Highlight Reel

Credit scoring, technology, brokers’ communications with consumers and the insurance-to-value (ITV) conundrum all found their way into the public discussions during the 89th annual convention of the Insurance Brokers Association of Ontario (IBAO) held in Toronto in October.

In many ways, IBAO’s seminars and panel discussions proved to be a kind “highlight reel” of many of the issues brokers have been raising throughout the year. Highlights included:

CREDIT SCORING

The IBAO made its position on insurers’ use of credit scoring crystal clear, when IBAO president Peter Bodgett, in his opening address, challenged the association’s members to stand behind the IBAO in its bid to ban the use of insurance-based credit scoring outright in all lines.

Blodgett’s speech acknowledged some of the IBAO’s members have not yet fully endorsed the association’s strong stance against credit scoring for the purpose of underwriting insurance. In Ontario, the use of credit scoring for underwriting purposes is currently banned in auto in auto lines, and the IBAO has called on regulators and legislators to extend the ban to homeowners’ lines as well.

“Our request in [May 2009] has now moved for asking for an outright ban on credit scoring, which I strongly support, and my hope is that our voice will be heard loud and clear,” Blodgett said. “We do, however, have some of our members who are opposed to our position. May I suggest it’s time to disregard insurer propaganda and get in the game.”

Blodgett likened the IBAO’s battle against credit scoring to the brokers’ fight against banks on the issue of banks selling insurance on their Web sites.

In both cases, brokers are “doing what we can to ensure that all Canadians are protected and treated fairly,” said Blodgett. “The use of credit is an evil that will do no more than increase cost for those who can least afford it and change our role from a professional advisor to a mere credit counselor.”

Blodgett’s use of the term “evil” drew a rebuke from one insurer at the IBAO’s annual CEO panel. Insurers on the panel who supported the use of credit scoring said a ban would not actually resolve the issue, since insurers and brokers would be at an unfair advantage with direct writers and banks that have already had a head start in the use of credit scoring.

Jean Francois Blais, president and CEO of Axa Canada, said as long as banks have access to consumers’ credit information, insurers — and thus the brokers who distribute their products — need to use credit information to remain competitive and maintain a level playing field.

“Is it the proper solution to ban [the use of credit scoring] when the competition has it?” Blais asked the panel. “The reality as we see it is: if we ban it, don’t think it will go away. We are here to compete.”

Robin Spencer, president and CEO of Aviva Canada, similarly argued that banning credit scoring would disadvantage the broker channel — and insurers supporting brokers — because a ban on credit would take away a valuable underwriting tool that insurers and brokers can use to win back business from direct writers and banks.

But remarks by panelist Charles Brindamour, president and CEO of Intact Insurance, sowed some confusion about whether the direct channel actually benefited from the use of credit scoring.

In a question-and-answer session following the panel discussion, Brindamour was asked if the use of credit scoring for pricing favours one distribution model over another.

He responded that if it were to be used, it would be to the broker model’s advantage.

“The direct models don’t really allow for the use of credit when it comes to pricing,” he said. “It doesn’t present an advantage for this channel in Ontario auto [where the use of credit scoring is banned].”

Brindamour’s remarks created some confusion, prompting IBAO CEO Randy Carroll to ask Brindamour to clarify whether the direct writers he monitored were using credit scoring.

Brindamour confirmed the direct companies he monitored were not using credit scoring for the purpose of underwriting.

“Then we don’t need it,” Carroll said of credit scoring, which the IBAO wants prohibited in all lines of business.

Kevin McNeil, president and CEO of Gore Mutual Insurance Company, said he believed enough underwriting factors are available for insurers to write profitable books of business. “When you couple the underwriting factors with predictive modelling, and the conversations that occur between the customer service representative and our underwriters, we don’t need credit in order to profitably underwrite and be successful as an insurer,” he said.

George Cooke, president and CEO of The Dominion (which does not use credit scoring), said he felt the debate around credit scoring was caused by regulations that are “unclear and unenforced.”

TECHNOLOGY

In his address to the convention, IBAO incoming president Bryan Yetman encouraged insurance brokers to adopt a much stronger Web presence.

As the Internet increasingly becomes the dominant mode of communication for consumers (particularly younger consumers), brokers need to adapt their business strategies to take advantage of this trend, said Yetman.

He noted the window of opportunity for the broker channel to use technology to its advantage would not be open forever. “Research suggests that whatever it is we do, we have less than a two-year window to develop and deliver a strategy,” Yetman said. “If we stand still, time will pass us by [and], as we know from other industries, those that adhere to the status quo get left behind.”

Going somewhat against the grain, Yetman argued that the Internet — commonly presumed to be a way to forge an electronic link between consumers and direct writers — is in fact compatible with the business model of the broker channel.

“Many profess that the Internet is eliminating the need for the intermediary,” said Yetman. “I, on the other hand, would argue exactly the opposite…

“You see, the problem with information on the Internet is that there is simply too much of it. More often than not, consumers searching for answers are often left more confused and/or misinformed than when they began.

“If anything, the Internet has created a much larger demand for the intermediary.”

This dovetails nicely with the advicebased aspect of the broker business model, Yetman observed. “With so much out there to decipher, trends show that consumers continue to crave advicebased answers to their inquiries.”

The broker’s opportunity to engage the Web lies in his or her ability to “wade through the myriad of information, validate it and present it to [consumers] in a manner they can understand.”

BROKERS’ COMMUNICATIONS WITH CLIENTS

Brokers need to do more of the grass-roots style of communication with their clients that made the channel so successful in the first place, the IBAO’s proprietary research shows.

IBAO CEO Randy Carroll and IBAO director of operations Paul Taylor both presented the research results at a convention seminar.

IBAO received 1,500 responses to its survey, which found that 17% of the market has switched from the broker channel to another provider over the past three years. Brokers still hold the largest segment (43%) of the market.

But brokers ought not to be complacent about communicating with their customers, Carroll and Taylor warned. The survey found a significant number of brokers were falling short of managing current demand from consumers.

For example, 31% of respondents answered indifferently when asked if they were receiving “superior value” from their insurance broker.

In a separate question, 18% of respondents were ambivalent when asked if they would recommend a broker to their family or friends.

A key goal for brokers should be to reach out to these people with more frequent contact, Carroll and Taylor sa
id. They pointed to survey results that showed broker customers like to be contacted at least twice a year, not including renewals or claims.

The IBAO’s survey results showed 62% of respondents wanted to be contacted occasionally, and 37% said they were contacted less than they would have preferred.

Carroll and Taylor gave several examples of personally receiving information from direct writers and cable companies — sometimes as often as once a week. And yet, some consumers only hear from their brokers once a year.

They said brokers need to be seen in their communities, and they need to hear from their brokers by telephone.

INSURANCE TO VALUE (ITV)

Would adherence to a single tool for estimating reconstruction costs help to resolve the insurance-to-value (ITV) issue?

Industry sources estimate residential and commercial properties in Canada are underinsured by up to Cdn$11 billion. In large measure, this is due to the fact that reconstruction costs have been inaccurately valued for decades.

Insurance company CEOs at the IBAO’s CEO panel raised the role of cost calculators in this historical dilemma. George Cooke, president and CEO of The Dominion, got the ball rolling when he said: “The biggest problem, from my perspective, relates to the fact that you need to have one [cost calculator] tool in order to solve this [ITV] problem.”

He said a hidden problem for insurers is that multiple cost estimation programs can be used to determine the reconstruction cost of a house, and yet a company can only set one rate. Thus, if the cost estimators differ wildly in their outcomes, that will make it more difficult to split the difference between variable property values to establish a single, accurate rate.

“You don’t set the rate for an [individual] estimator,” said Cooke, who added: “Maybe that would be part of the solution.”

Charles Brindamour, president and CEO of Intact Insurance, countered that it would be impossible for an insurance company to impose a monopoly on a single cost calculator tool. He said his company was responding to the ITV issue by “trying to find guidelines that can be applied to the output of certain tools…”

Kevin McNeil, president and CEO of Gore Mutual Insurance Company, said his company has dealt with the dilemma of brokers using different cost estimators by embracing all of them. “Whatever tools [brokers] are using, we accept,” he said.