Auto insurers' interest in N.B. credit scores is bad news for many

Figures show the rate of New Brunswick adults coping with serious financial problems is the highest in Canada for the fourth year in a row, adding a wrinkle to the introduction of credit scores as a factor in setting auto insurance rates in the province.

Over the last several months, the New Brunswick Insurance Board has given several insurance companies the go-ahead to ask customers for permission to use credit scores as a factor in setting auto premiums.

It could be a significant change in a province where an unusually high number of people struggle with personal finances.

According to figures compiled by the Office of the Superintendent of Bankruptcy Canada, about one in 87 New Brunswick adults — 7,246 in total — filed for insolvency over a 24-month period ending in July. 

That's the highest number per capita in the country over those two years and about 65 per cent above the national average.

An insolvency can involve an outright personal bankruptcy or a formal "proposal" to creditors to settle debts for a partial payment.

Financial troubles nothing new

But high rates of personal financial trouble are nothing new in New Brunswick.  

Over the last 10 years, 40,000 New Brunswick adults — about 1 in 16 — have sought some kind of protection from creditors.

Andrew Graham, CEO of the free online credit score site Borrowell, said credit problems among New Brunswick residents show up in his own company's data.

"When you look at credit scores across Canada and you look at scores in the largest cities, three of the bottom five are in New Brunswick," said Graham.

Last spring, in a national compilation of average credit scores of Borrowell users in 20 Canadian centres, residents of Moncton finished 20th. Saint John residents, who posted even worse credit scores, would have been last but were not included in the survey.

Credit scores are compiled by companies like Equifax and TransUnion that track consumer borrowing and bill payment histories.

A perfect credit score in Canada is 900. Anything above 740 is considered excellent. Below that, scores tumble quickly into the good, fair and poor range.

According to Graham, the average credit score of Borrowell's New Brunswick users is 634, with average scores in Moncton slightly higher at 636 and Saint John well below the provincial average at 625. 

Below national average

Fredericton residents had the best average scores of the three, at 656, but all three cities were below national averages with scores in the fair-to-poor range.

"For good, we typically think anything between 713 to 740, fair is 660 to 712 and below 660 it definitely gets harder to get credit," said Graham.

"New Brunswick is actually at the bottom, unfortunately, of the list of Canadian provinces."

Auto insurance companies have not said publicly how much credit scores might affect premiums in New Brunswick. But they argue it's an efficient way to differentiate between customers with otherwise similar driving records.

Citing their own New Brunswick accident data as well as several American studies, some more than 20 years old, insurers successfully convinced the board that bad credit points to risky personal behaviour that makes people accident risks.

"By including Credit Score, which has shown to be an apt predictor of risk, it will further segment our risks leading to the most just rates for policyholders," Wawanesa, New Brunswick's largest insurer, argued in its successful application. 

"Those policyholders who are likely to generate the highest costs will be charged more than those who are likely to generate lower costs," 

In its decision granting Wawanesa the right to set rates using credit scores for customers who agree to the practice, the board said it had been satisfied by the company that there is a connection between bad credit and bad driving.

"[Wawanesa] argued an individual's level of risk taking, risk tolerance and responsibility with financial matters, as reflected in his/ her credit score, is a behaviour reflected in other expressions of risk taking, risk tolerance and responsibility, including driving patterns, risk avoidance and a general level of care," read the decision.

Graham said there is evidence to support the position of insurance companies that drivers with bad credit do pose a higher risk to make a future claim but notes credit scoring itself is not a flawless process and should not be relied on too heavily.

Tenants, for example, do not get the same credit for making rent on time that homeowners do for making mortgage payments.  

Others with no credit history, like new immigrants, young people, spouses in marriages where one person controls the money and others, can be invisible to the credit scoring system and show up as a bad risk when they are not.

"Having no score, you know, is pretty much as challenging or almost as challenging as having a low score," said Graham. "It's certainly a tricky area and one I think that needs to be handled very cautiously.  There's lots of reasons why people may have low scores or no credit scores."