Credit Flashcards
What constitutes a credit-based insurance score?
- Ranking assigned to an insurance risk based on that risk’s underlying characteristics
- Common purpose to produce useful information in underwriting and pricing insurance
- Provides a relative measure of the expected cost of the risk
- Uses items found in a typical individual’s credit report, such as number of inquiries into opening new accounts and accounts 30 days or more past due
Describe how insurers use credit-based insurance scores.
- Some insurers use to determine whether to accept or reject a risk
- More commonly used to segment risks into homogenous groups for rating
– May be used directly as a rating factor (a.k.a. risk classification factor)
– May be used to assign risk to the appropriate tier
Briefly describe why credit scores are a statistically reliable tool for segmenting risks with different expected costs:
There is a strong correlation between insurance scores and expected costs associated with the risk
Briefly describe 2 ways in which credit scores can be used to segment risks into homogenous groups for rating:
- May be used directly as a rating factor (a.k.a. risk classification factor)
- May be used to assign risk to the appropriate tier
According to Kucera, what is the effect on premiums of not using credit-based insurance scores?
It will not lower overall insurance premium, but redistribute charges
- Risks with lower expected costs will pay more than actuarially fair
- Risks with greater expected costs will pay less than is actuarially fair
What were the concerns about how the economic crisis would affect overall insurance costs and prices:
Some regulators concerned that if insurance scores worsen, it will lead to unwarranted premium increases
Explain why a distributional shift is likely to have a smaller effect on renewal business:
Some states / companies only allow use of scores for renewals if it reduces insured’s premium
Argue for and against the use of credit-based insurance scores in personal lines insurance.
Proponents
- Scores are predictive of an insured’s future claims experience
- Necessary tool for underwriting and/or rating
Critics
- Example of imposed discrimination against lower income individuals and protected classes of people
- Studies show use of scores disparately impacts certain classes of people
2 classes of people adversely impacted by the use of credit scores in insurance:
- Lower income individuals
2. Protected classes of people
List 4 inherent weaknesses in the credit reporting system:
- 2000 study by Consumer Reports showed 50% of credit reports contained errors
- Identity theft leads to invalid information on reports
- Excessive access to credit as evidenced by the problems in the mortgage industry
- Credit reports disproportionately negatively affect certain parties
List some parties disproportionately negatively affected in the credit scoring process:
- Recent divorcees
- Recently naturalized citizens
- Elderly
- Disabled
- Those with certain religious convictions
- Younger individuals who have not established credit histories
Explain how a downturn in the economy could impact different segments of the population:
It could potentially magnify differences in credit scores among vulnerable populations
According to empirical data, is there a relationship between the credit score and frequency/ severity of claims:
No significant difference in magnitude of claims, only frequency: Consumers with lower credit scores file more claims
Provide a reason that the consumers with low credit scores file more claims:
Possible that frequency of insured loss events is the same across populations, but that those with higher scores are less likely to file a claim
The Florida Legislature limited use of credit-based scores in 2003 for PPA and HO. List the 4 legal challenges that insurers used to oppose these limits:
- FL Office of Reg didn’t have the authority to prevent use of credit scoring as underwriting/rating tool
- Office did not have authority to define term “unfairly discriminatory” as in statute
- Insurers didn’t have necessary data to demonstrate effect of credit scoring on protected classes
- Definition of “disproportionate impact” was too vague