AAA Credit Scores

Question 1

Overview arguments by Jeff Kucera at the NAIC Public Hearining on Credit-Based Insurance Scores, April 30 2009 for Credit-Based Insurance Scores

Answer 1

• Allow better segmentation of insurance risks
• Most companies use for PPA and HO
• Better matches premium and risks’ costs
• Prohibition of the use of scores will not affect overall premium but rather its distribution among risks

Question 2

Important credit-based attributes

Answer 2

• # of inquiries into opening new accounts
• Accounts 30 days or more past due
• Generates info for UW and pricing

Question 3

Principle #4 of CAS SOP

Answer 3

A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer

Question 4

ASOP 12 - Risk Classification

Answer 4

• Risk charac should relate to expected outcomes
• A relationship between a risk charac and expected outcome is demonstrated if it can be shown that the variation in actual or reasonably anticipated xp correlates to the risk charac
• Rates within a risk classification would be considered equitable if diff in rates reflect material diff in expected cost for risk charac

Question 5

How insurers use credit-based insurance scores?

Answer 5

• Underwriting: To determine whether a prospective insured qualifies to be written by the company
• Rating: More typically, insurers also use insurance scores to help segment risk into

Question 6

Contrast Insurance Score and Credit-based Insurance Score

Answer 6

• Insurance Score: Numerical score/ranking assigned to an insurance risk based on that risk’s underlying charac
• Credit-based Insurance Score: Insurance score that utilizes various attributes found in a typical individual’s credit report

Question 7

How do current economic conditions affect PH premiums related to credit-based insurance scores on “an aggregate basis”?

Answer 7

• Insurers use insurance scores to determine appropriate rate relationships between risk classes, not to determine overall premium need
• Actuary would observe this distributional shift and adjust overall rate levels so that the total premium collected by the insurer remains the same and the integrity of the rate relationships among risks remains intact
• Not different than any other distributional shift, such as an increase in the average value of homes

Question 8

How do current economic conditions affect PH premiums related to credit-based insurance scores on an “individual PH basis”?

Answer 8

• Some regulators may be concerned that a dramatic shift in credit scores could disrupt the current relative rates among risks
• This is commonly seen in insurance, but is corrected by rate differential analysis
• This potential shift in differential, and intent to be competitive, provide incentives for companies to regularly review their rate differentials
• So far no dramatic shift in credit scores