By Stan Sauerwein
Credit scoring, the use of an individual's credit history as part of the rating process, has raised contentious storms of criticism in the U.S.
In the last few years the regulatory cold front blew through Ontario as well, resulting in an outright ban of the process. While insurance credit scoring remains legal in every other province, Canadian companies continue to tread lightly on the subject here. Customers, they suspect, simply don't understand the difference between insurance credit scoring and something that raises their emotional hackles - credit reports.
The job of taking credit scoring public is one that no company relishes doing. Recent experience by one company may be a good example of why.
ING Insurance Company of Canada started to apply credit scores in Quebec as an integral component in its underwriting tool chest, along with other variables for evaluating risk on home insurance, two years ago. It was introduced as a pilot project called Stability. An individual's "stability" scores were determined partly by residence location. Considered a success, the company rolled it out to other provinces where credit scoring is allowed for auto and home insurance.
Last January, ING introduced its B.C. brokers to a new tool it calls the Customer Value Index (CVI) that resulted from the Quebec experience. Since then, and despite the company's best efforts to explain the innovation, an emotional broohaha has been quietly bubbling.
At the heart of 'shop talk' in the ING broker community is a misconception that CVI is a euphemism for something else - data checks to acquire consumer credit reports that are then used to set customer premiums on home owner insurance.
That conclusion is erroneous according to Todd Klapak, vice-president of corporate personal insurance at ING.
Checks on 'credit ratings', which set credit worthiness based on an individual's history fulfilling credit obligations, require an individual's permission under privacy legislation. 'Insurance credit scoring' on the other hand, contemplates a variety of other factors and can draw conclusions from proxy information. A client's mortgage-free status could be one example. Insurance credit scoring factors can include demographics, claims history, and geographic locale relative to zones of higher risk, among other things.
For competitive reasons, ING is tight-lipped regarding the proprietary factors and methods of weighting it uses in its CVI model.
However, Klapak says: "We are not using credit rating in the B.C. marketplace at this point. The Credit Reporting Act puts a lot more requirements around notification to the consumer and we are not set up to handle that in an efficient manner."
An emotional response from some brokers to the news that ING was using their CVI model may stem from the company's use of credit information when assessing clients for their payment plan option.
"For the payment plan, we do seek the permission of someone for their credit information," Klapak says.
"If they don't give that permission or consent then we do restrict them to one pay or an agency bill."
That however, is a corporate financing matter and the same adjudication is performed by other companies and agencies with payment plans in varying degrees. In essence, the companies with monthly payment plans are just assuring themselves clients can pay their premiums if credit is extended and it has nothing to do with premium setting.
"The CVI is always used to write customers. We never use it to decline anyone. Through ING you're always getting an offer. We may have declined someone because of their claims but never because of their credit score."
ING is not the only company to have ever employed a scoring system of some kind to help with rating.
In 2003, Economical Insurance began using the Canadian Property Loss Score (CPLS) to assist in evaluating new business in Ontario only.
Cindy Graham, communications manager for Economical, says the CPLS is not used for underwriting and premiums are not based upon it. It is not used at all in B.C. by Economical.
South of the border, credit scoring is in widespread use by an estimated 92% of that country's top auto insurers.
As of last year, about 40 states were cobbling some form of legislation to ban credit scoring or limit the practice. Legislators claim it unfairly targets racial groups and the low-income demographic. A Missouri Department of Insurance study has tried to prove credit scoring impacts the poor and minorities unfairly.
Companies using credit scoring in the U.S. point to a stack of studies they say prove the practice has nothing to do with skin color or wage level. Rather, they say it is all about an individual's historical credit worthiness, regardless of income or social strata.
One study the companies tout was done by the Texas Department of Insurance last March. It concluded there was nearly a 100% probability a correlation existed between an individual's credit score and incurred losses. For the study, 150,000 auto policies were examined and it was shown there was a 65% spread between the losses incurred by individuals with poor credit scores and those with excellent scores.
Another study, done by EPIC Actuaries for a number of American insurance industry groups, looked at 2.7 million auto insurance records. EPIC said they found 33% higher losses than average among policyholders with the lowest credit scores.
EPIC said "credit-based insurance scores" referred in their study were different from traditional credit ratings used by lending institutions. For the study, EPIC researchers used a multivariate analysis technique that "analyzed all risk factors simultaneously so as to adjust for any interrelationship between insurance scores and other risk factors."
"The credit attributes and the weighting of those attributes to develop an insurance score for private passenger automobile insurance may be different that a score used for commercial automobile insurance, or for homeowners insurance," they said.
State governments have reacted to the storm of studies in different ways. In February, Missouri's governor called for a ban on credit scoring. Maryland joined 11 other states in launching still another and even larger study than the EPIC effort. As it happens, in 2002 Maryland passed legislation to regulate credit scoring. The number of states looking to ban the procedure continues to grow.
In Canada the issue has remained largely unaddressed by regulatory authority because credit scoring is apparently not a generalized practice and it does not represent a bone of regulatory contention in B.C.
Michael Grist, the Deputy Superintendent of Insurance in B.C. confirms that legislation in this province is not specific on the issue and does not prohibit the use of credit scoring as an underwriting tool. He is unaware of any pending changes being considered in the legislation.
In view of the rising fuss over credit scoring in the U.S., will general company usage of the tactic in underwriting be worth a similar battle in Canada?
For the moment ING seems to be weathering the storm well enough and no doubt its competitors are watching their success. Time will tell.
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