Threat of adverse selection prompts auto carrier to start credit checks

Nova Scotia motorists who consent to a “soft” credit check from Economical Insurance will soon be eligible to get a discount on their auto premium, the province’s regulator announced Monday.

The Nova Scotia Utility and Review Board (NSURB) has already allowed some carriers — including RSA, Aviva, and The Co-operators — to start using credit scores as a rating factor to set auto rates in the province.

NSURB has now given Economical the green light to start using credit score as a new rating variable, effective July 27 for new business and Sept. 30 for renewal business.

“Economical is concerned about anti-selection,” NSURB member Jennifer Nicholson wrote in the board’s decision. “Without its own credit variable, Economical may see poorer credit risks adversely select to insure with Economical, and better credit risks leave to seek discounts elsewhere. The proposed variable should limit this anti-selection, while improving the company’s ability to retain customers.”

Ontario and Nova Scotia prohibit the use of credit scores for rating auto insurance. The provincial monopoly auto carriers in British Columbia, Manitoba and Saskatchewan do not use credit scores to underwrite basic coverage.

The use of credit scoring as a rating factor is controversial.

Insurers say a statistical correlation exists between how insureds manage their personal finances and the likelihood that they will make an insurance claim.

Broker associations, on the other hand, in addition to advocacy groups for seniors, low-income earners, and immigrants, oppose the use of credit scores.

Some consumer advocates have made the argument that newcomers to Canada, for example, may have lower credit scores than people who were born here simply because – all other factors being equal – the longer a consumer has had accounts open, the better the credit score.

Using credit scores also has an impact on small business owners relying on lines of credit, Rick Orr, then president of the Insurance Brokers Association of Ontario, said in a release in 2012.

In Nova Scotia, Economical does not plan to check consumers’ credit score unless they specifically give their consent.

“Economical will provide a discount to all clients who consent,” wrote Nicholson. “The discount will vary with better credit scores receiving a higher discount. If the company cannot find a credit score value, the client will receive the smallest discount. Non-consenters will pay the undiscounted rates.”

For Nova Scotia auto clients, Economical will not rely on credit checks it already ran on clients for other purposes such as home insurance or payment plans.

“Fresh consent specifically related to automobile insurance will be obtained,” wrote Nicholson. “Once obtained, that consent will be in place until revoked by the client or the business relationship with the client is ended, allowing for periodic refreshing of the client’s credit score. Each inquiry would be a ‘soft query’ that would not impact the client’s credit score.”

Different credit bureaus use different methods to score consumers. One big factor is payment history, says Equifax – including how late the payments were, how much was owed, and how recently and how often the consumer missed a payment.

In early 2020, NSURB approved an application from Aviva Insurance Company of Canada and Traders General Insurance Company to use consumers’ credit information as an auto rating factor.

At that time, Aviva supplied confidential data supporting its argument that credit information is predictive of risk in property insurance and that this would carry over to auto insurance.

In the decision on Aviva and Traders, NSURB considered whether current Nova Scotia regulations preclude auto insurers from using credit scores to rate auto. At that time, NSURB considered Section 2 of Nova Scotia Regulation 183/2003, Matters Considered in Automobile Insurance Rates and Risk-Classification Systems Regulations, which says a rating factor may not be subjective, arbitrary, contrary to public policy, or one that “bears little or no relationship to the potential risk to be assumed by the insurer.”

Equifax Canada says it uses five main factors to calculate a credit score. They are:

• a consumer’s payment history
• a consumer’s used credit, versus available credit
• The length of a consumer’s credit history
• public records
• number of inquiries into the consumer’s credit file.

Equifax explains why the consumers with longer credit histories tend to have better credit than those with shorter histories. “In general, creditors like to see that you’ve been able to properly handle credit accounts over a period of time.”

Feature image via iStock.com/yinyang