Credit scoring debate heats up despite potential industry ignorance

One integral disparity in the industry today is the use—or misuse—of credit scoring.According to Rodney Hancock, CEO of McFarlan Rowlands and chair of the Independent Broker’s Association of Ontario (IBAO), insurers currently using credit scoring, outside of setting home policies, are in direct violation of the rulings of regulators. Hancock made his remarks during a panel discussion on market misconduct at the National Insurance Conference of Canada (NICC), held in Ottawa from September 30 to October 2.“Consumers are not served well,” with the partial ban on credit scoring that is currently in effect in most jurisdictions across Canada, said Hancock. As recently as Spring 2009, the Financial Services Commission of Ontario (FSCO) released a bulletin reminding P&C industry players that the use of credit scoring and ranking, outside of auto policies, is prohibited.

“This partial ban—where credit scoring is used for home, but not for auto policies—leaves the regulator in a tough position,” said Hancock. “As a company it becomes impossible or difficult to differentiate, or adhere, to the no credit scoring use,” as many policies bundle home and auto policies together, “and it’s impossible for regulators to regulate,” in such an ambiguous environment.”

As a result, Hancock, speaking on behalf of the IBAO, is calling for a complete ban on the use of credit scoring.

“A complete ban levels the playing field for insurers, creates a market that regulators can control and places the interests of the consumers first.”

However, one P&C delegate, who attended Hancock’s panel discussion, suggested that the interests of consumers were met with the use of credit scoring. The delegate conceded that his company, which operates in Canada and the U.S., uses credit scoring, where allowed, and has found a strong correlation between a policyholder’s credit score and their claims record. He also suggested that for every policyholder that is required to pay more, due to a poor credit history, another saves money due to “better decisions.”

The delegate suggested that rather than implement an outright ban on credit scoring, a more robust discussion on the use of credit scores and the application of this social metric was required.

Originally published in Canadian Insurance Business Magazine in October 2009