Last month, the Credit Scoring Working Group of the Canadian Council of Insurance Regulators released a paper intended to seek the views of consumers and the industry regarding insurers' use of credit-based insurance scores. Specifically, the paper invited feedback regarding whether the potential risks surrounding the use of such scores have been fully identified and/or adequately addressed. According to the CCIR, the identified potential risks could possibly impede the fair treatment of consumers, the disclosure of information to allow consumers to make informed choices, compliance with law and good corporate governance.
Essentially, a credit-based insurance score is a numerical ranking derived from information contained in a credit report and is used to predict the likelihood a policyholder will make an insurance claim. Such a score may be purchased from a credit reporting agency or calculated by the insurer independently. Insurers use credit-based insurance scores in their rating and underwriting risk classification systems to determine the risks they will insure and the amount of premium to be charged. As stated by the CCIR, however, such a score may not be used "without adequate justification that it is predictive of future losses" and the use of such scores has raised questions regarding the connection between a consumer's score and the likelihood the consumer will make a claim.
In light of such concerns, various jurisdictions in the United States and Canada have limited the use of credit information for certain types of insurance. For example, Ontario and Alberta currently do not permit the use of credit information and scores in connection with mandatory automobile insurance coverage. Meanwhile, the federal Personal Information Protection and Electronic Documents Act (PIPEDA) and similar provincial statutes regulate the collection and use of personal information for commercial purposes. Credit reporting laws in most provinces also regulate the use of credit scores by mandating practices that credit reporting agencies and insurers must adopt to protect the rights of consumers. These statutes generally prohibit the collection of certain types of information and include obligations regarding consent, confidentiality and disclosure.
The Insurance Bureau of Canada has also published a voluntary guideline that considers the use of credit information in light of principles of consumer protection. In the United States, the use of credit scores by insurers is widespread, although some states have restricted the use of scores in certain circumstances, primarily related to automobile insurance coverage.
While questions regarding the correlation between scores and insurance claims and the impact of credit score use on certain demographic groups were beyond the scope of the paper, the CCIR welcomed the observations and ideas of stakeholders wishing to cover these topics within the context of their responses to the specific feedback requested in the paper. Similarly, the question of whether to ban the use of credit scores went beyond the scope of the paper, as ultimately this is a government decision dependent on a combination of political and socio-economic conditions within a jurisdiction.
Instead, the CCIR focused on the potential risks to consumers resulting from the use of credit-based insurance scores, which were described as follows:
Recent surveys suggest that many consumers are unaware of the fact that insurers make use of credit information. According to the CCIR, such polls suggest that consent is not sufficiently informed. The paper thus raised numerous questions regarding consumer consent, including: whether insurers disclose the specific ways in which credit information will be used, whether consent is in a verifiable form and whether consumers are aware that consent can be refused or withdrawn.
Unreliable credit data
While the prevalence of inaccurate credit data is unknown, the paper cited reports suggesting that almost a fifth of Canadians surveyed who checked their credit ratings found inaccuracies. Meanwhile, only about one-third of consumers are reported to have checked their credit reports at all.
Availability and affordability of insurance
The CCIR also considered whether the use of credit-based insurance scores could make insurance unavailable to some consumers, as the paper specifically cited instances where the use of scores has resulted in a decision against renewing a policy. Further, the CCIR expressed concern that credit scores could cause a substantial difference in premiums charged to policyholders at opposite ends of the risk spectrum. While there is a dearth of Canadian studies available to ascertain the extent of premium increases or decreases, an Arkansas report cited by the paper found that almost a third of policies in that jurisdiction received a premium decrease due to the use of credit scores, while 9% received a premium increase.
According to the CCIR, consumers may also suffer from insufficient disclosure with respect to the actions required to improve their credit rating. This concern stems from the fact that credit-based insurance scores are calculated using confidential and proprietary models. As such, consumers may be unaware of the weight afforded to credit-based insurance scores and the lack of transparency may make it difficult for consumers to make behavioural changes to improve their score. The CCIR contrasted such a situation with that of transparent rating factors (such as, for example, the number of speeding tickets received).
Undue impact on certain groups
The CCIR also expressed concern that consumers who refuse to provide consent, who have a lack of credit history, or who have been negatively affected by "extraordinary life circumstances" may be unduly penalized by insurers. According to the paper, the desired outcome would see such consumers treated fairly.
The paper states that, while consumers may have concerns regarding the protection of private credit information, the risks are adequately addressed under PIPEDA and provincial legislation where applicable.
Lack of understanding
The CCIR cited consumer surveys in Canada and the U.S. as suggesting that consumers may lack an appreciation of how credit-based insurance scores are being used to affect a rating decision. The paper thus specifically requested information regarding how insurers currently explain the use of credit-based insurance scores to consumers, if some of the objections regarding the use of such scores are based on misinformation about the practice and who should be responsible for educating the public.
The CCIR's paper surveyed a number of important issues regarding the use of credit-based insurance scores and specifically requested "comments, suggestions and ideas" from stakeholders on the issues identified. The CCIR is accepting submissions until August 14, 2011.
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