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Hunting Elk and the Principles of Underwriting

Who would have thought the History of Insurance would be a gripping read? But dipping into Andrew Beattie’s article over Christmas, in between raids on the festive Quality Street, I discovered that the very first written insurance policy appeared on a Babylonian obelisk, back in 1754BC. King Hammurabi of Mesopotamia created 282 laws that set standards of conduct and justice for his empire and had them carved on a seven and a half foot obelisk. One of the laws offered basic insurance in that a debtor didn’t have to pay back his loans if some personal catastrophe made it impossible.

Beattie also pointed out that the principle of risk assessment has also been around as long as human existence. Early hunters in pursuit of giant elk, hunted in a group to spread the risk of being gored to death and later, shipped cargo in several different camel caravans to avoid losing the whole shipment to a marauding tribe.

Interesting stuff but its not just a history lesson. It’s good to remember that assessing risk is fundamentally an exercise in considering the external risk factors and how the individual is equipped to respond. Assessing risk is all about the nuances of human behaviour and that’s not changed in thousands of years.

They may not be carved onto an obelisk, but generations of underwriters have assessed risk and human behaviour using the three key principles of:

  • Ability
  • Stability
  • Willingness to pay

Stability

The automated process of credit scoring does the job of measuring the applicant’s stability. The models analyse past performance, assume that future behaviour will mirror past performance and provide a forecast for the next 12 months. Job done.

Ability

And then, up until now, there was the rather messy matter of assessing the ability of the applicant to repay the loan. Bank statements and payslips had to be gathered and verified that they hadn’t been tampered with. It took time, it was expensive. And for some companies it still does. However, for companies using Castlight Financial’s Affordability Passport technology, the whole “Ability” principle has been revolutionised.

Our innovative platform allows applicants to share their transactional data with the lender in real-time, providing them with a summary of their spending and splitting it into scores of categories of discretionary and non-discretionary spending. At the touch of a button, the applicant opens a door onto his life, revealing exactly what he spends his money on each month and how much he has left at the end of the month. We called ourselves Castlight for a reason – the light our technology allows us to cast on an applicant’s ability to pay is transforming for him or her and the lender they are approaching.

Willingness to pay

And then there’s the principle of willingness to pay. And yes, we’re back to human behaviour again. Does the applicant really intend to make the payments? How can a lender know? Mostly, its experience. But here again, our Affordability Passport is transformative.  All that information about what the applicant spends their money on and how often, that’s a hugely valuable insight into the kind of person the applicant is. Add all that to the lender’s experience and suddenly the willingness to pay principle becomes significantly more robust.

Happy New Year. And may you catch many elks!