Insurance regulators are scrutinizing the way in which insurers use consumer credit scores to price and underwrite certain products.

The Canadian Council of Insurance Regulators, an umbrella group of provincial and territorial insurance superintendents, struck a working group late in 2009 that will spend this year reviewing the potential risk to consumers arising from this common industry practice.

The CCIR will then publish a report, begin consultations with the industry and make recommendations that the superintendents can take to their respective jurisdictions.

The review is taking place in response to various consumer and watchdog complaints made about the industry practice in early 2009, says Jim Hall, superintendent of insurance for the Saskatchewan Financial Services Commission in Regina and chairman of the CCIR’s working group.

Media reports had indicated that Guelph, Ont.-based Co-operators Group Ltd. had been contacting clients to inform them of its intent to use credit scoring.

Subsequently, the CCIR asked the Financial Services Commission of Ontario to send a survey to a cross- section of insurance companies in the province in the spring of 2009. FSCO found that about half of those companies use consumers’ credit scores to underwrite and price their products.

“We know that there’s a wide practice of using [credit scores] right now,” Hall says, “but it’s not typically discussed by a company, either for competitive reasons or because there’s controversy around their use.”

The FSCO survey’s results, which were published in November, found that the majority of insurers (19 of 35) have determined, by analyzing their own portfolios, that there is a correlation between credit scores and claims experience among consumers. Ninety-four per cent of the insurance manufacturers found that credit scores are a valid predictor of future loss experience.

The survey also showed that most insurers that have been using credit scoring — in their qualification, rating or underwriting of insurance — have been doing so for three years or less. Of the manufacturers not using the technique, six had said they plan on using credit scoring in the future.

The CCIR’s working group is reviewing the survey results, and is gathering information about the way other global regulators have tackled the problem in their own jurisdictions.

RISKS TO CONSUMERS

Says Hall: “We’ll look at the risks to consumers as a result of what we determine from looking at the survey and any other information we may gather.”

Most of the legislation that governs this sort of practice in Canada is provincial, Hall notes. Some provinces, including Ontario, prohibit the use of the credit scores to price auto insurance, but not for home or other property insurance.

At this point, the CCIR’s fundamental concerns fall into two main categories, only one of which falls under its purview. The CCIR is concerned that the data used by consumer credit agencies may be inaccurate or out of date in some cases. This is not a matter for the CCIR, Hall adds, and will be passed on to the appropriate provincial and federal ministries.

Just as important, the other concern is that there are no standards for the practice in general. Nor are there standards specifically related to clear and transparent disclosure by insurers to consumers about the use of credit scores.

The FSCO survey makes it clear that insurers do provide some disclosure, but there is no standard practice. And, Hall says, some insurance providers fail to explain clearly what the credit scores are being used for: “The lack of complete disclosure gives the consumer no opportunity to question the score.”

As well, no standard exists for the frequency with which insurers update the information, or for the length of time they can keep the information. These issues trigger privacy concerns.

The review is in its early stages, Hall says. But it will be up to every province and territory to decide whether to make legislative changes or to recommend best practices through their regulatory bodies.

In response to the review, the Insurance Bureau of Canada has developed a voluntary “code of conduct” for insurers, which it posted on its website late last month.

In that code, the IBC recommends that manufacturers that use credit scoring should update their credit data at least every three years, and insurers should make changes to their data if consumers find errors. The code also defines how consumers should give “informed consent” to insurers to obtain their credit data: “Customers must understand the nature and scope of the request. The question must be reasonably clear to ensure that customers know what they are consenting to and how that consent will be used.”

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The IBC code adds that consent may be given orally, in writing or electronically. However, if consent is to be given in an electronic format, such as using a website field, the consent must not automatically default to a confirmed “yes.”

The code also suggests that insurers “seek assurance” from data vendors that multiple vendor requests or consumer inquiries do not affect the scoring and that information on race, nationality, gender or income is not used as a negative factor in the scoring.

The IBC has posted a “Q&A” for consumers, outlining their rights on the matter, including the option to decline the insurance manufacturer’s request. The Q&A notes that consumers who do so may not get the best price — although the Q&A does not say that consumers could also get a better price.

Three credit bureaus operate in Canada, all based in Toronto: Equifax Canada Inc., which is owned by Atlanta-based Equifax Inc.; Trans Union Canada, a unit of Chicago-based Trans Union LLC; and the Canadian branch office of Experian PLC of Dublin.

Each credit bureau stores data gathered from banks and other lending companies concerning the value of the loans, outstanding balances and consumers’ habits in paying off the loans.

John Russo, legal counsel and a vice president with Equifax Canada in Toronto, says the company’s internal analysis shows its data are 99.8% accurate.

“We stand by our data,” says Russo, who was unaware of the CCIR’s review and its concerns.

Equifax Canada relies on its own technology, consumer inquiries and data providers to verify and correct data, he adds.

The credit-scoring industry is overseen by federal privacy and consumer credit regulations, but neither includes regular auditing of the data. IE