Thursday, December 9, 2021

Removing insurance risk scores from personal line ratings is not the answer to the concerns of fairness and financial distress of consumers.

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This post is part of a series sponsored by TransUnion.

Insurance pricing is a complex, versatile process. An important variable of the mixture is a Credit-based insurance score (hereinafter, insurance risk score). It’s not like a credit score – it’s drawing a lot of the same data, but it’s designed to predict insurance losses, not financial crimes.

Since the insurance industry works to maximize social equality and fairness, many unfairly influence the use of insurance risk scores in insurance prices for those who are already at a disadvantage. As a result, some state legislatures in the United States are considering restricting the practice. We believe that the opposite may be true – that removing insurance risk scores from insurance ratings would have an incongruous adverse effect on some underprivileged groups.

Evaluating the fairness and suffering of consumers is a versatile exercise, and an automated insurance rate plan that provides many lenses to see. During the epidemic, many consumers were forced to make tough decisions, such as having their insurance terminated, insurance coverage reduced, or seeking relief to pay their rent or mortgage. These behaviors are reflected in a number of variables in a rate plan outside of the insurance risk score – think about prior liquidation, home ownership discounts and coverage selection.

To understand the consequences of removing the insurance risk score from the rate plan, Transunion conducts an analysis that removes the insurance risk scores from the rate plan, reconsiders the remaining variables, and analyzes the premium difference between the insurance risk score and the plan.

Some of the results were not surprising. For example, a rate plan without an insurance risk score is less accurate than the one they include. More interestingly, new insights have been revealed in the analysis; The missing insurance risk score, for example, seeks to replace the model variable, putting even more pressure on the rating variable associated with consumers ’financial hardship.

We also found that if insurance risk scores were removed from the underwriting process, most consumers would face higher insurance costs. This affects consumers in all risk categories, not just those with good insurance risk scores. Eventually, consumers lose an element of control to differentiate themselves and justify lower insurance premiums.

Moving a tool for accuracy

What if the insurer is prevented from using the insurance risk score? At the most basic level, rate plans become less accurate, blunt instruments, reducing the range of prices available in the market. Since the consumer risk profile will not change, insurers may limit other features of the program based on eligibility such as driving, claim history and previous insurance lapses. These changes ultimately affect market competition, which helps protect the interests of consumers.

For personal insurance lines, more emphasis will be placed on consumer age, previous coverage and limits, homeowner status and coverage selection. This can have a particularly negative effect on some backward groups. For example, in response to a Trans Union Consumer Survey conducted in March 2021, 34% of consumers surveyed said they had become completely uninsured or uninsured during the epidemic.

Our analysis of the removal of insurance risk score from the rate plan has shown that, as a group, customers who have purchased only liability coverage will see an increase in the overall rate. In contrast, the insurance risk score that an insurer takes into account can identify customers with higher insurance risk scores and offer lower, more competitive rates, despite only liability coverage. But if the insurance risk score is removed from the equation, those consumers may pay higher premiums.

Extends access to credit-based scoring

In an underwriting model that includes insurance risk scores 59% of the population can get the opportunity at a good rate They are under a model that excludes credit. And it particularly affects some protected classes because some variables are easily (or less) influenced by consumers. For example, when it is impossible to change your age and often difficult to change neighbors, it can be much easier to take steps to improve your credit.

From an insurer’s perspective, credit-based scoring is an important tool in marketing and customer acquisition. Credit-based data is not just used for risk assessment; It can also measure the convenience of shopping and thus signal to an insurer when a consumer may be ready to buy. Without an insurance risk score, carriers lose a powerful way to properly place the right product in front of the right consumer at the right time.

Take a look ahead

Hopefully, you now have an idea of ​​why credit-based scoring is so important to a fair underwriting process. TransUnion, like industry, focuses on maximizing financial inclusion and equity. In future blogs, we’ll dive deeper into the subject, and take a look at what the insurance industry can learn from fairness test research.

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    (from what I’ve read) Is that what you’re using on your blog?


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