Draft PEI regulations, if enacted, would prohibit credit scoring

A number of complaints over the use of personal financial information by insurance companies in Prince Edward Island – a practice that has resulted in some individuals being denied property or auto coverage insurance – has spurred the development of draft regulations that propose banning the practice.

Last week, the PEI government released draft regulations that, if enacted, would ban insurers from using said financial information with respect to those seeking residential property or private passenger automobile insurance.

The regulations were released along with a discussion paper that asks stakeholders if they believe such a ban is desirable.

“In essence, what we are looking at is the question of whether someone’s personal financial information should be used in determining their eligibility for insurance coverage,” Janice Sherry, PEI’s environment, labour and justice minister, says in a statement. “Along with that is the question of whether personal financial information should be used by insurers in determining the rates clients will pay if accepted,” Sherry adds.

“Government has received complaints that this practice has resulted in some individuals either not being offered insurance, or only being offered insurance at unaffordable rates,” the discussion paper notes.

Related story: CCIR working group reaches no conclusion on controversial credit scoring issue

With regard to residential property insurance, the regulations state “no insurer shall decline to issue, refuse to renew, terminate a contract of residential property insurance or refuse to provide or continue any coverage or endorsement” in respect of the insurance contract to an applicant or person on any of the following grounds:

• credit history, credit rating, credit score or credit-based insurance score;
• income level;
• gross or net worth;
• indebtedness;
• ownership of a credit card; and
• whether late or dishonoured premium payments have been made in respect of a contract of insurance that was not terminated by reason of the late or disnhonoured payments.

The same prohibition applies for applicants or individuals applying for automobile insurance, although the grounds differ. The grounds include those listed below:

• age of the applicant or person;
• age of the vehicle to be insured by the contract (unless the vehicle is an antique vehicle, is a reconstructed vehicle, or has been substantially modified for enhanced performance);
• whether the applicant or person was declined insurance or refused a renewal by an insurer;
•  whether the applicant or person has claimed in the past under an automobile insurance policy as a result of accidents for which the applicant or person was not at fault; and
• whether the applicant or person failed to make one payment to an insurer – if that missed payment is the only payment missed under an auto insurance policy in the past 24 months, and if the missed payment was made within 30 days of its original due date.

Although use of personal financial information by insurers is currently not a widespread practice in PEI, it may soon become so if the practice is note banned, notes the discussion paper.

It points out that insurance companies have increasingly been making use of personal information. “That, in turn, may lead to significant availability and affordability issues within the province, with respect to these insurance products.”

The discussion paper notes that some support using the criteria, while others do not. The former argue a ban could mean some consumers will lose discounts they may now be enjoying or will enjoy in future; the latter contend any such discount is insignificant compared with “the hardship suffered by those who either have less favourable personal financial information or refuse to consent to the insurer accessing the criteria.”

Opinions were also divided as part of a report released in November by the Canadian Council of Insurance Regulators’ (CCIR) Credit Scoring Working Group. Members of the group, which was tasked with reviewing the use of credit scoring by insurers, were unable to develop recommendations on the matter.

The group noted in its report that it had a “preponderance of opinion but a dearth of fact as to the actual and current, rather than potential, harms that may be accruing to consumers from the use of credit scores by insurers.”

Market conduct reviews by provincial regulators, something beyond CCIR’s scope, would be needed to come to recommendations, the group concluded.

That leaves the determination of what to do about any risks and harms associated with credit scoring to policymakers.

Written submissions on the proposed regulations in PEI, which must be received by January 11, 2013, will help determine if the regulations should be enacted in their current or another form.