CEO panel at IBAA heats up over use of credit scoring

A lack of transparency and clarity in the regulations around the use of credit scoring are major obstacles to its widespread use in underwriting personal lines insurance policies, insurance company executives on a CEO panel told the annual general meeting of the Insurance Brokers Association of Alberta (IBAA), in Jasper, Alberta.
Insurers’ use of credit scoring for the purpose of underwriting home and auto policies has hit the nation’s newspapers, and insurance brokers have taken a stand that the issue needs to be publicly aired and addressed by regulators.
Peter Blodgett, president of the Insurance Brokers Association of Ontario (IBAO), told the IBAA’s annual general meeting that Ontario brokers are lobbying their provincial regulator “to initiate a total prohibition on credit as it relates to all personal lines property and casualty insurance in the province of Ontario.”
But when one broker at the IBAA’s CEO panel asked the question, “Is credit scoring here to stay?” he didn’t receive many definitive ‘yes’ or ‘no’ answers.
Shawn DeSantis, senior vice president of personal and commercial insurance at RSA, said RSA does not use credit scoring on an individual basis “today,” although he said he couldn’t rule out the possibility of doing so in the future if regulations allowed it. “I support any underwriting techniques that allow us to segment better, as long as they are respectful of the customer and we execute them correctly in the broker channel.”
Jean-Francois Blais, president and CEO of AXA Canada, reiterated that credit scoring is a useful tool for categorizing a consumer’s risk.
“How do you define a good client?” Blais recalled asking brokers earlier in his career. “The answer I got all of the time [from brokers] was: ‘A client that pays well.’
You don’t want in your business any client that does not pay well.”
He then linked the necessity of credit scoring to the credit crisis originating in the United States.  “What was the subprime? Well, the subprime is lending money to someone with a poor credit score. This is why we are in this mess today.”
Blais said insurers had to be careful if they used credit scoring to do so with the knowledge of their consumers.
Robin Spencer, president and CEO of Aviva, agreed with Blais about the utility of credit scoring, saying the practice has “underpinned many parts of insurance for decades, not centuries, particularly on the commercial lines side…”
But he suggested insurers needed to work with “very responsible regulators” to make sure its is used in a responsible and not a discriminatory manner. Whatever rules are in place, “insurers had to be on a level playing field,” he said.
Diane Brickner, president and CEO of Peace Hills Insurance, agreed.
She said her company does not currently use credit scoring because of “transparency” concerns. But she said companies such as hers might be forced to look at it to avoid the effects of “being selected against.”
In other words, a company that does not use credit scoring might be at a disadvantage with competitors that do. This is because the company that doesn’t use credit scoring would take on unprofitable risks that are denied by other insurers on the basis of their use of credit scoring.
While most jurisdictions do not allow credit scoring for the purpose of writing auto insurance, regulations around the use of credit scoring for underwriting other personal lines are currently under review.
In the morning session of the AGM, Arthur Hagan, deputy superintendent of insurance, said the Canadian Council of Insurance Regulators (CCIR) is undertaking a survey of 33 insurance companies to find out who is using credit scoring for underwriting property insurance. Hagan described credit scoring as “a hot issue” at the most recent CCIR meeting in Toronto.