AAA - Credit Scores

Question 1

Define ‘credit score’.

Answer 1

An insurance score using attributes found in a credit report.

Question 2

What are credit scores used for? (3)

Answer 2

• U/W criterion
• segmentation
• assignment to tiers (and/or RSPs or FARM)

Question 3

Arguments in support of using credit scores. (2)

Answer 3

STATISTICALLY SIGNIFICANT: high credit score individuals have lower claims costs (improves segmentation and availability & affordability)
REMOVING CREDIT SCORE: will not change aggregate premium collected
ALSO: (easy to calculate, objective, verifiable)

Question 4

Arguments against using credit scores. (4)

Answer 4

UNFAIRLY DISCRIMINATORY: poor families, recent immigrants
PRIVACY CONCERNS: too invasive
ACCURACY: data may not always be accurate (credit bureau errors, identity theft)
HIGH CREDIT SCORE INSUREDS: will often pay small claims out-of-pocket so true potential costs may be understated

Question 5

Regulators’ concerns in economic crisis.

Answer 5

ON AGGREGATE PREMIUM: unwarranted increase

ON INDIVIDUAL PREMIUM: distributional shift that doesn’t reflect true cost differences

Question 6

Actuary’s response to regulator’s concerns over credit score use after economic crisis.

Answer 6

FOR AGGREGATE PREMIUM: apply off-balance to reverse change
FOR INDIVIDUAL PREMIUM: stop using credit score (at least temporarily) and redo a classification analysis after economy has stabilized (incurs lag time however)