Insurers Urged To Re-Examine Risk Models as COVID-19 Complicates Lending Picture
Economic uncertainty means judging credit risk is more complex than ever for insurers – with TransUnion’s Consumer Pulse study showing that nearly half (48%) of UK households have recently experienced a change to incomei.
Most commonly, this was due to being furloughed (14%), experiencing a reduction in salary (11%), losing a job (11%) or newly receiving benefits (11%).
Colin Wallace, director of insurance at TransUnion in the UK, said: “As lockdown lifts, we’re continuing to see a polarised financial picture amongst UK consumers, with optimism in some quarters contrasted with a significant minority still struggling to pay bills and seeing their income change regularly. For the insurance industry, this uncertainty is making it more important to obtain a holistic picture of an individual’s financial situation, in order to help insurers make informed risk assessments and drive longer lifetime value.”
How COVID-19 has impacted the insurance sector
The financial uncertainty that the pandemic has brought means that for insurers, traditional data sources may be flagging customers as low risk when they are actually struggling with income shock or taking payment holidays elsewhere. According to TransUnion’s ongoing study, which has been tracking the financial impact of the pandemic, one in five (20%) UK households say they expect to be unable to keep up with at least one of their current bills or loan payments.
Of those, 9% will be unable to cover car insurance costs, while 7% say that they will not be able to pay their home insurance. And with the courts having been shut, county court judgements (CCJs) may have been delayed, meaning some signs of risk may not be visible to insurers unless they are able to use additional data sources.
At the other end of the scale, some potential customers being flagged as high risk may have seen their fortunes improve due to decreased cost of living during lockdown. In fact, 16% say that they paid down debt faster in recent monthsii.
Price walking and profitable growth
This instability comes at a complicated time for the insurance sector. The implementation of impending price walking regulation from the Financial Conduct Authority is likely to make footprint growth more expensive, with stricter controls on incentives and price cuts offered to new versus existing customers. A data-led understanding of the quote pool will be key to identifying where there are opportunities for growth.
This and other ‘fair value’ considerations for instalment customers – such as making it easier to cancel auto-renewal on contracts – have the potential to reduce revenues unless offset elsewhere. Targeted risk selection may have a bigger role to play in ensuring new customers offer greater value to insurers in the long-term, and that potential problems are minimised by reducing the number of customers that will be likely to either default or consistently shop around.
Colin Wallace continues: “The current regulatory picture – combined with COVID-19 uncertainty – makes it harder to offset the cost of attracting business. In response, insurers will be rebuilding their risk models with greater power and precision as a priority. It will be key for the sector to use precise data and insights to aid them in targeting customers appropriately and confidently offering more instalment finance options.”
Supporting financially vulnerable customers
There is also greater regulatory pressure to ensure affordability checks are performed on all instalment customers. Balancing this requirement alongside making the right commercial decisions means insurers will need to work harder to cater for credit histories that are improving or declining over time – calculating for example, whether customers are long-term vulnerable or have suffered only a short-term income shock.
Globally, there are signs that an uneven economic recovery has affected insurance behaviours. Recent research from TransUnion in the US found a fifth of consumers went from being fully insured to being under or uninsured during the COVID-19 pandemiciii.
Unless otherwise stated, all figures relate to TransUnion’s Consumer Pulse study, based on research conducted among 1,027 adults between 2-3 June 2021.
i Research from TransUnion’s Consumer Pulse study, conducted 2-3 June, at which time respondents were asked about income changes they experienced in the past month.
ii From TransUnion’s Consumer Pulse study. Research conducted 2-3 June, at which time respondents were asked about changes they made to savings or debt in the past three months.
iii Based on a TransUnion survey of more than 2,000 US consumers conducted in March 2021.