring, according to Beaulieu. (Several major insurers were contacted for this article, but declined to comment.)

CREDIT SCORING IN QUEBEC

“In Quebec, it is hard to find an insurer that is not using it,” he says. “Brokers there have been familiar with the process for several years. In the other provinces, we see the trend of insurers trying to use it. There is a ‘first mover’ advantage to that client segmentation. I think it is in the best interests of brokers for all insurers to be allowed to use it in order to compete on a level playing field.”

Rene Kramkimel of Gamut Insurance Agency in Mount Royal, Quebec, says there was some initial resistance by consumers to the request for credit history when it was first introduced, but most have come to accept it as a routine part of the insurance process.

“In the past few years, it has become a normal thing,” she says. “Today, there are so many places that check your credit, most clients don’t bat an eyelash about it anymore.”

In fact, Kramkimel argues that access to credit history can help brokers in terms of assessing the type of payment plan offered to a particular client. “For my brokerage, what I like about it is if someone asks for a quote, the credit score does provide some information,” she says. “I am not going to carry a receivable or have to cancel a client for non-payment. It helps my bad debt.” She adds that her brokerage has never had a risk denied based on a bad credit score.

For ING Canada’s Beaulieu, how exactly an insurance company uses credit history is the real issue. He says ING only uses credit scores with the express consent of the consumer, which is part of privacy legislation requirements in Canada. The company does not decline coverage or increase rates as the resul t of a poor credit score, but rather offers a discount for those with positive credit history. For consumers concerned that third party access to their credit history will lead to a lower credit rating, Beaulieu says insurance company requests represent “soft hits” that leave no trace.

“Those who use it have to be disciplined as to how they use it,” he notes. “Consumers have to know what we are going to do with it, so it has to be done in the proper fashion.”

LOW PROFILE IN CANADA

The relatively low profile of credit scoring in Canada differs markedly from United States, where public controversy over the practice has prompted regulators in 26 states to adopt laws that prohibit or limit its use in underwriting or rating decisions. In many cases, the concern about credit history involved allegations of discrimination by insurance companies related to race, ethnic origin and income levels. Some companies were accused of declining coverage or raising rates based solely on credit scores, particularly in certain urban settings.

Beaulieu acknowledges Canada’s early experience with credit scoring may not have been entirely positive for consumers either. “I think some insurers used it to decline access to coverage in the early stages, but that is not part of the practices anymore,” he says.

For Beaulieu, the time is right for a broader debate about how credit scoring is — or should be — used by insurers across the country. “The best way to ensure there a level playing field and proper controls as to how it is used is to open up the gates and make sure this is done openly and with full disclosure,” he recommends. “As long as you say, ‘This can be done for this, but not for that,’ I think there will always be uncertainty about whether some companies are using it properly or improperly.”

“You cannot prevent insurers from using marketing twists to try to get that segment of financially disciplined consumers,” Beaulieu adds. “We favour as an organization that governments and regulators would give permission to use as many variables as possible for pricing and underwriting, with the financial discipline indicator as one. So let the free market decide if this is a good practice or not.”

Some, such as IBAO’s Rodney Hancock, agree this kind of public discussion may be in order, given the current confusion around existing rules on credit scores.

“At some point in time, there may be a debate over whether the use of credit is appropriate or not,” Hancock says. “We may need to have a bigger debate and a clearer direction about what we are going to do with credit scoring.”

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It is clear financial discipline is a good predictor of insurance experience. It is a good predictor of driving habits and whether you take care of your belongings.