Tuesday, March 28, 2023
  • Login
CEO North America
  • Home
  • Business
    • Entrepreneur
    • Industry
    • Innovation
    • Management & Leadership
  • CEO Interviews
  • CEO Life
    • Art & Culture
    • Food
    • Health
    • Travel
    • Environment
  • Opinion
  • News
  • Multimedia
No Result
View All Result
  • Home
  • Business
    • Entrepreneur
    • Industry
    • Innovation
    • Management & Leadership
  • CEO Interviews
  • CEO Life
    • Art & Culture
    • Food
    • Health
    • Travel
    • Environment
  • Opinion
  • News
  • Multimedia
No Result
View All Result
CEO North America
No Result
View All Result

How Lenders Are Providing Natural-Disaster Insurance

in Opinion
How lenders are providing natural-disaster insurance
Share on LinkedinShare on WhatsApp

With the chaos of cleanup and insurance claims, the aftermath of a natural disaster often triggers a financial shock for households. This was strikingly evident in the United States in 2020, which saw not only COVID-19 but also a record 22 officially declared weather and climate disasters. Each caused at least $1 billion of damage.

Since 9/11, US financial institutions have taken to voluntarily applying disaster flags to consumers’ credit files in regions affected by disasters. The idea is to give consumers a break by temporarily overlooking any missed payments. In the pandemic, flags popped up everywhere for the first time.

For all that, little is known about how widely these designations have been applied or what the effects are, according to Chicago Booth PhD student Benedict Guttman-Kenney, who argues that these flags have helped consumers and lenders alike.

A disaster flag on a consumer’s account masks any missed payments, giving the impression in a credit score that payments are up to date. “This is like natural-disaster insurance for your credit file,” Guttman-Kenney says. “When you’re in that position, there’s something to help you.”

But unlike health and unemployment insurance, and other types of systems in place, disaster flags are assigned ad hoc. Currently the onus is on lenders to decide whether to flag accounts and for how long, as well as which types of financial products to apply the designation to.

To find out how the flags were being used, Guttman-Kenney examined the TransUnion Consumer Credit Panel, a representative sample of credit files, housed at Chicago Booth’s Kilts Center for Marketing, covering 2000 to the end of 2021. He then combined this with Federal Emergency Management Agency public data to track where and on which dates disasters struck over the past 20 years.

From January 2010 to December 2020, a period when the use of disaster flags expanded dramatically, 59 million people had such a tag on at least one open account on their credit file for at least one month, he finds. Lenders’ use of disaster flags accelerated with climate change and more-frequent extreme weather crises, rising particularly after Hurricanes Irma and Harvey in 2017.

The data show the prevalence of the flags, including a change in the use of the designation over time, the characteristics of affected consumers, and the types of products involved, such as mortgages and credit cards.

People at higher risk of defaulting—those with lower credit scores, higher debt, and more credit products a year before a disaster—were more likely to have flags on their accounts, Guttman-Kenney finds. They also got a much bigger boost to credit scores when their accounts were flagged—10 to 15 percentage points—than people with better credit, who saw little change, according to the study.

However, disaster flags typically only stay on a credit file for a few months and, as a result, their beneficial effects on credit scores were temporary, and didn’t translate into consumers’ credit access increasing.

In his analysis of the FEMA disaster records, Guttman-Kenney wanted to know how costly it would be for lenders if there were a standardized requirement in place to permanently mask disaster defaults in credit files, rather than the current ad-hoc version that only provides temporary relief. To find out, he essentially created his own disaster flags and applied them in disaster zones, which affected 6 percent of defaults that occurred during and shortly after a disaster, as well as 18 percent of defaults that occurred more than a few months later.

“A disaster default may be adding noise to your credit scoring model, so if you mask it, it actually improves your model,” he notes.

Guttman-Kenney finds that removing missed-payment information didn’t hamper lenders’ ability to assess risk and build effective credit-scoring models. “It’s almost like we are removing something that is randomly occurring,” he says. “If we remove disaster defaults, it might help consumers without hurting lenders.”

With weather-related catastrophes expected to continue to rise, the findings provide some rationale for creating a standardized system of applying such credit flags to replace the present practices, Guttman-Kenney says. A formal policy could make sense for both lenders, which would have a clearer picture of true customer credit risk, and consumers, who don’t want to be penalized for the bad luck of being hit by a disaster.

(Courtesy Chicago Booth Review. By Sally Parker)

Tags: Chicago BoothInsuranceNatural Disasters

Related Posts

Do you know why your employees are leaving?
Opinion

Do You Know Why Your Employees Are Leaving?

Here are the 5 key drivers of employee engagement
Opinion

Here are the 5 key drivers of employee engagement

What do your customers want in 2023?
Opinion

What Do Your Customers Want in 2023?

Five questions all leaders should always be asking
Opinion

Five Questions All Leaders Should Always Be Asking

Two basic problems of a declining population in a country
Opinion

Two basic problems of a declining population in a country

4 surprises all leaders face
Opinion

4 Surprises All Leaders Face

Women get “nicer” feedback — and it holds them back
Opinion

Women Get “Nicer” Feedback — and It Holds Them Back

Does it feel like your department has been sidelined?
Opinion

Does It Feel Like Your Department Has Been Sidelined?

How to test if your interview process is a nightmare
Opinion

How to Test If Your Interview Process Is a Nightmare

Helping gen z employees find their place at work
Opinion

Helping Gen Z Employees Find Their Place at Work

No Result
View All Result

Recent Posts

  • Symbotic’s CEO Rick Cohen shines a light on the consumer goods supply revolution
  • CEO John Wynne outlines how Fortis Solution Group is disrupting the packaging industry
  • CEO Keh-Shew Lu explains how Diodes Inc is pushing the frontiers of connectivity
  • CEO NA Andrea Pirondini explains why the Prysmian Group is best-in-class at cable solutions
  • Eric Clark on how ONE NTT is driving client-led innovation

Recent Comments

    Archives

    Categories

    • Art & Culture
    • Business
    • CEO Interviews
    • CEO Life
    • Editor´s Choice
    • Entrepreneur
    • Environment
    • Food
    • Health
    • Highlights
    • Industry
    • Innovation
    • Issues
    • Management & Leadership
    • Multimedia
    • News
    • Opinion
    • PrimeZone
    • Printed Version
    • Travel
    • Uncategorized

    Meta

    • Log in
    • Entries feed
    • Comments feed
    • WordPress.org

    • CONTACT
    • GENERAL ENQUIRIES
    • ADVERTISING
    • MEDIA KIT
    • DIRECTORY
    • TERMS AND CONDITIONS

    Editorials – stuart.james@ceo-na.com

    Advertising – media@ceo-na.com

    NEW YORK

    110 Wall St.,
    3rd Floor
    New York, NY.
    10005
    USA
    +1 212 432 5800

     

    MEXICO CITY

    Paseo de la Reforma 296,
    Floor 38
    Mexico City
    06600
    MEXICO

    • CONTACT
    • GENERAL ENQUIRIES
    • ADVERTISING
    • MEDIA KIT
    • DIRECTORY
    • TERMS AND CONDITIONS

    Editorials –
    stuart.james@ceo-na.com

    Editor-In-Chief –

    caroline.sposto@ceo-na.com

    Editorials – editorials@ceo-na.com

    Advertising –
    media@ceo-na.com

    NEW YORK

    110 Wall St.,
    3rd Floor
    New York, NY.
    10005
    USA
    +1 212 432 5800

    MEXICO CITY

    Paseo de la Reforma 296,
    Floor 38
    Mexico City
    06600
    MEXICO

    CEO North America © 2022 - Sitemap

    No Result
    View All Result
    • Home
    • Business
      • Entrepreneur
      • Industry
      • Innovation
      • Management & Leadership
    • CEO Interviews
    • CEO Life
      • Art & Culture
      • Food
      • Health
      • Travel
      • Environment
    • Opinion
    • News
    • Multimedia

    © 2023 JNews - Premium WordPress news & magazine theme by Jegtheme.

    Welcome Back!

    Login to your account below

    Forgotten Password?

    Retrieve your password

    Please enter your username or email address to reset your password.

    Log In

    Warning: array_sum() expects parameter 1 to be array, null given in /home/ceonacom/public_html/wp-content/plugins/jnews-social-share/class.jnews-social-background-process.php on line 111