AAA.CrdSc

Question 1

Define ‘credit score’

Answer 1

An insurance score using attributes found in a credit report.

Question 2

Identify 3 uses of credit scores.

Answer 2

1. U/W criterion
2. Rating variable
3. Assignment to tiers (and/or RSPs or FARM)

Question 3

Identify 2 arguments in support of using credit scores.

Answer 3

1. Statistically significant:
   - high credit score individuals have lower claim costs
   (improves segmentation and availability/affordability)
   - Removing credit score will not change aggregate premium collected
2. Has qualities of a good rating variable (from Exam 5):
   - easy to calculate, objective, verifiable

Question 4

Identify 2 arguments against using credit scores.

Answer 4

1. Unfairly discriminatory:
   - poor families, recent immigrants
2. Privacy concerns:
   - too invasive
3. Accuracy::
   - credit bureau errors or identity theft may cause inaccurate credit data
4. High credit-score insureds:
   - often pay small claims out-of-pocket so their true costs may be understated

Question 5

Briefly describe the ‘regulators’ concerns (2) over credit score use after economic crisis.

Answer 5

1. On aggregate premium:
   - an unwarranted increase
   (a new rating variable alone should not increase aggregate premium)
2. On individual premium:
   - a distributional shift that doesn’t reflect true cost differences

Question 6

Briefly explain the actuary response to regulators’ concerns over credit score use after economic crisis.

Answer 6

Will need to review because:

1. Avg score will be different (need to offset)
2. Potentially greater differentiation of credit score between PH. Need to re-evaluate algorithm & factors to see if it still makes sense