Francesca Carlesi, co-founder and CEO, Molo
2020 saw a paradigm shift in the mortgage market like never before. That shift is still very much underway this year, but before we get into that, it is important for us to note just what changed last year and how the COVID-19 pandemic facilitated it.
Like industries everywhere, the mortgage market was rocked by COVID-19. Customers needed online solutions that enabled them to carry on with some semblance of normality in their everyday lives.
This was just as relevant for the mortgage industry as any other. With increased demand for online solutions, mortgage providers obviously needed digital solutions that worked across any device, any day, and at any time. However, there were also less obvious fundamental changes behind the scenes as well: with critical parts of the mortgage decision process – such as property valuations – also needing to be digitised and made remote.
These changes coupled with new customer preferences meant that the ‘traditional’ way of getting a mortgage offline was very much under threat. At Molo, for example, we have seen a 70% increase in people over the age of 45 applying for mortgage loan offers compared to the first lockdown in March. The reason for this shift is apparent: people who were previously against an online mortgage (or resisted against it) felt that they had no alternative and gave it a shot.
Unsurprisingly, those who did end up taking the plunge and getting a mortgage online ended up being pleased with an overall faster and easier experience. Not to mention actually receiving a mortgage in a time where it was sometimes difficult to get an offer via more traditional routes.
The impact on the future
So what does that mean for 2021? Well the odds are that these changes are here to stay. Those who were able to successfully get a mortgage despite being bound to their homes, are far less likely to venture down to their local high-street and seek out a mortgage via more traditional in-person means the next time they need one.
While 2020 and the reasons outlined above might be remembered as the cause of mortgages going digital, it will most certainly not be the end. These changes are here to stay and will continue to shape the mortgage sector going forward.
Changes in habits
That said, now that we know what facilitated mortgages to continue and flourish during the pandemic, we can also start to assess the impact it had on our habits.
Over the past year we have observed a myriad of motivational changes for property investors. Now, more than ever, people are considering property as a safer investment for their money. With so much uncertainty and change going on around us, investors have taken to buy-to-let properties as an attractive alternative to the stock market or savings accounts.
According to Google Trends, the search ‘how to get a buy-to-let mortgage’ saw a 5000%+ increase in popularity over the last year and was classified as ‘breaking out’ by Google. And at Molo, we can confirm from our own data that there has been a significant increase in first-time buyers searching for a mortgage.
Interestingly, it wasn’t the only change in habits that we saw. While let-to-buy mortgages are by no means new, these too saw a change in the way consumers viewed them. With new ways of working from home and less commuting, we’ve seen an incredible growth in demand for let-to-buy mortgages that allow families from big cities to rent out their home in the city and move to the countryside to accommodate a more rural lifestyle. Making use of the countryside while they are not expected to be at a desk in London, Birmingham or Reading (the cities we’ve seen the biggest interest in) five times a week.
What this means for beyond 2021
The traditional, well-established regional split of property investment is very much under threat. And that is no bad thing! We’re seeing an investment shake-up across the UK.
Moving forward, we expect hotspots like London and the South East to continue high demand, but areas such as the North West also continued to surge in interest in 2020 and we cannot see why that would stop. In fact, we’ve seen demand in cities such as Blackburn grow twice as much as the average across the rest of the UK!
COVID-19 may have caused delays and issues for some mortgage lenders, but it has also been as bigger lesson as any that more digitally advanced propositions are less susceptible.
However, above all else, the last year has really demonstrated one thing in particular in the mortgage market: not only are online mortgages a feasible proposition, but they are also the best fit for customers today.
If a business has steps in place to digitise the front-end of the customer experience, and the requisite previsions to perform back-end tasks – such as credit decisioning and case assessment – digitally as well, then there really is no reason to return to slower, traditional ways of mortgage applications once the pandemic is over.
While predicting the future is impossible, one thing we can say for certain is; there has never been a more interesting time to be working in the mortgage industry.
HOW DO YOU ADAPT YOUR INSURANCE PRICING STRATEGY IN THE FACE OF INCREASED PRICE COMPETITION?
By Ketil Kristensen, Senior Advisor, Insurance, SAS
Many countries in Europe have in previous years experienced increased price competition for general insurance products. Especially in Southern Europe, the competition has been very fierce, fuelled by online price comparison websites. In Spain, Portugal and Greece, there has been a substantial drop in average premiums for products like motor, home and health insurance. This poses a real threat to the profitability of property and casualty insurers.
While some insurance products are highly specialised and almost impossible to compare, most common products have increasingly become commodities. Consumers can now easily compare them online.
When comparing insurance policy prices and details becomes as effortless as getting quotes for airline tickets or hotel accommodation on price comparison sites, more insurance companies will eventually enter the market. And thus price competition will increase.
Preparing for a price war
Once the price war starts, there is no way to avoid it. And insurers need to meet their competitors head-on.
To win a price war, insurers need to be meticulous when they set the premium levels. They might also need to rethink the definition of “profit” when they are making pricing strategies for the future. In a market where premium levels are volatile and the competitive situation may change rapidly, insurers also need the capability to evaluate potential future scenarios in a short period of time.
Setting the premiums right
In the fast-paced digital era, customers expect insurance prices to be easily available online. They will make inquiries for insurance covers for their cars or homes on price comparison websites and expect the prices to be available immediately. From an insurer’s point of view, the premium customers will see on their screens when comparing insurance policy prices is the sum of the insurer’s technical premium and the commercial loading.
The technical premium represents the break-even price that the insurance company would charge for the policy if it had no costs and no desire to make a profit. Commercial loading represents the sum of the insurance company’s costs and the profit it expects to make on the policy. Technical pricing is the subject of many actuarial textbooks. But as machine learning algorithms make their way into actuarial departments, we will need to rewrite those books. Modern pricing techniques that include machine learning algorithms are a notable improvement compared to traditional models. If applied properly, ML models will result in more accurate technical pricing given the same data.
But what about commercial loading? How much profit should the insurer aim for?
Every one of us has a different tolerance for how much we would pay for, e.g., a car insurance policy. Some customers don’t consider price to that important. Others will try to search for a better deal elsewhere, regardless of how much time the process would take. Most customers are somewhere in between.
Being able to price the insurance products analytically based on the “willingness to pay” is, for many actuaries, seen as the holy grail of insurance pricing.
Most insurers already do personal pricing to some extent today. For example, they give different discounts to policyholders with equal risk. However, there is often a great potential to do segmentation and price calculations in a more analytical manner. Ideally, insurers would like to set the premiums as high as possible, but not so high that customers move their policies to another insurer.
On the other side, insurers would like to move customers away from their competitors by offering low premiums – but not too low. The insurer must first determine the price sensitivity of insurance customers and then price each insurance policy so that it maximises the profit for the insurer.
Insurers that can quickly reoptimise changing prices in the online market will also quickly identify customers that are at risk for churn. They can then perform the appropriate actions to prevent this from happening.
When insurers think “profit,” they usually mean the income statement for next year. This is about to change. The concept of Customer Lifetime Value (CLV) is becoming more and more common in the insurance industry. And many insurers are now refining their pricing strategy based on a maximisation of the CLV of all its customers, thus not focusing solely on the profit definition in the income statement. The CLV of an insurance customer is the net present value of this customer for the insurer, where behavioural effects like renewal, cancellation and cross-selling of other insurance products are considered for the entire lifetime of the customer.
To accurately compute CLV for a customer, the insurer will need data that describes the behavioural patterns of the customer. Most insurance companies have quite a lot of such data available – the problem is usually that it is not adequately structured. In practice, to quantitively identify the customer lifetime value, insurers need to integrate both actuarial and customer behaviour models. Once a system for this is in place, insurance companies will have a strong quantitative foundation to compute the customer lifetime value of their policyholders.
Competitive insurance pricing
When a customer determines where to buy insurance, the price is the most important factor. Thus, to stay competitive and still run a profitable business, insurers need to set their premium levels just right. The evolution of price comparison websites – which provide real-time quotes on competitor prices and increased access to data that contains information about the customer’s insurance risk – has made the actuary’s job of calculating the premium more complicated.
Over the years, SAS has worked together with insurers to ensure that strong system support is in place to compute premium levels down to an individual policy level. These pricing systems have been put through the test in some of the most competitive insurance markets in Europe. They have turned out to be a valuable strategic tool for insurers to balance the desire for profit against the desire for market share. And maybe most important of all, they have enabled these insurance companies to effectively join the price war, fight it and still make a profit.
FROM EFFICIENCY TO NEW INVESTMENTS – WHY BLOCKCHAIN IS MORE THAN MEETS THE EYE
Thomas Borrel, chief product officer at Polymath
Blockchain has been an extremely hot topic in 2021. With companies and financial institutions internationally having to adapt to an increasingly digital world, the true potential of blockchain is becoming increasingly clear. We have seen hospitals using the technology to track vaccine distributions, major blue-chip companies floating digital assets or ‘stablecoins’, even progress made by central banks in piloting and adopting digital currencies
When it comes to the world of finance, much of the attention has focussed on the booming price of Bitcoin, and there has been much excitement around using cryptocurrencies as an alternative investment. However, the real potential of blockchain technology stretches far into traditional finance and beyond.
Improving access to investment options
Security tokens created and issued on the blockchain are already being used to improve efficiency in a variety of more traditional asset classes, ranging from real estate to green bonds. The Sustainable Digital Finance Alliance (SDFA) and HSBC Center of Sustainable Finance recently joined forces to highlight how security tokens for green bonds can reduce management costs and increase operational efficiency by up to ten times. And in early 2020, RedSwan CRE Marketplace tokenised $2.2B in commercial real estate, making it one of the biggest tokenisations we’ve seen so far.
However, the potential of tokenisation does not only stand to improve the process of trading traditional assets; blockchain can also open up the pool of investors able to participate. To date, the focus has been on how fractionalisation brings benefits to retail investors by lowering the bar to entry. However, the retail regulations are still very stringent, which is important to protect non-professionals from disproportionate losses.
Tokenisation can be used to enable large institutional investors to buy into smaller projects. Referred to as aggregation, this process can be used to bind assets together so that they meet an institution’s minimum investment threshold. Because of the transparency of blockchain, the investor is still able to inspect each individual offering and ensure each element meets their quality and risk requirements, but by packaging it into one larger token, an institution can diversify with assets that would have otherwise flown under its radar.
Optimising efficiency and minimising risk
Risk management and operational efficiency are usually at the core of any financial institution’s wider strategy. However, no matter how much firms optimise their own processes, there are a range of financial instruments that are still very prone to issues in these areas, especially those that are traded ‘over the counter’ (OTC). The best example of this is likely the bonds market – a multi trillion-dollar market, where OTC trades are still common practice.
When an OTC trade is conducted, it is often so over the telephone – one person calling another to make a deal. This introduces significant information risk with securities operations teams reporting error rates as high as 40%. When instructions for the trade are passed on to the custodians, they will spot the discrepancy. They then have to investigate and find out what has gone wrong, often resulting in very long delays to settlement times.
Blockchains go a long way to solving this problem, providing transparent access to trade and clearing information so that operational issues can be caught earlier and help mitigate settlement risk (i.e. settlement failure). For example, on Polymesh settlement instructions must be affirmed prior to settlement, in a case where an OTC trade has been improperly captured by one counterparty, the counterparty which has affirmed the instruction can see that the other counterparty has not affirmed the instruction within a defined period. In this way, the affirming counterparty can reach out proactively prior to the settlement date to rectify the situation and avoid settlement failure.
Trading on blockchain also generates an easily accessible, secure ledger of trading information. When it comes to reporting in traditional asset classes, the process is highly manual and often expensive. But, with a blockchain solution, reporting is built into the ecosystem from the ground up. There are no significant additional costs or resources required to extract this data and share it where necessary, and the number and complexity of the steps required to complete reconciliations between different entities are reduced and simplified.
Is tokenisation a ‘cover all’ solution?
Fundamentally, certain traditional asset classes are not right for the blockchain yet. Instruments with well-established frameworks, like publicly traded stocks, already have very well-formed, rigorous rails in place, and so transferring to a blockchain could cause disruption and incur unnecessary costs.
It is very common to hear blockchain advocates claiming that blockchain technology should be introduced into every corner of the finance space, which is misguided. Blockchain should be introduced where it brings value to investors or institutions. It should be about augmenting and supplementing the marketplace – not overhauling it, or at least not until the incumbent systems no longer keep up with demand.
The costs and infrastructure associated with capital markets have made some assets – like green bonds or real estate – too expensive to bring to market and service, or too difficult to invest in. These use-cases are examples of where tokenisation can really shine.
Blockchain is an extremely powerful tool, with a range of exciting applications and potential benefits for businesses and financial institutions, ranging from risk management and efficiency through to enabling new investments. However, as with any product, it isn’t the answer to all problems, and must be treated as a powerful enabler – not as an agitator.
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