A Success Story for Insurance coverage Danger Scores

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This post is part of a series sponsored by TransUnion.

An unprecedented economic disruption puts credit-based assessment to the test – and it passed with flying colors.

With the Coronavirus Aid, Relief and Economic Security (CARES) Act in 2020, the U.S. Congress ensured that Americans in financial distress due to the effects of the pandemic could protect their loans from economic conditions beyond their control. The CARES Act helped protect those most in need during an unprecedented crisis.

Providing credit reports to consumers in financial distress is not a new practice. During COVID-19, data providers used long-standing housing practices to relieve consumers who were in financial distress due to events such as catastrophic weather events and other declared emergencies.

But the combination of these protections, the pandemic itself and its impact on the economy have been a cause for concern in the insurance industry. An important variable in the insurance underwriting process is a credit-based insurance risk score (hereafter referred to as an insurance risk score. This is not the same as a credit score. Although it relies on much of the same data, it is designed to be used by insurance companies predict losses, not financial performance. Yet these scores draw on many of the same data sources as traditional credit scores and are covered by some of the same regulations.

The general question was: Have the provisions of the CARES Act diminished the quality of analytical insurers on which decision-making is based? In fact, we now have enough retrospective to know that both the CARES Act and insurance risk assessments worked as intended during the worst stages of the COVID-19 pandemic and its associated economic consequences.

Overall, most consumers who were in distress due to an involuntary loss or reduced employment were able to secure housing with lenders so that their creditworthiness was not compromised. Regardless, but at the same time, insurance risk values ​​remained stable and predictable. Let’s look at a few examples to see how this has worked out in practice.

A stability study

TransUnion CreditVision® Auto, an insurance risk score for auto insurance companies, is a strong example of this stability. Figure 1 compares the monthly median over the course of 2020 and up to 2021 for the total lending population. A higher score indicates a lower insurance risk.

Figure 1. Monthly median CreditVision Auto Insurance Score.

As you can see, this value showed strong stability throughout 2020 and through 2021. This stability reflects an underlying economic stability that has been cushioned by the post lockdown recoveries and the boost provided by the CARES Act and other legislative interventions.

By September 30, 2021, the number of consumers with at least one non-student loan home on record has decreased 67% since the peak of housing activity in Q2 2020. TransUnion studies have shown that the vast majority of consumers continue to make payments to accounts in accommodations and that 89% of accommodations have now been removed. The credit reporting requirements of the CARES Act helped maintain the stability of insurance risk assessments so that insurance providers and consumers were not affected by the first sharp economic shock from a pandemic.

The consumer protection of the CARES Act continues to apply even after accommodation has ended. In June 2020, the Consumer Financial Protection Bureau (CFPB) published a guide to consumer reporting under the CARES Act, which outlines post-housing protection. The guidelines stipulated that a consumer who had a “current” account status when entering a property could not be reported overdue based on the property period based on the property period after the property was closed, unless payments were required or the consumer requested payment from The property . In addition, the period covered by the accommodation cannot be used to bring forward or expedite a payment arrears after the accommodation has ended.

Where we are and a look ahead

The credit arrangements built into the CARES Act were unprecedented, but not of their nature: statutory arrangements are not new and we can expect them to remain important in the future. The past 18 months have shown us that, even in a regulatory environment, insurers can rely on the integrity of the insurance risk assessment when certain derogatory information cannot be taken into account.

Nonetheless, there are public and regulatory concerns about the fairness of using credit-based scoring for insurance purposes. In future blogs, we’ll take a look at fairness testing and the need for the industry to align with best practices and see how insurers can share these positive messages with their public and government partners.

How to find out more

If you have any questions about TransUnion, please visit transunion.com/industry/insurance or send an email to inssupt@transunion.com.

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