Insurers “urged to re-examine risks”

The research from the consumer credit reporting agency found that 48% of UK households have recently experienced a change to income. This was most commonly due to being furloughed (14%), experiencing a reduction in salary (11%), losing a job (11%) or newly receiving benefits (11%).

TransUnion’s director of insurance in the UK Colin Wallace said: “As lockdown lifts, we’re continuing to see a polarised financial picture amongst UK consumers, with optimism in some quarters contrasted with a significant minority still struggling to pay bills and seeing their income change regularly.

“For the insurance industry, this uncertainty is making it more important to obtain a holistic picture of an individual’s financial situation, in order to help insurers make informed risk assessments and drive longer lifetime value.”

Additionally, the financial uncertainty caused by the pandemic for insurers means traditional data sources may flag customers as low risk who may actually be struggling with their income. As such the research found that one in five UK households say they expect to be unable to keep up with at least one of their current bills or loan payment.

Conversely some potential customers being flagged as high risk may have seen their situation improve due to a decrease in their cost of living during lockdown. In fact, 16% say that they paid down debt faster in recent months.

The research also highlighted the implementation of impending price walking regulation from the Financial Conduct Authority, which it says will “likely make footprint growth more expensive”. This is due to stricter controls on incentives and price cuts offered to new versus existing customers. Because of this, it says a “data-led understanding” of the quote pool will be key to identifying where there are opportunities for growth.

The study added that other “fair value” considerations for instalment customers have the potential to reduce revenues unless offset elsewhere. As such, a targeted risk selection process may have a bigger role to play in ensuring new customers offer greater value to insurers in the long-term.

Wallace added: “The current regulatory picture – combined with Covidf-19 uncertainty – makes it harder to offset the cost of attracting business. In response, insurers will be rebuilding their risk models with greater power and precision as a priority. It will be key for the sector to use precise data and insights to aid them in targeting customers appropriately and confidently offering more instalment finance options.”

In addition to this, there’s greater regulatory pressure to ensure affordability checks are performed on all instalment customers. This need to balance this requirement, alongside making the right commercial decisions, means insurers will need to work harder to cater for credit histories that are improving or declining over time.