Is it okay to use open banking data for underwriting?

Mutual insurers support a proposal to prohibit insurers in Canada from using banking data for underwriting, in an initial phase of open banking. However, one industry expert questions whether there is any harm in letting consenting consumers give their own banking data to insurance companies.

“If a consumer whose banking data belong to him, wishes his banking data to be used [in an open banking framework] by an insurance company, why not?” said Steve Masnyk, a long-time insurance lobbyist, who has followed the issues of banking and insurance for about 15 years.

Masnyk – currently managing director of Canadian Association of Managing General Agents (CAMGA) – was commenting on the final report of the Advisory Committee on Open Banking, released Aug. 4.  In that report, the committee recommended that the “initial phase” of open banking, in Canada, be up and running by January, 2023.

Masnyk is confident the federal government will follow that recommendation.

Open banking – also known as consumer directed finance – is the concept of enabling consumers to instruct their financial institutions to share their banking data with other parties chosen by the consumer.

The Advisory Committee on Open Banking was appointed in 2018 by the federal government. In its final report, the committee says banking data should not be used for underwriting insurance policies as part of the initial scope of open banking. The government should not relax such a restriction without first considering whether there are discriminatory or inequitable outcomes in insurance availability and coverage, the committee said in its report.

During a 2019 senate committee hearing, the Canadian Association of Mutual Insurance Companies expressed concern that an open banking concept could undermine the long-standing prohibition barring banks from engaging in the insurance sector.

“Any open banking framework should continue the legislative and regulatory prohibition of the use of consumer banking data for insurance underwriting purposes,” said Normand Lafreniere, then CAMIC’s president, in the 2019 hearing. Lafreniere has since retired.

CAMIC’s position on open banking has not changed, said CAMIC’s current CEO, Sangita Kamblé, in an interview with Canadian Underwriter shortly after the Aug. 4, 2021 release of the advisory committee’s final report.

“If banks are able to provide insurance for a client, then that is taking away from the mutual insurance industry,” Kamblé said in an interview. “With the open banking framework, we believe that it must continue to prohibit the use of consumer banking data for insurance underwriting purposes.”

For his part, Masnyk draws a distinction between the use of banking data in insurance underwriting (on the one hand) and letting banks and credit unions sell insurance at the point of granting credit (on the other). Generally, property and casualty brokers are concerned that a consumer applying for credit might feel pressure to purchase insurance from that lender (if that lender were allowed to sell insurance) for fear of not qualifying for the loan. The principle is that insurance should be sold by a qualified insurance professional rather than someone who is in the business of loans.

This is one reason the federal Bank Act prohibits banks from selling home and auto insurance in their branches in the same way they sell creditors’ insurance.

“If done properly, there is no reason to exclude banking data from insurance underwriting” in an open banking context, Masnyk said.

“Insurance, by its nature, is the law of large numbers. Ask any actuary. The more data you have, the better you can underwrite a risk. The more data an underwriter has – including banking data – the better for the consumer.”

One driving force behind open banking is to help consumers benefit from a broader range of financial products and services by giving fintechs and other financial service providers increased access to consumer financial transaction data. The thinking is that the fintechs could use that data to develop products more tailored to consumer needs and preferences.

Feature image via iStock.com/AsiaVision