APPROACHES TO ADDRESS RACIAL BIAS IN FINANCIAL SERVICES: LESSONS FOR THE INSURANCE INDUSTRY

Link: https://www.casact.org/sites/default/files/2022-03/Research-Paper_Approaches-to-Address-Racial-Bias_0.pdf?utm_source=Landing+Page&utm_medium=Website&utm_campaign=RIP+Series

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The goal of this paper is to equip actuaries to proactively participate in
discussions and actions related to potential racial biases in insurance
practices. This paper uses the following definition of racial bias:
Racial bias refers to a system that is inherently skewed along racial lines.
Racial bias can be intentional or unintentional and can be present in the
inputs, design, implementation, interpretation or outcomes of any system.
To support actuaries and the insurance industry in these efforts, this paper
examines issues of racial bias that have impacted four areas of noninsurance financial services — mortgage lending, personal lending,
commercial lending and the underlying credit-scoring systems — as well
as the solutions that have been implemented in these sectors to address
this bias. Actuaries are encouraged to combine this information on
solutions and gaps in other industries with expertise in their practice areas
to determine how, if at all, this information could be applied to identify
potential racial biases impacting insurance or other industries in which
actuaries work.
Parallels can be drawn between the issues noted here in financial services
and those being discussed within the insurance industry. While many
states have long considered race to be a protected class which cannot be
used for insurance business decisions, regulators and consumer groups
have brought forth concerns about potential racial bias implicit in existing
practices or apparent in insurance outcomes. State regulators are taking
individual actions to address potential issues through prohibition of
certain rating factors, and even some insurers are proactively calling for
the industry to move away from using information thought to be
correlated with race. However, this research suggests that government
prohibition of specific practices may not be a silver-bullet solution.
Actuaries can play a key role as the insurance industry develops
approaches to test for, measure and address potential racial bias, and
increase fairness and equality in insurance, while still maintaining riskbased pricing, company competitiveness and solvency.

Author(s): Members of the 2021 CAS Race and Insurance Research Task Force

Publication Date: March 2022

Publication Site: CAS

Actuarial Group Takes Steps to Identify Racial Bias in Insurance Rates

Link: https://www.investopedia.com/race-and-insurance-5224764

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Two new papers from property casualty actuaries delve into issues of historical and ongoing bias in insurance pricing.

These papers are on potential Influences among four rating factors and attempts to actually define discrimination in insurance.

Factors such as geography, credit scoring, home ownership, and motor vehicle records affect homeowners and auto insurance rates and can cause Black consumers to pay higher premiums.

Actuaries and regulators are trying to untangle factors from societal prejudice for fairer pricing

AI or machine learning can augment or amplify these biases with their vast inputs, and data scientists will be analyzing outcomes for discriminatory pricing effects.

States have been taking action through regulation or pending legislation to extinguish some factors that can lead to racial bias or to examine data modeling to check for discriminatory effects.

Author(s): ELIZABETH FESTA

Publication Date: 5 April 2022

Publication Site: Investopedia

Biological and Psychobehavioral Correlates of Credit Scores and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works

Link: https://www.jstor.org/stable/4138424

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Abstract:

The most important new development in the past two decades in the personal lines of insurance may well be the use of an individual’s credit history as a classification and rating variable to predict losses. However, in spite of its obvious success as an underwriting tool, and the clear actuarial substantiation of a strong association between credit score and insured losses over multiple methods and multiple studies, the use of credit scoring is under attack because there is not an understanding of why there is an association. Through a detailed literature review concerning the biological, psychological, and behavioral attributes of risky automobile drivers and insured losses, and a similar review of the biological, psychological, and behavioral attributes of financial risk takers, we delineate that basic chemical and psychobehavioral characteristics (e.g., a sensation-seeking personality type) are common to individuals exhibiting both higher insured automobile loss costs and poorer credit scores, and thus provide a connection which can be used to understand why credit scoring works. Credit scoring can give information distinct from standard actuarial variables concerning an individual’s biopsychological makeup, which then yields useful underwriting information about how they will react in creating risk of insured automobile losses.

Author(s): Patrick L. Brockett and Linda L. Golden

Publication Date: originally 2007

Publication Site: jstor, The Journal of Risk and Insurance

Cite: Brockett, Patrick L., and Linda L. Golden. “Biological and Psychobehavioral Correlates of Credit Scores and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works.” The Journal of Risk and Insurance, vol. 74, no. 1, 2007, pp. 23–63. JSTOR, http://www.jstor.org/stable/4138424. Accessed 22 May 2022.

DOJ Antitrust Chief Warns S&P Global Over Insurer Ratings Tweak

Link: https://www.yahoo.com/now/doj-antitrust-chief-warns-p-152645646.html

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S&P Global Inc. should “carefully consider” a proposed tweak to how it assesses the creditworthiness of bonds owned by insurance companies, the Justice Department said, warning that such a change “could raise significant concerns” under U.S. antitrust law.

The Justice Department’s antitrust division said in a letter dated last Friday that a proposed methodology change by S&P — the world’s largest credit ratings company — could raise barriers for its rivals. The changes could end up hurting the credit grades of insurance companies that invest in bonds that aren’t rated by S&P.

The firm should “carefully consider whether penalizing insurers that purchase securities rated by S&P’s competitors has the potential to raise barriers to entry and expansion by competitors, insulate S&P from competition, or otherwise suppress competition from rival rating agencies,” said antitrust chief Jonathan Kanter in the letter. “Such actions could raise significant concerns that the Sherman Act has been — or will be — violated and warrant additional scrutiny.”

Author(s): Leah Nylen

Publication Date: 4 May 2022

Publication Site: Yahoo (Bloomberg)

Private Overborrowing Under Sovereign Risk

Link: https://www.chicagofed.org/publications/working-papers/2022/2022-17

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Abstract:

This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.

Author(s): Fernando Arce

Publication Date: May 2022

Publication Site: Chicago Fed

US CMBS Loan Defaults Leveled Off in 2021 with Pandemic Recovery

Link: https://www.fitchratings.com/research/structured-finance/us-cmbs-loan-defaults-leveled-off-in-2021-with-pandemic-recovery-17-05-2022

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US CMBS loan defaults declined significantly in 2021 compared with 2020, as the resumption of economic activity supported a recovery in asset performance and property cash flows from their pandemic lows, says Fitch Ratings in its US CMBS 2021 Loan Default Study. The total annual default rate for Fitch-rated CMBS transactions declined to 0.4% in 2021, down from 3.3% in 2020.

Author(s): Stephanie Duski, Melissa Che, Everett Bruer, Sarah Repucci

Publication Date: 17 May 2022

Publication Site: Fitch Ratings

President Biden changing his mind on student loan forgiveness ‘is a tremendous victory,’ Rep. Pressley says

Link: https://finance.yahoo.com/news/student-loan-forgiveness-biden-pressley-141234731.html

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Pressley, alongside Senate Majority Leader Chuck Schumer (D-NY), and Senator Elizabeth Warren (D-MA) have repeatedly called on Biden to cancel $50,000 in student loan debt immediately via executive order on the premise that there is sufficient legal backing for the administration to do so.

….

Cancelling $10,000 in student loan debt per borrower would help the most number of borrowers at the lowest cost, recent research from the New York Fed found.

The Fed researchers, using data from the New York Fed/Equifax Consumer Credit Panel, estimated the cost of two federal loan forgiveness proposals, one for $10,000 and another for $50,000. They found that limited forgiveness and placing income caps on who would be eligible would “distribute a larger share of benefits” to low-income borrowers while also reducing the cost of forgiveness.

Rep. Pressley has repeatedly stressed that women and people of color hold significant levels of student loan debt and that cancellation would represent a massively impactful form of relief given the disproportionate burden.

Author(s): Aarthi Swaminathan

Publication Date: 30 Apr 2022

Publication Site: Yahoo Finance

Global government debt set to soar to record $71 trillion this year, new research says

Link: https://www.cnbc.com/2022/04/06/global-government-debt-set-to-soar-to-record-71-trillion-this-year-research.html

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Global sovereign debt is expected to climb by 9.5% to a record $71.6 trillion in 2022, according to a new report, while fresh borrowing is also broadly set to remain elevated.

In its second annual Sovereign Debt Index, published Wednesday, British asset manager Janus Henderson projected a 9.5% rise in global government debt, driven primarily by the U.S., Japan and China but with the vast majority of countries expected to increase borrowing.

Global government debt jumped 7.8% in 2021 to $65.4 trillion as every country assessed saw borrowing increase, while debt servicing costs dropped to a record low of $1.01 trillion, an effective interest rate of just 1.6%, the report said.

However, debt servicing costs are set to rise significantly in 2022, climbing around 14.5% on a constant-currency basis to $1.16 trillion.

Author(s): Elliot Smith

Publication Date: 6 Apr 2022

Publication Site: CNBC

Blackstone Doubles Insurer Assets, Faces Questions About Role

Link: https://www.thinkadvisor.com/2022/04/22/blackstone-doubles-insurer-assets-faces-questions-about-role/

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Blackstone loves managing assets for insurers, but it has no interest in assuming a large amount of investment risk itself.

Blackstone Executives talked about the skin-in-the-game idea Thursday, during a conference call the company held to go over first-quarter earnings with securities analysts.

Patrick Davitt, an analyst with Autonomous Research, asked Blackstone executives Thursday about reports that some insurance regulators have concerns about independent money managers’ role in handling insurers’ investments.

“Some observers have suggested that an outcome of these reviews could be a requirement of more skin in the game for the managers, particularly those that aren’t consolidated with their insurance counterparties,” Davitt said. “So, first, what is your position on this focus? Do you think there’s a risk that regulators will require more skin in the game?”

Author(s): Allison Bell

Publication Date: 22 April 2022

Publication Site: Think Advisor

U.S. Insurer Exposure to Russia, Ukraine, and Oil/Gas Companies Declines from 2020 to 2021

Link: https://content.naic.org/sites/default/files/capital-markets-special-reports-Russia-Ukraine-Oil-Gas-YE2021.pdf

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Total Russian and Ukraine sovereign and corporate debt was $813.3 million at year-end 2021,
representing 97% of total exposure; the remainder comprised $28.8 million in stocks (see Table 2).
While life companies accounted for the majority of the bond exposure at $683.9 million (or 84% of total
Russia and Ukraine bonds), property/casualty (P/C) companies accounted for almost all the Russia and
Ukraine stock exposure at $28 million. About 90% of U.S. insurers’ exposure to Russia and Ukraine
bonds and stocks was held by large companies, or those with more than $10 billion assets under
management.

Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus

Publication Date: 14 Apr 2022

Publication Site: NAIC Capital Markets Special Reports

Warning: Tossing Russian Banks From the International System Could Backfire

Link: https://www.ai-cio.com/news/warning-tossing-russian-banks-from-the-international-system-could-backfire/

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The decision to boot Russian lenders from the global bank messaging system as punishment for its invasion of Ukraine is a very bad idea that could boomerang and hurt the West, Credit Suisse admonishes.

“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” wrote Credit Suisse strategist Zoltan Pozsar, in a research note.

….

“Exclusions from SWIFT will lead to missed payments everywhere,” Pozsar wrote. Two years ago, “the virus froze the flow of goods and services that led to missed payments.” Aside from the financial panic at the outset of the pandemic, the world ran into a similar problem in 2008, when Lehman Brothers collapsed, he said. 

 Pozsar wrote: “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

Author(s): Larry Light

Publication Date: 28 Feb 2022

Publication Site: ai-CIO

No Ordinary Panic – Bank Run in Russia

Link: https://www.city-journal.org/russian-bank-run-is-no-ordinary-panic

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The war in Ukraine and subsequent international sanctions have triggered a bank run in Russia. But this is no ordinary run—it may become a run on the central bank itself, one that holds important lessons for introducing central bank digital currencies.

Reports show Russians lining up at ATMs to withdraw their cash. For now, the run is largely driven by fears of withdrawal limits and the anticipation that credit cards and electronic means of payments will cease to function. If that happens, cash at hand is the better alternative. For that scenario, central banks know what to do: provide solvent banks with plenty of liquidity against good collateral, as Walter Bagehot recommended.

But will that be all? As Western countries freeze the Russian central bank’s reserves and limit the ability of banks to transact internationally, the exchange rate of the ruble has collapsed, falling by more than 40 percent. Prices for ordinary goods may begin to rise, perhaps dramatically so. If that happens, then rubles would no longer be a good store of value. Russians may seek to convert them into foreign currency, but that’s hard to do with the current sanctions. Consequently, they may start to hoard goods instead, dumping their cash as they go along. The situation would no longer be a run on specific goods, but a run away from fiat money and toward goods—a run, in other words, on the central bank.

Author(s): Linda Schilling, Jesús Fernández-Villaverde, Harald Uhlig

Publication Date: 7 Mar 2022

Publication Site: City Journal