It seems a long time ago that insurances were taken out via a trusted insurance broker, someone with whom you already had various insurances and who was familiar with your home situation or your business. The broker knew its clients and took the acquired knowledge of the neighborhood, insurance history and particular risks into account in the final offer for a policy. If necessary, the broker made some inquiries into the situation at work or worries about a teenage son. In other words: an excellent first risk assessment.
Nowadays, this underwriting process has become a far more distant affair: insurance brokers rarely visit a client’s home and many consumers prefer to handle their business through the internet. But if there is no personal contact with clients applying for a policy, how can one still make a good assessment of the risk that is taken on? Of course, risks are an inherent part of any insurance, but risks need to be valued as best as possible for a healthy return on an insurance portfolio.
Information from external sources may present a more comprehensive picture, thus providing good and sound arguments for acceptance, rejection or perhaps adapted conditions.
How does it work?
When we talk about external data we mean, for example, information from a chamber of commerce, payment morale or payment behavior and claims history, as well as demographic data and vehicle records.
Should asking for external data become standard practice for each application? Obviously, this is up to the insurer, but in practice the somewhat higher administrative costs are set off against the possible risk and the height of possible claims.
Whether or not using external data is allowed varies per country. Generally, one can say that in Europe, from north to south, privacy laws become less lenient and the use of external data becomes a more sensitive issue. In Scandinavian countries a credit check is fairly simple, in Norway and Sweden tax returns are even public. Here transparency comes before privacy. In Central and Middle Europe protection of the consumer is stricter. In the international setting in which FRISS operates, we often have to deal with these differences. We always strive for the optimal effort per situation and naturally abide by the current laws and legislation of each country.
Existing insurance portfolio
Every insurer rightly treasures the information about their clients. Much is known about their possessions, their value, how long someone has owned them and what claims occurred over the past years. When applying for new insurance, external data can complement the picture. Take, for example, solvency, the history of an object (e.g. a vehicle) that is to be insured for the first time, or the claims history with other insurers. It may well be that an exemplary client with property insurance has quite a different history with his vehicle insurance, including dubious damage claims, elsewhere.
Or take an entrepreneur who privately is a good client with a vehicle or travel insurance policy., When applying for fire insurance concerning his business, he turns out to have a low credit score, increasing the risk of default and more claims.
External sources may be even more important in order to make a good assessment of applications for new clients. Fairly general information can complement the supplied data to present a more comprehensive picture. This might be information about a vehicle, a credit check or demographic data about the neighborhood, such as the degree of urbanization, burglary statistics of the types of homes in the area. Often it is not enough in itself to draw decisive conclusions, but it can point to a certain direction for further communication with the applicant and for weighing the risks.
To be fair: sometimes external data does have a direct influence on the policy that is taken out. Like for some products where the zip code partly determines the height of the premium. Here insurers have made an obvious choice for a clear and short underwriting process with a certain price-risk balance.
Chain reaction and marketing
All the acquired information is put into the insurer’s database and adds value to the internal data, offering more information about the clients, as well as about possible considerations for accepting policies. For insurers this is a wealth of information that gives them insight into the possibilities of cross-selling and which offers are most suitable for their clients.
Vitamin External Data for the Database
All in all, there is plenty of reason to regularly apply a portion of vitamin E of external data to the underwriting processes. It improves the health of the insurance portfolio with the right balance in risk coverage. In the end, this is in the best interest of both insurance companies and consumers.