Full credit data checks for insurance are common in the US. Graham Odiam looks at the likelihood UK insurers will wake up to the benefits and start using the practice here.
The latest CIFAS fraud figures for quarter one of 2011 show a dramatic increase of more than 60% in application fraud, identified once the product or service has been granted. This figure highlights the continuing battle that companies across a range of industries face in weeding out fraudsters before applications are granted — and the need to identify any serious fraud risks that may have slipped through the net.
The economic situation continues to be a challenge for consumers, as wage reductions, job losses, and rising food and fuel costs put serious strain on personal finances. An interest rate rise will only add to this as mortgage rates increase and wallets get squeezed even further. It is, therefore, no great surprise to most that as financial challenges have continued to rain down on consumers, certain types of fraud are on the increase. Simply put, some consumers may try to rebalance their finances through dishonest means. Unfortunately, the insurance industry is not immune from this and, like many other industries, needs to take measures to keep one step ahead of the fraudsters.
Insurers are already using a range of measures to tackle fraud, but an additional valuable and beneficial tool may well be sitting under their noses, largely unused for fraud purposes. Credit checks are commonly used by insurers to assess and price the risk accordingly, and protect from the additional costs that can be incurred when customers default. However, full credit data holds a great deal more value than is currently being recognised by most UK insurers, and could prove a crucial tool in the continuing fight against fraud and bad debt.
The propensity to commit fraud is generally higher for those faced with financial difficulty than those who are not. While not all consumers will follow this route during difficult times, it is useful to understand as much as possible about a customer's financial situation, and full credit data helps to build up a more accurate picture by creating deeper insight. In recent research conducted by Callcredit, 4% of 18 to 24-year-olds admitted to having falsely claimed or overinflated an insurance claim as they were struggling to afford their debts. So, seeing negative changes in credit history could indicate these as the 'ones to watch'.
Research has also shown those customers who pay in a single annual payment are less likely to make a claim than those paying by monthly instalments, but they are also more likely to change insurers at renewal. Therefore, using full credit data, insurers can identify customers with a high credit score, who are less likely to claim, and offer them interest-free monthly payments to increase the chance of them remaining loyal at the renewal stage. This kind of strategy not only reduces fraud but can enhance renewal retention.
In the US, full credit data is integral to the underwriting process and has been for almost a decade. Known as credit-based insurance scoring, general insurers use credit data to assess the likelihood a customer or prospective customer will claim in the future, recognising a correlation between credit history and propensity to claim. US insurers can also adjust annual percentage rates of customers' monthly payments if credit data suggests a change in their fraud risk. These fraud protection measures are used by only a few UK insurers, but have been adopted by one or two major UK players in the past year — showing that its true value may have been uncovered.
However, gaining access to full credit data is not simply a case of ticking a box to say full data is required. Steps need to be taken to share credit data in order to gain reciprocal access, but the considerable benefits to the industry have been widely recognised by many insurers across the Atlantic as well as some big players in the UK. Once full credit data has been implemented within the application or customer management process, checks can be carried out almost instantaneously to ensure they do not negatively impact upon the customer experience but give insurers that extra customer view.
As fraud continues to change and develop in a turbulent climate, anti-fraud measures will do the same and it is unlikely UK insurers will be able to ignore such a valuable tool for much longer. Most UK insurers have yet to jump into the world of credit-based fraud prediction, but the substantial benefits will inevitably encourage more firms to do so in the near future. It may only play a small part in the British insurance industry today, but could be the catalyst of fraud protection measures in years to come.
Graham Odiam is head of insurance at Callcredit Information Group
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