Threat of adverse selection prompts auto carrier to undertake credit checks Canadian Underwriter


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

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

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

“Economical is concerned about anti-selection,” wrote NSURB member Jennifer Nicholson in the board’s decision. “Without its own credit variable, Economical can see the poorest credit risks choosing unfavorably to insure with Economical, and the better credit risks going 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 to rate auto insurance. Provincial monopoly auto carriers in British Columbia, Manitoba and Saskatchewan do not use credit scores to purchase basic coverage.

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

Insurers say there is a statistical correlation between how insureds manage their personal finances and the likelihood of making an insurance claim.

On the other hand, brokerage associations, in addition to senior, low-income and immigrant advocacy groups, 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 born here simply because, all other factors being equal, the more accounts a consumer has open. for a long time, the better their credit rating.

The use of credit scores also has an impact on small business owners who depend on lines of credit, said Rick Orr, then president of the Insurance Brokers Association of Ontario, in a statement released in 2012.

In Nova Scotia, Economical does not intend to check the credit rating of consumers unless they expressly give their consent.

“Economical will offer a discount to all customers who consent,” Nicholson wrote. “The discount will vary, with the better credit scores receiving a higher discount. If the business cannot find a credit score value, the customer will receive the smaller discount. Non-consenters will pay the unreduced rates.

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

“A new consent specifically related to auto insurance will be obtained,” Nicholson wrote. “Once obtained, this consent will be in place until it is revoked by the customer or the business relationship with the customer is terminated, which allows for a periodic refresh of the customer’s credit rating. Each request would be a “soft request” that would not affect the customer’s credit rating. “

Different credit bureaus use different methods to assess consumers. Payment history is an important factor, Equifax explains, including late payments, how much owed, when and how often the consumer missed a payment.

In early 2020, the NSURB approved a request from Aviva Insurance Company of Canada and Traders General Insurance Company to use consumer credit information as an auto pricing factor.

At that time, Aviva provided confidential data to support its argument that credit information is predictive of risk in property insurance and that this would spill over into auto insurance.

In the Aviva and Traders ruling, the NSURB considered whether current Nova Scotia regulations prohibit auto insurers from using credit scores to value the automobile. At that time, the NSURB reviewed section 2 of Nova Scotia Regulation 183/2003, Matters Considered in Automobile Insurance Rates and Risk-Classification Systems Regulations, which says that a rating factor cannot be subjective, arbitrary, contrary to public order or which “has little or no relation to the potential risk to be assumed by the insurer”.

Equifax Canada claims to use five main factors to calculate a credit score. They are:

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

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

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Martin E. Berry

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