AAA.CrdSc

Question 1

Define “credit score”

Answer 1

Credit score is an insurance score that is determined using attributes found in a credit report of an individual, which is used for underwriting or pricing

Question 2

What are credit scores used for in insurance? (3)

Answer 2

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

Question 3

Arguments in support of using credit score (4)

Answer 3

1. Easily obtained & verifiable
2. Objective
3. Statistically significant

• High credit score individuals have lower claim costs
• Note that removing credit score will not change aggregate premium collected

Question 4

Arguments against using credit scores (4)

Answer 4

1. Unfairly discriminatory to certain groups
   - Poor families, recent immigrants
2. Privacy concerns
   - too invasive
3. Accuracy
   - Credit bureau errors or identify 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

Regulatory concerns of using credit score after/during economic crisis

Answer 5

On aggregate premium:
- an unwarranted increase (a new rating variable alone should not increase aggregate premium) due to overall shift of avg credit score

On individual premium:
- A distributional shift that doesn’t reflect true cost differences

Question 6

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

Answer 6

For aggregate premium concerns:
- Apply off-balance to reverse aggregate change

For individual premium concerns:
- Must re-evaluate the credit score algorithm and factors to see if still make sense, if not
- Stop using credit score (at least temporarily)
- Redo classification system analysis after economy has stabilized (incurs lag time however)

Moreover, insurance book is mostly renewals, change in credit score after economic crisis would only impact renewals so much since: is only 1 variable, and insurer likely has capping and other factors in place for renewals, so impact would be mitigated