How Insurance Companies Use Your Credit Rating To Decide Your Premiums
UK Insurance Companies have been using credit scoring to determine policy acceptance, flag potential claims risks and load premiums for over ten years now.
What this means for the consumer is that if you do not fall into the credit/lifestyle brackets determined by the credit rating companies and identified by the Insurance Companies as the most profitable people sectors for their particular products, you will be either declined cover or offered it at a loaded rate commensurate with the amount of extra risk that the lifestyle group that you fall into presents, and designed to deter you from taking up cover.
In other words if you aren't what the insurance companies are looking for.... they don't want your business!
Here are the examples of the Experian Groups of type of person that YOU are! These are used for what is known as 'customer segmentation'. For Insurance purposes these are then grouped into four quadrants.
Low Conversion / Low Risk of Claims - An Insurance Company's desired customers
1. Wealthy Retirement
2. Mid Life Affluence
3. Surviving Singles
4. Elderly Deprivation
Low Conversion / High Risk of claims - An Insurance Company's least preferred customers
1. Ageing workers
2. Happy housemates
3. Credit Hungry Families
4. Advancing Status
High Conversion / High Risk of Claims - The customers an Insurance Company would like to be rid of
1. On The Breadline
High Conversion / Low Risk of Claims - An Insurance Company's most preferred customers
1. Gilt Edged Lifestyles
2. Modest Mid Years
3. Successful Starters
4. Flourishing Familes
So.....which one are you?
In the UK credit scoring was first introduced in the household and
car insurance markets in the late 1990's.
It is important to remember that credit scoring in the UK as carried out by 'big brother' credit scoring company Experian plc, is postcode and not people centric.
Where you live is the database primary key!
Nothing much has changed in the last decade with regards the database structures with the exception of the
amount of data that Experian holds on each and every one of us and
how the data Experian holds on each and every one of us is used!
When a customer applied for home insurance in the 1990's, the insurance company collected the data regarding all new policyholders and sent the extract overnight to Experian. Experian then took the extract and applied it to its credit scoring database and sent the file back a day or so later with the credit scores for the applicant attached. The Insurance companies could then use the database to see the likelyhood of claims by the type of people they'd underwritten the policies for.
At renewal those likely to make a claim could have their premiums loaded to discourage renewal and in theory protect the fund.
That is if you believe the Experian categorisation of propensity to claim!
When I first was asked to design these systems I thought that propensity to claim by lifestyle had some merit, for example young drivers, but to judge someone by the house the live in, job they do, credit cards they hold, and nowadays even by the school reports they were given... as being rational variables in a model to determine propensity to claim....was complete and utter bullshit... and I still do!
Yes Big Brother Experian even holds your school reports these days and it won't be long before they get your medical records as well.........
Thanks to the Internet and Experians new offshoot company Hitwise, all these things can be done online and the decision to offer insurance made instantly.
If you'd like to see an interesting if flawed analysis by Experian of the UK Insurance Industry online for 2009, but more importantly an excellent demonstration of how Experian data is used by UK Insurance companies to bracket and categorise each and every one of us before deciding how much to charge us in premiums...... -
watch this!
Labels: Credit Scoring, Experian, Insurance companies, Premium Calculations, premiums, UK Insurance
UK Car Insurance Rates Must Harden As Loss Making Companies Claims Reserves Run Dry!
Incredibly
Car Insurance companies in the UK are struggling to make a profit and 2010 is likely to see a large reduction in the supply of car insurance, with many famous brands and suppliers predicted to disappear from the high street and our television screens as the market adjusts to cater for the massive losses, according to analysts from car insurance comparison website
Car-Insurance.tv.
Recently released figures show that the UK Motor Insurance market has been consistently losing money since 2004 when the total UK profit from underwriting car insurance policies was £77 million.
In 2007 the UK car insurance market made a £1.1 billion underwriting loss, last year the loss was £1.3 billion and the figures for 2009 are expected to be worse........
Very few car insurance providers have escaped the losses and are profitable, whilst many have released claims reserves held from previous profitable years to disguise the 'actual ' loss.
So what is causing such massive losses in a large compulsory market that not so long ago was the most aggressive in the world?
On the face of it the answer appears to be simple ...... The Cost of Claims!
Claims are the problem not because the Car Insurance Companies have failed to include the rising costs of claims into their pricing structures; but because they have failed to cover the true costs in the retail price!
Car Insurance underwriters seem to have forgotten the basic rules of betting when setting their prices - and that is, that the Bookie never loses.......
To understand where the car insurance underwriting companies have gone wrong you first need to examine how they arrive at the price of a car insurance policy premium.
The cost of your car insurance premium is basically made up of three components:
1. The costs of production - Staff, Systems, Distribution etc
2. The costs of losses - known claims ratios ( the proportion of a policy premium pool that gets eaten up in claims)
3. Profit
The cost of all these components can be calculated by clever people called actuaries who work for the insurance companies and the rates set accordingly.
So what's gone wrong?
Well naturally it is obvious to first look at claims as the cause of the losses - but the truth is far from this end of the life of a car insurance policy......
The frequency of claims has either fallen or remained fairly constant over the period of losses and the actual cost of claims has only risen by 1 percent.
Despite all the noise made about gangs of car insurance claims fraudsters roaming the streets of the UK, the fact of the matter is that most of this is propoganda aimed at deterring fraud which naturally rises during a recession/depression. The number of fraud cases are really insignificant in the true scale of the market to affect pricing.
Admittedly there has been a significant increase in the number of personal injury related claims, egged on by claims farming companies, which would affect long term pricing, however the losses experienced by Car Insurance companies are nothing to do with claims and claims pricing.
These type of claims fluctuations have always been dealt with successfully in the past by car insurance companies by adjusting reserve ratios or negotiating better re-insurance ( laying the risk off), or more importantly by adjusting price ........
But this time something is different....
Car Insurance Companies can no longer set the price! Not if they want to win the business anyway!
And they certainly cannot sell policies at the premium levels that the Actuaries suggest!
Why? Seemple .......The Internet!
And more importantly Car Insurance Price Comparison websites or aggregators as they are known in the industry, which account for around 90 percent of the Car Insurance sold online. Since around 2004 it has been possible to easily
compare car insurance quotes online from numerous suppliers, and invariably the cheapest premium wins the business.
Car Insurance companies not longer set their own prices! And this is the problem!
In a race to achieve enough volume to make a book of car insurance business profitable the car insurance companies have been selling their
car insurance polices too cheap and covering their losses with their claims reserves........time is running out!
Labels: Actuaries, car insurance, car insurance fraud, Car Insurance Pricing, car insurance rates, cheap car insurance, cheap motor insurance, claims, compare car insurance, premiums, quotes, UK Car Insurance
Time is Not on your side - Age as insurance rating factor
Time is on my side, yes it is! - not!
Even their satanic majesties have grown old and wrinkly.
It doesn't matter whether you are young or old - your age is going to to affect what type of cover you are offered for particular insurance products cand more importantly - how much you pay!
Well the young man, ain't got nothing in the world these days!
So what insurance products favour you or go against you if you are fortunate enough, to be young!
Well if you are young the things that favour you are going to be reflected in risk price for the particular insurance product you are purchasing. If you are young! That's It!
That's about all you have got going in your favour - the fact that you are young! - so the costs of products where the risk is to your person tend to be much cheaper the younger you are.
Some examples are:
Health InsuranceMortgage Payment Protection InsuranceLife InsuranceCritical Illness cover
ASU ( exception of unemployment insurance)
Income Protection InsuranceTravel Insurance
Lifestyle Insurance
All the cheaper products for younger people are concerned with risks to you as a person.
When it comes to Property insurance and Liability insurance - Woah! you are going to have to pay through the nose!
Fact of the matter is that when it comes to young people owning property or using property of others, the risks to themselves and others is far far greater than for older people and people with more life experience.
So young people in general, are going to have to pay a lot more for the following types of insurance:
Car Insurance
Home Insurance
Boat Insurance
Trademans Insurance
Commercial Insurance
Professional Indemnity Insurance
Not surprisingly if you are older the reverse applies
Time and Insurance wait for no man!
Labels: Insurance, premiums, rating
