Use of credit scoring will allow banks to compete

It was a panel deeply divided as CEOs from top Canadian and international insurers once again squared off on the credit score debate at the 89th annual Independent Brokers Association of Ontario this week.Considered to be the one of the highlights of the three day IBAO conference—held at the Royal York between Oct. 21 and 23, 2009—the moderated CEO panel offered brokers an opportunity to hear what top decision-makers thought about pressing issues, including regulation and compliance, the role of the Insurance Bureau of Canada, solvency, insurance to value, Ontario’s auto product and credit scoring.But no topic prompted as much debate as credit scoring.

On one side, Gore Mutual’s Kevin McNeil and The Dominion’s George Cooke stood adamantly against the use of credit scoring.

McNeil explained that regardless of how sound the actuarial science is behind credit scores, the use of this tool was unnecessary as there are enough actuarially sound variables currently available.

“We managed to turn a profit without using it in the past. I’m sure we can continue to do so in the future,” declared McNeil, whose company declares itself a dedicated independent broker-channel insurer.

But Aviva’s Robin Spencer disagreed. “You can’t just say it’s evil, or that consumers don’t like it so let’s be rid of it. It’s just not that simple.”

Spencer argued that banks already have the information that insurers are barred from using, giving them a competitive advantage. This, then, puts brokers at an obvious disadvantage, said Spencer.

AXA Canada’s Jean-Francois Blais also argued for the use of credit scoring saying that the 75% of consumers that would benefit from its use are the consumers who no longer want to pay for the poor habits of other consumers. Also, any advantage a broker or the insurance channel can offer a consumer—to attract them away from bank or direct business—is an advantage that should be used, said Blais.

However, Cooke, a vocal opponent to credit scoring, disagreed with the advantages proposed by credit scoring. While Cooke concedes that there may be some short-term benefit to using credit scoring to set rates, he argued that the use of this metric provided the banks more opportunity to step into the P&C business. He explained that the use of credit scoring is an accepted and mandated part of financial services in the banking sector. By allowing it in the P&C sector it is one less hurdle for banks to contend with when moving into this line of business. “Those that are using this [tool] either legally or illegally are hurting this industry in a very material way,” said Cooke. “We are going against our own interests.”

Originally published in Canadian Insurance Business Magazine in October 2009