Effective on May 13 2011, insurance companies operating in Newfoundland and Labrador are prohibited from using "credit information" to decline to issue, to terminate or to refuse to renew a contract of "personal insurance".(1) The ban also extends to refusing to provide or to continue coverage or an endorsement with respect to an insurance contract.
'Personal insurance' is defined as meaning a contract of fire insurance or property insurance, or both fire and property insurance. In the event of uncertainty as to whether a product is 'personal insurance', the minister is given the right to make the determination, which is final for the purposes of the regulation. 'Credit information' is widely defined and includes, as just one of a number of components, a person's credit-based insurance score.
The history of the battle for and against using credit scoring as a correlation for insurance risks has been ongoing in Canada for the last 15 years and for even longer in the United Sates.
In the late 1990s Progressive Casualty Insurance Company filed automobile rates in Ontario which proposed to use aspects of credit scoring. The Ontario regulator insisted on a rate hearing and, partway through, Progressive withdrew from the hearing and from Ontario auto insurance.
In 2005, through its regulatory making powers, Ontario prohibited the use of credit scores as a risk classification factor for auto insurance. Auto is the most regulated insurance product in each province and territory, and is the only product in Canada for which the policy forms (including applications) need to be approved by the insurance regulators. The regulations were silent on using credit scoring for other classes of personal insurance - namely, property and fire - and a number of companies started using it for underwriting purposes.
In 2008 the Alberta superintendent of insurance issued an interpretation bulletin in which he restricted the practice of insurers in Alberta accessing the credit scores of their insureds by allowing them access only to those insureds who applied for a premium payment plan. His decision was based on a strict reading of the consent language in the approved automobile application form. In addition, the superintendent took exception to insurers refusing to provide a premium quote for property insurance unless the applicant consented to allowing access to his or her credit report or score. The relevant portion of the bulletin in this regard reads as follows:
"In my opinion, a person's credit report or score has nothing to do with the quotation of a premium for insurance coverage… requiring a person to permit access to their credit report or score in order to receive a policy premiums quote is an unfair practice."
As 'unfair practices' are prohibited, the bulletin effectively sought to ban this practice.
In 2009 a taskforce of the Canadian Council of Insurance Regulators issued its analysis of information gleaned as a result of a questionnaire sent to insurers on the use of credit scoring in the personal property insurance market. This analysis was administered by the Canadian Council of Insurance Regulators on behalf of the provincial superintendents of insurance (except for the superintendents in British Columbia and Quebec, who opted out of the questionnaire). The results indicated just how extensive credit scoring is in this market. It also showed the variation in practice, knowledge and application of controls and the disclosure protocols of the industry. As one would expect from the US experience, the study generated a fair amount of adverse publicity and concern from consumer advocates, as well as from the insurance broker community.
Earlier in 2011 the British Columbia privacy commissioner held that while it appeared reasonable for insurers to want to use credit scoring to predict risk, they could not access the credit records without a clearly worded explicit consent which must disclose that the access sought is for underwriting purposes. The revised Centre for Studies in Insurance Operations application form is a good example of the extent to which the industry wishes to be able to use credit scores and records for underwriting purposes.
Newfoundland and Labrador is the first province to ban the use of credit scoring in the personal insurance non-auto marketplace. New Brunswick has announced that it too is looking at banning this practice in the home insurance market. In November 2010 Ontario introduced Bill 130, which would ban the use of credit scores in rating, in refusing to provide or in refusing to renew personal property insurance. Manitoba has also indicated that the use of credit scores in personal insurance is one of the areas of consumer protection that it plans to address.
Despite the fact that insurance companies maintain that there is a strong correlation between credit score and increased insurance risk (whether it be for automobile or home owners' insurance), critics of this practice argue that there is no legitimate causal link, and that using credit scoring in underwriting unfairly penalises the poor, the sick and the disadvantaged because it results in higher premiums for these individuals.
The insurers claim that there is hard evidence supporting the correlation, yet consumer advocates and the broker community have successfully politicised the issue and influenced governments to the point of enacting legislation prohibiting the practice. The debate will continue, and it remains to be seen whether insurance companies can convince the regulators and the public that credit scoring is an appropriate tool to measure and quantify the risk that they are insuring. In order to succeed, insurers must do more than argue correlation; and as more provinces ban the practice, it will become increasingly harder to reverse the tide.
For further information on this topic please contact Frank Palmay at McMillan LLP by telephone (+1 416 865 7000), fax (+1 416 865 7048) or email ([email protected]).
Endnotes
(1) Newfoundland and Labrador Reg 46/11 - Insurance Prohibited Underwriting Regulations.