Can the insurance companies use credit scores?

From Tuesday's Globe and Mail
March 2, 2009 at 8:54 PM EST

Regulators are taking a hard look at insurers' widespread use of consumer credit scores to determine home insurance rates, something that critics fear could put policies out of reach for more homeowners during the downturn.

Insurers in Canada are increasingly using credit ratings as one of the factors that determine rates or premiums, based on the rationale that people who pay their bills on time are more responsible homeowners and lower-risk customers.

But the practice, which raises concerns about the accessibility and affordability of insurance as well as privacy issues, is now drawing attention from regulators as more customers complain.

Alberta's Finance Department recently told insurers that denying customers home insurance quotes because they won't provide a credit score “was an unfair practice, and [we] told them they can't do that,” spokesman Bart Johnson said.

The Financial Services Commission of Ontario (FSCO), which regulates insurers in the province, is looking into the use of credit scores by home insurers, according to a spokesperson.

Regulators are scrutinizing the practice as more companies are adopting it. Co-operators Group Ltd. is currently notifying customers that it will soon be using credit scores in its rating process for property insurance.

Scores will be accessed “periodically” and used in combination with a variety of other factors to determine premiums. Customers are being given 30 days to inform the insurer if they do not want their score accessed.

“If you do not allow us to access your credit score, we will not be able to provide an accurate or competitive premium that reflects the risk we are insuring,” the company states in a letter to customers. “If we do not have a credit score, we must assume the lowest possible score, which may result in a higher premium.”

In a statement, Co-operators said credit scores have been shown to be an accurate predictor of future claims for property insurance. Insurers argue that the use of credit scores allows them to tailor rates to customers, so that good customers pay less than riskier customers.

Accessing credit scores has been a common practice in the industry in Canada since 2001, said Co-operators spokesman Leonard Sharman.

“Credit is the very best proxy or indicator of risk that there is,” said the chief executive officer of one property and casualty insurer who did not want to be identified because the firm is still working on a submission for FSCO.

“It basically comes down to risk-taking behaviour, where the same person who will leave their bill payment until the very last moment is also the person who might say, ‘I'll squeeze through that yellow traffic light.'” Martin Beaulieu, senior vice-president of personal lines for Intact Insurance Co. (which until recently was called ING Canada), said his firm has been using credit scores since earlier this decade.

“We call it a financial discipline indicator, and we are using it where it is allowed in Canada,” he said.

Talk to your agent or broker about your situation. There has been a ruling by the Registered Insurance Brokers of Ontario (RIBO) that a broker is required to make a reasonable effort to inform the individual as to why personal information is being requested. Also the broker is to ensure that the individual is advised for what it will be used for and with whom it will be shared.