A telesales agent bypasses your spam call blocker and entices you to switch your short-term insurance cover to another insurer by promising a lower monthly premium. With money tight and a growing mountain of debt to whittle down, you agree.
A couple of months later, your financial juggling act helps you pay off your car, but in the process, you default on some debt and land a court judgment against you. In desperation to keep at least your car insured, you try to switch to another insurer, hoping to reduce your premium even more.
This time, the insurer may take the judgment into account as part of its assessment. It may also receive an insurance-specific score intended to predict insurance or lapse risk, potentially informed by information about your previous insurance relationships.
Depending on the insurer’s underwriting criteria and its overall assessment of your risk, it could offer cover at a higher premium or decline the application.
At this point, according to John Wessels, actuary and member of the Short-term Insurance Committee of the Actuarial Society of South Africa (ASSA), you are unlikely to find a short-term insurer willing to provide cover at the same premium you had before the judgment.
Wessels explains that an impaired credit record is not necessarily the only factor that can affect an insurance application. Your insurance history, including how frequently you switch insurers, may also affect how an insurer assesses your risk.
Wessels says the information held by a credit bureau may extend beyond a consumer’s conventional credit score. Depending on the information reported to it, a bureau may hold information about credit applications and agreements, payment or default patterns, financial circumstances, employment, identity, marital status, family relationships, addresses, and contact details.
The National Credit Act sets out the information that credit bureaus may collect and the responsibilities that apply to them. Wessels says credit bureaus collect information from a variety of sources, including information provided on credit applications, credit accounts and outstanding balances, payment histories, and records of applications and credit enquiries.
This information is not necessarily limited to traditional loans. Wessels says information arising from arrangements other than traditional loans, including cellular, insurance, gym, and subscription accounts, may also be reported to credit bureaus, subject to the applicable legal and contractual requirements.
When an insurer obtains a consumer’s credit information, the information available from the credit bureau can therefore extend beyond a conventional credit score.
Insurance-specific scores
Wessels says consumers should distinguish between a conventional credit score and an insurance-specific score.
A conventional credit score is calculated to predict credit risk, particularly the probability that a consumer will default on debt. Insurance-specific scores, by contrast, are calibrated for the insurance industry to predict insurance risk and lapse risk.
Different credit bureaus have different proprietary models and do not disclose precisely how information is weighted when calculating their scores.
Depending on the model, Wessels says the information used may include credit information, based on the theory that people who manage credit responsibly may also be more responsible with their assets.
It may also include a consumer’s history of switching insurers, because this can be an indicator of lapse risk, as well as other information available to the credit bureau, such as the number of dependants and education or employment information.
Claims history is typically obtained through questions insurers ask when underwriting a policy. However, Wessels says many insurers participate in the Insurance Data System (IDS), which contains personal-lines claims information from participating insurers. The information available through the system depends on participation and the data submitted by participating insurers.
He says there is often a relationship between financial health and insurance claims, based on the general theory that people who are responsible with their finances tend to be responsible with their assets as well.
Wessels says severe financial pressure may also increase the incentive to commit insurance fraud.
The proprietary nature of insurance-specific scoring models means consumers and insurers do not necessarily know precisely how each factor is weighted when a bureau produces a score. The score may, in turn, be one of several inputs into the insurer’s broader underwriting decision.
According to Wessels, information that may influence an insurance-specific score or form part of an insurer’s broader underwriting assessment includes:
- whether the consumer is up to date with debt repayments;
- the relationship between the consumer’s vehicle finance obligations and income, which Wessels says may indicate whether the consumer can afford to maintain the vehicle;
- a history of switching insurers, which may be treated as an indicator of lapse risk; and
- other information available to the credit bureau, potentially including the consumer’s number of dependants and education or employment information.
When incorrect information affects a claim
Although credit information and insurance-specific risk information may form part of an insurer’s underwriting assessment, the accuracy of the information supplied by the customer when applying for cover remains important when a claim is submitted.
“Insurers will check at claims stage that the information provided by the customer as part of the application process was truthful,” Wessels says. “This usually relates to the regular driver of the vehicle, the type of use, the day and night address, and whether the client has had their insurance cancelled elsewhere.”
If a consumer describes a vehicle as being used for personal purposes when applying for cover, but it is already being used for purposes that the insurer classifies as business use, the consequences of the incorrect disclosure will depend on the circumstances, the materiality of the information, and the policy wording.
Wessels says insurers that distinguish between personal and business use should explain to the customer what they regard as business use. A professional who drives to clients a few times a month, for example, may fall outside an insurer’s definition of business use. Consumers should therefore understand how their insurer defines the different categories of vehicle use.
If the vehicle’s use changes only after the policy has commenced, the issue may instead be whether the policy requires the consumer to notify the insurer of the change.
Wessels says that, where incorrect underwriting information has been provided, an insurer may consider what premium it would have charged had it received the correct information.
If the difference between the premium paid and the premium that would have been charged is immaterial, the claim will not necessarily be prejudiced. According to Wessels, an insurer may in some cases collect an additional or backdated premium or settle the claim proportionately.
Where the difference in risk is substantial, rejection may result, depending on the circumstances, the materiality of the incorrect information, the insurer’s underwriting decision, and the policy terms.
Wessels uses e-hailing as an example. A vehicle insured under personal lines but used for e-hailing could attract a substantially different premium because of the additional risk. In such circumstances, a claim is more likely to be rejected than where the difference in the underlying risk and premium is immaterial.
Wessels says insurers cannot simply treat every misrepresentation as though the difference in risk were immaterial and collect the additional premium only when a claim arises.
He explains this in terms of the principle of risk pooling.
To illustrate the point, Wessels uses a hypothetical example in which 10 vehicles are being used for e-hailing but are paying premiums calculated for personal use. In his example, the premiums are 30% lower than they should be.
If one vehicle claims, the insurer could collect the backdated premium from that policyholder. But the other nine vehicles would also have received cover at premiums that did not reflect the risk they posed.
The portfolio as a whole would therefore not have collected sufficient premiums to cover the risk.
Consumers should provide accurate information when applying for cover and understand what their insurer means by different categories of vehicle use. They should also check whether they are required to notify the insurer if the use of the vehicle or another relevant circumstance changes after the policy begins.
Wessels advises consumers to read the policy wording, schedule, and related disclosures carefully to understand the cover, exclusions, and any obligations to notify the insurer of changes in circumstances. These could include an obligation to inform the insurer of an address change if it affects the security of the vehicle.
“When it comes to insurance, the insurer relies heavily on your honesty and willingness to disclose important information when making underwriting decisions. The insurer is entitled to check that you were honest when you submit a claim, because if companies had to pay all claims without question, fraud would skyrocket, leading to higher premiums for all customers.”
At the same time, Wessels says insurers need to be careful not to reject claims unreasonably, because this can erode customer trust and invite regulatory trouble.
A consumer who disputes an insurer’s decision should first use the insurer’s internal complaints process. If the complaint remains unresolved, it may be referred to the National Financial Ombud, provided the insurer and the dispute fall within the NFO’s jurisdiction.
