Use credit score to buy insurance

Indicators of financial discipline such as credit score and credit history can help in more than getting good rates on loans. They can also help in faster issuance and claim settlement of insurance policies. While lower premium for financially ‘healthier’ customers is still some time away in India, insurers are increasingly looking at data from the credit bureaus for more than identity verification. Let us see how.

Life insurance policies issued faster

Anyone who has purchased a life insurance policy knows that undergoing a medical test can be time consuming. Especially if the sum assured is above a certain amount. But it is required as the insurance company has to be convinced that the customer will survive the policy term. In case the customer chooses to buy a non-medical policy, then the premiums will be higher, because of higher risk to the insurer.

Two years back Aegon Life Insurance Co started selling directly to customers - digitally as well as physically, without intermediaries. Since the customer is buying directly from the company, he is better informed and understands the need for undergoing medical tests. Yet, about 20% of the policies are approved, said Vineet Arora, MD and CEO Aegon Life Insurance.  

“We use data, such as a customer’s credit score that is available from credit bureaus, with the customer’s consent and do the underwriting basis that. When you look the customer differently, you look at how much information you get from a medical test versus how much information you are able to get from the lifestyle of the customer. That’s the next level that insurance companies will have to reach very soon,’’ he said.

Fifteen years back, most life insurance products were of 15-25 years duration. But today more people are buying term plans till 100 years of age. While medical test will give some indication, other data like family history, credit history, etc, will give an indication of the customer’s lifestyle.

“If as a customer I am more disciplined, then I will have a better lifestyle. I will keep myself more fit. That is the correlation. It is a human behaviour. A person who has good score and his loan repayments are on time, everything else remaining the same, it is a fair assumption to make that the customer is a better customer. Then do I (insurer) still need to check the medical history,’’ said Arora.

It is a psychological issue. If you as are more organised, more disciplined, more self-conscious, more aware and responsible, then the assumption is that you will keep yourself more fit.

However, credit score or credit history is just one of the parameters that the insurance company will look at. The correlation is not yet so simple that if you have a certain score, you will get the policy for sure. The insurance company will go through your history and other details before issuing the policy.

“We try to make customer’s life easier, in whatever way we can. This is one part of it,’’ Arora said.

Credit score as a financial surrogate

According to Kayzad Hiramanek, COO, Bajaj Allianz Life Insurance, life insurance companies are extensively using data from credit bureaus as a financial surrogate. Insurance companies look at the income level basis, which they do the underwriting. So, if the person has good credit score, then the company does not ask for additional income documents.

“In India most life insurance companies are using credit bureau scores to arrive at a derived income, basis which they are underwriting policy. Typically, if you have a credit score of above 650 in the top 150 towns, we look at those customers favourably. The reasoning is that the person has a good track record, good payment morale and the ability to afford to pay future premiums. We know the customer is liquid enough to be paying future premiums. The fact that he has a credit history with various other institutions works in our favour,’’ he said.

Faster claims settlement

Insurance companies are seeing a relationship between the claims behaviour and the credit score. Better the credit score, the safer we find the customer is from an insurance perspective, said Anurag Rastogi, member of executive management, HDFC Ergo General Insurance.

For instance, the claims process may be simplified for customers who have higher credit scores. While for those whose credit scores are low, the claims process may involve a higher level of due diligence.

The practice of using credit score for fixing premium is prevalent in western countries, because over there premiums are payable on credit. Customers don’t pay the entire premium upfront, but pay in monthly or quarterly installment. So the customer’s credit score becomes very important to understand whether the insurer will get the full year premium or not.

In India, as per laws entire premium is paid upfront. So that concern is not there. “But there is a correlation between customers’ claims propensity and credit profile. In simple terms people with low credit score are more likely to claim than those with higher credit score.  However, at this point we plan to offer service differentiation rather than premium fixing,’’ Rastogi said.

Global practices 

While globally insurance companies use scores as an input into their pricing models, Indian insurers are in the process of piloting such processes, said a spokesperson from Experian India.

“In India, bureau information is used at the time of underwriting a policy. Bureau score and income estimation using bureau information are used at the time of policy issuance to determine eligibility and to make the underwriting process easier. We are starting to see insurers use credit reports at the time of claims processing,’’ said the spokesperson.

Globally, the insurance sector is utilising credit information solutions across the business life cycle for underwriting, digitalising processes and controlling frauds. In India, insurance companies are using credit report and credit information solutions that provide them with updated contact information on their consumers, said Harshala Chandorkar, COO, TransUnion CIBIL.

CUSTOMER FOCUS

• Since good credit score indicates discipline the assumption is that person is healthy and hence medical check-up requirement could be waived of 
   
• Claims process may be simplified for customers with  higher credit scores and good credit report