Leap-frog the competition with smart credit risk strategies

It is difficult to identify, predict and manage insurance risk – whether the risk occurs through loss ratios or churn. The good news is that technology, data collection systems, data mining tools and predictive analytics have all combined to improve the actuarial toolkit available to insurers and underwriters to identify these risks. And the assessment of insurance risks is a more scientific process today than ever before.

Despite this some insurers still have a narrow view with regards the basis upon which they assess risk. Although many of the internally-based methods remain effective the industry is missing out on the myriad opportunities to improve their businesses by adopting new risk assessment techniques.

The use of credit history as an insurance rating factor is one method that has received significant attention in recent years. Credit history provides a real view of a consumer’s positive and adverse behaviours in terms of credit acquisition, repayment and appetite. These factors can be considered in addition to relying on internally identified models and actuarial assessments of risk.

Changes in risk manifest in various consumer spending patterns. A change in the mix of a consumer’s accounts, a once-off crisis event, a difference in family circumstance (the arrival of a new baby, for example), new accommodation arrangements (renting instead of paying a bond) and the changing economic environment – all influence the consumer’s insurance risk profile... And credit history is uniquely able to reflect many of these factors.

An insurer that ignores the external, wider perspective that credit history provides could potentially misdiagnose the true risk of a consumer – an oversight that could in turn have significant repercussions for both insurer and consumer.

Given the tough economic landscape credit history can also provide insight into the affordability of the proposed insurance solution. The overall country debt situation – used in conjunction with affordability-based factors such as ratio of balances payments, credit limits, and high credit exposures – are predictors of insurance risk.

Likewise the extent of the debt burden that a consumer is struggling with is a key indicator of his or her spending power. There are some consumers out there who do not miss payments but are very close to doing so due to ever-increasing debt burdens.

A comprehensive credit history offers many benefits during the insurance risk assessment process… These include:

• A comprehensive assessment based on additional factors to the ones insurers traditionally use… It is closely aligned to the various changes in risk that a consumer experiences in real life;

• An early indication (or prediction) of lapse and claim behaviour. Statistically, credit history has already illustrated correlation with insurance risk;

• Better verification and validation of customer information as well as a wider base against which to identify, detect and prevent fraud; and

• Direct benefits to insurers due to the greater sophistication in application processing and premium setting.

The additional perspective of credit data allows the insurer to refine the risk assessment bearing in mind that in today’s competitive market an alternative source of rating factors affords it the opportunity to responsibly offer a more competitive premium and win additional business.

Credit history can provide incredible value in complementing the process of insurance risk assessment. It will continue to develop as an important additional rating factor for insurance risk assessment and should gain traction among insurers and underwriters looking to get a jump on the competition.