Naked? Business transparency!

What is the naked truth about credit scoring, and my insurance rates? People are saying, "I want to know if my insurer is collecting personal information about me. How is the information used, in determining what I'm going to pay?" Credit is not a transparent process. This can be a difficult situation, trying to explain why one person has a better rate then another, when on the surface, the policies appear to be similar. It certainly can be the result of your credit score.

First off, what is credit scoring? The way your credit is scored, is that companies that have lent you money or have given you a credit card such as retailers, credit unions, banks, or a finance company send out regular reports about you. Included in this report, will be when you started your account, go over your credit limit, if you pay on time, or even miss payments. Credit score is not based on how rich or poor you are. Credit score is based on how well you handle your finances.

Two agencies in Canada collect the credit information, namely TransUnion Canada and Equifax. This information is compiled and credit reports are produced to determine if you, the customer, will be likely to pay back your loans. At this time, the credit scores range from 300 to 900. A poor credit risk would be at 300, with 900 being an excellent credit risk. Some of the information compiled includes:

  • What type of credit are you using - mortgage, car loan, credit card or line of credit;
  • How diligent have you been at paying your bills on time - what is your credit history;
  • How long have you had credit accounts;
  • How many inquiries have been made about getting new credit;
  • How much do you owe?

What is happening in insurance is that you, the consumer, are encouraged to submit to a credit check. You may not have received a clear explanation, as to why this information is required and how it will be used.

Another transparency issue in insurance, is your policy being lapsed or canceled without your receiving an adequate explanation. There is an obligation on the part of the insurance company, to clearly state why you are not being offered a renewal. Your agent or broker then has an obligation, to pass this information on to you, and to offer you alternate coverage. This is clearly understood by the insurers, the agents and brokers. The issue with credit score, is not as clearly understood by the agents and brokers and you, the consumer.

The credit score has been used by Canadian property and casualty insurance companies, for approximately the last 10 years to assist in underwriting home, commercial and auto policies. This is so commonly done, because it is a highly predictive underwriting tool. Statistics consistently show that the better the credit score, then the less likely that person is to make a claim. Yes, insurance is to help pay claims, but the insurance companies want to pay out as few as possible.

The long and short of the situation is, that if you have a good credit score, you will end up paying less for insurance. If you have a poor credit score. then you will pay more. So the logic follows, that if you want to help lower your insurance rates, then try to increase your credit score. The insurance companies feel that everyone, would want to be credit scored as most people will find this to their advantage. The smaller percentage with not great credit scores, are having problems in managing their finances. This is a group that will be outspoken about an increase in their rates, that they do not clearly understand. It will not be perceived as "fair", if their neighbour has the exact same car, same driving record, and yet pays less for insurance.

Most provinces, do not interfere with this credit scoring practice. In Alberta, the consumer has to explicitly grant consent for credit scoring. If the consumer says, "no" then the insurer cannot use credit information for underwriting that particular auto risk. Ontario prohibits the use of credit scoring, but only for underwriting auto. So credit scoring can be used in Ontario, for part of the underwriting on your home or business policies. Nova Scotia is looking at banning the use of credit scores for auto insurance.

Turner's Tips feels the answer seems to be full transparency on credit scoring. If a credit score affects a person's driving record, then it should be declared on the policy document. Some industry self-regulation would establish a Code of Conduct, and make the process universal. At the present time you could see an increase of 25% or more on your rates, due to a poor credit score.

At this time, not all companies are using credit scoring. If you seek an agent or broker who has a wide range of insurers to choose from, then you have a better chance of not having an adverse selection against you, resulting in higher insurance premiums. Ask you broker or agent about the use of credit scoring by your insurer.