Application for Credit
Canadian Underwriter, Jun 2009 by Gambrill, David
Insurance Brokers Association of Alberta (IBAA) 2009 Convention
CEOs at the I BAA’s annual general meeting suggest the allowed use of credit for underwriting purposes should be based on improved public education, clear regulation and competitive fairness.
“Is credit scoring here to stay?” an authence member asked a panel of insurance company executives at the Insurance Brokers Association of Alberta (IBAA) in May 2009.
The seemingly innocent question is loaded: in many Canadian jurisdictions, it is against the law to use a person’s credit scores for the purpose of underwriting auto insurance policies. But credit scoring can also be used legally to underwrite both home and commercial insurance in some jurisdictions. Unsure about what is allowed and what isn’t, brokers and members of the public have recently gone to the press and asked regulators to clarify the extent to which credit scoring is not only legal, but used.
Arthur Hagan, deputy superintendent of insurance, kicked off the IBAA ’s annual general meeting in Jasper by saying the Canadian Council of Insurance Regulators (CCIR) is undertaking a survey of 3 3 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.
Later at the IBAA’s AGM, Peter Blodgett, president of the Insurance Brokers Association of Ontario, called for a “total prohibition on credit as it relates to all personal lines property and casualty insurance in the province of Ontario.”
The debate thus stoked, insurance company executives on the IBAA panel suggested any “staying power” of credit scoring would depend in part on three factors:
* the transparency of its use to brokers and consumers;
* the clarity with which the use of credit as an underwriting variable is regulated; and
* whether or not the use of credit would create an unfair competitive disadvantage between insurance companies.
Several insurers on the panel pointed out that credit scoring does serve a useful purpose in underwriting. To help illustrate the point, Jean-Francois Biais, president and CEO of Axa Canada, told two stories. The first recalled his early experience as a CEO talking to brokers about what constitutes a good risk. “My first question to brokers was always the same,” Biais said. “It was: How do you define a good client? The answer I got all the time was a client that pays well. You don’t want in any of your business a client that doesn’t pay well.” In helping to determine whether or not a client “pays well,” credit scoring can be used to identify a comparatively safe financial risk.
Biais’ second story illustrated how credit scoring can be used to determine an unacceptable risk. “My other story is about the origin of the subprime,” Biais said. “What is die subprime? The subprime is nothing but lending money to a person with a poor credit score at a reasonable rate. This is why we are in this mess today. It’s lending to people who were not able to repay that money.”
Biais concluded that basically insurers are using credit scoring as a means to identify financial auto insurance in montana risk before insuring it. “But we have to be careful that we use it with the knowledge of the consumer and that there is education around this, and that there is some regulation so that there is no misuse,” he said.
Robin Spencer, president and CEO of Aviva Canada, observed that credit scoring has “underpinned so many parts of insurance for literally decades, if not centuries, particularly on the commercial lines side.” He thought it would be inappropriate for Canadian insurers to turn their backs on the technique altogether. “This is a fantastic way of being able to use one of die variables that allow us to price, hopefully, more accurately for appropriate risk,” he said. “I don’t think we should be scared by this. I think it’s an exciting development in the industry. I think it’s just an education piece, and then we need
Leave a Comment