Chicago Group Designs Test Study for Underwriting in Urban Markets

Insurers seeking a competitive edge in diverse markets are in the final stages of designing a study that will test a wide array of traditional and non-traditional information.

Chicago-based Urban Insurance Partners Institute (UIPI) is sponsoring the study, which will include non-traditional consumer financial behavior data and data that is more typically used for marketing purposes. Personal lines companies are invited to participate.

The study is being developed to offer insurers improved underwriting capabilities in both traditional and non-traditional markets, within legal and regulatory requirements, and in a way that can be adapted to individual company needs, according to UIPI, a non-profit insurance industry resource organization.

UIPI says that since traditional credit-based insurance scoring has been shown to be very predictive, and is widely used in underwriting, the study will incorporate baseline credit information that will be donated by one of the three major consumer credit bureaus. However, traditional underwriting information typically has been insufficient for accurately predicting risk in emerging, often urban markets, says UIPI President Suzanne Reade. The Center for Financial Services Innovation found that up to 70 million consumers in the U.S. may have no credit history or incomplete credit files. Many of these consumers are part of the large emerging, multicultural insurance market that is often concentrated in cities or adjacent suburbs.

“We are told that many urban and emerging markets consumers use financial services differently than other traditional market consumers,” according to Gregg Dykstra, chief administrative officer for the National Association of Mutual Insurance Companies (NAMIC), a UIPI member. “Therefore, the study will test and analyze other information in an effort to help interested insurers better understand emerging market consumers and their risk profiles.”

To expand the analysis, Convergence Data, the sole supplier of non-traditional credit data for insurance underwriting, will provide a wide array of information not typically reported to the major credit bureaus, including check writing history, banking activity history, payday loans, installment credit payments and debit card transaction history.

“Our data can help segment risks in the population without credit-based insurance scoring, which is a major objective of the study,” says Bill Wilson, chief operating officer of Convergence Data. “Our experience has shown that we have positive underwriting data on about two-thirds of this population, enabling insurers to confidently offer better rates based on better risk information.”

“Regulators have said they would welcome innovation in underwriting that increases the affordability and availability of insurance in urban and emerging markets,” says Bruce Foudree, an attorney with Lord, Bissell & Brook. Foudree is a former president of the National Association of Insurance Commissioners, and one of the legal advisors to the project. “We are assisting UIPI in the development of this new underwriting model with the objective of satisfying regulatory requirements as well as various privacy laws and the Fair Credit Reporting Act.”

The study plans to test other types of variables, including those more commonly used for marketing purposes such as census information, and banking and mortgage data. Through a sophisticated predictive modeling analysis conducted by Pattern Recognition Systems (PRS) the study will determine predictive and statistically valid links among the hundreds of variables to be tested.

At a recent meeting, the initial participants agreed upon several key aspects of the study design: Each carrier will submit a set of policyholder records to the participating major consumer credit bureau; and a wide range of other data will be appended through a secure procedure that includes a policyholder de-identification process. Insurers will receive overall study results, results for their company, and also dollar loss projections for each policy in their file.

“Insurers that do not explore new technology and data to segment risk in this growing market could be leaving millions of dollars in profitable business on the table,” notes Canh Tran, PRS president.

Legal research for the study design was recently completed by Lord, Bissell & Brook and Skadden, Arps, Slate, Meagher & Flom. UIPI received a partial grant to conduct the study from the Center for Financial Services Innovation. RW Ventures, a national urban markets consulting firm, serves as an advisor to the project.

The study will be presented at the sixth annual Urban Insurance Advantage workshop, sponsored by UIPI, Nov. 9 in Chicago. UIPI has applied for CPCU continuing professional education credits for the workshop. For more information, contact Suzanne Reade, UIPI president, at (773) 880-8780.

Source: UIPI