Disharmony

One frustrating aspect of doing P&C insurance business in Canada is the lack of harmonized regulations across the country. This manifests itself in a variety of ways, the most recent example being the use of credit scoring in insurance underwriting.

A significant number of brokers — not all — dislike credit scoring for a variety of reasons. Some note it is difficult to explain to clients the conceptual relationship between credit use and their insurance premiums. Others  are concerned about procedural fairness, because the process of rating credit is not transparent and not immune to error.

For insurance companies, on the other hand, the statistical correlation is clear: consumers with good credit scores make fewer claims, and therefore they deserve lower premiums. Companies argue that credit scoring is only one rating factor among many that allows them to gain a better understanding of the risks their policyholders present. An unknown, prospective  policyholder could cost a company nothing over 10 years, or more than $10 million in 10 minutes. A company needs predictive information to help determine the risk.

Thus far, everyone has simply agreed to disagree. Some provincial regulators have legislated in this area, while others have not. In all of this flurry of (in)activity, the Canadian Council of Insurance Regulators (CCIR) undertook a review of the issue. And although the CCIR’s recommendations are never binding on its provincial members, some hope existed the association might take a longer view of the issue and advocate for a more coordinated regulatory response.

It is important to take a consistent approach to the issue across the country. It does not make sense for credit scoring to be allowed in one part of the country, or in some insurance lines, but not allowed in others. If credit scoring is good or bad, then it is good or bad wherever you are in the country. Certainly, the reasons for liking or loathing it are consistent across the country.

But after examining the issue for almost a year, the CCIR has yet to pronounce on the issue, and the president of the association has recently given a speech that said, in effect, lower your expectations.

“Frankly, there will be no harmonized policy on use of credit information in underwriting,” CCIR chairwoman Danielle Boulet said in a Dec. 13 speech at a Canadian Association of Financial Institutions in Insurance (CAFII) board of directors meeting.

“Some jurisdictions feel it is a valid tool to underwrite and price insurance, but other jurisdictions have banned its use already and still others are moving to do so.

“Ultimately, this is a government decision dependent upon a combination of political and socio-economic conditions within a jurisdiction, and a jurisdiction’s level of tolerance in relation to any potential risk identified.”

Although this analysis is sound, it is neverthless disappointing to those of us who would prefer to see a consistent approach to credit scoring upheld across the country. For critics, it will always be frustrating to see credit scoring allowed in one province when it is not allowed in another. For proponents, it is frustrating to be able to offer credit scoring in some jurisdictions, but not others. And for consumers, it doesn’t make sense that credit scoring would be allowed or not allowed simply on the basis of where one lives, and not on any kind of common principle.

Expecting politicians to act in a coordinated fashion on this issue, without bickering, when there are so many other issues that deserve their attention, seems like folly.    

Perhaps the best hope for resolving this is to see the emergence of a better, less contentious rating factor. This isn’t entirely out of the question, given the rapidly emerging sophistication of analytics.

But until that happens, it appears the industry is stuck with yet another inconsistent legislative response to an issue in need of a national standard.