Insurance Study Could Provide New Underwriting Approach for Urban Areas

Chicago-based the Urban Insurance Partners Institute said it has passed another milestone in its pioneering study to develop a new underwriting methodology for assessing risk in the rapidly growing underbanked urban and multicultural markets. The current study seeks to develop new and better ways of differentiating and understanding the many customer groups contained within this broadly defined, underserved segment.

Subsidized in part by a challenge grant from The Center for Financial Services Innovation, the group has almost completed its fundraising phase and has several insurance companies involved in designing the study.

“There is much insurance companies can learn from participating. It would take companies considerable time and expense to accomplish even a small part of this study on their own,” said Suzanne Reade, UIPI’s president.

Jennifer Tescher, CFSI’s director said that, “One of the greatest obstacles to underbanked consumers obtaining high quality financial services is the lack of meaningful, reliable risk assessment. UIPI’s study has the potential to provide the insurance industry with a useful framework that will help them to better serve urban and emerging markets.”

The Illinois Department of Insurance also gave an encouraging nod to the group’s study.

“We look forward to hearing how well UIPI’s approach works,” said Illinois Director of Insurance Michael McRaith. “Illinois encourages companies to try new approaches that benefit consumers. We are interested in learning about any tools that can help insurers serve urban residents.”

“While many companies are either using or considering data mining, we initiated and are facilitating this study to see whether this new approach, combined with the use of nontraditional data, can complete a more accurate risk analysis,” said Reade. “This new underwriting method could give companies a higher confidence level in urban and emerging markets, where there is a wider dispersion of risks and where more customers have thin ordifferent credit files.”

Pattern Recognition Systems, which provides data mining services for financial services companies, and RW Ventures, an urban markets consulting firm, were brought together by UIPI to conduct the test. An opportunity will be offered to insurance companies to install pilot platforms to further refine the new underwriting models. PRS, known for its transparent approach, will show its models and variables to regulators upon request once they are developed.

Using traditional underwriting analysis is less accurate tools can be difficult in urban emerging markets where there is a wider variation among risks and a lack of standard underwriting information. While a typical insurance company underwriting analysis might look at 20 variables, PRS is equipped to test 500 variables with millions of combinations.

PRS can also examine a wide range of nontraditional data. The result will be an objective of the analysis is to determine which variables perform best, and in which combinations, within customer segments; thereby enabling insurers to put customers into risk classifications that better reflect the individual customer’s true risk characteristics.

“We currently analyze over three million records a day in the financial services industry,” stated PRS President Canh Tran. “We have a track record of providing robust predictive systems that are more accurate than current methodologies. The potential market benefit of more accurate models in the insurance industry is enormous.” The UIPI study will examine how to apply these methodologies to the underserved, underbanked, emerging urban markets.

UIPI has retained Lord, Bissell & Brook and Skadden, Arps, Slate, Meagher & Flom, LLP to provide legal advice on the test design.

UIPI anticipates announcing the results of the study later this year at its sixth annual Urban Insurance Advantage workshop on November 9, 2006.

UIPI is a nonprofit educational organization resource for insurers on urban, emerging markets.

For more information, please contact Suzanne Reade at 773-880-8780.

Source: Urban Insurance Partners Institute

Topics Carriers Underwriting Illinois