credit scores & UBI

Question 1

Use of credit-based insurance scores helps insurers

Answer 1

subdivide risks to determine appropriate rates

charge higher premiums for risks expected to incur more loss and/or expense

Question 2

Not using insurance scores will not lower overall insurance premium

Answer 2

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

Question 3

Insurance Score

Answer 3

-Insurance Score = Numerical score 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

Question 4

Credit-based Insurance Score

Answer 4

-Credit-based Insurance Score = 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

-Models developed by third-party vendors and individual insurance companies: Generally the higher the score, the better an individual’s credit rating

Question 5

There is a strong correlation between insurance scores and expected costs associated with the risk

Answer 5

Scores are a statistically reliable tool for segmenting risks with different expected costs

Question 6

how insurers use CBIS

Answer 6

Some insurers use Credit-based Insurance Score 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 or May be used to assign risk to the appropriate tier)
• can use insurance scores to target certain market segment in the marketing campaign

Question 7

Credit reports disproportionately negatively affect

Answer 7

Recent divorcees, recently naturalized citizens, Elderly, Disabled, Those with certain religious convictions, Younger individuals who have not established credit histories

Question 8

Reasons to disapprove using credit score as RV

Answer 8

• scores may not be measuring any event risk, but rather indirectly measuring socioeconomic status
• Use of credit is counter to equal protection for consumers and not sound public policy
• Has a disproportionate negative effect on low-income people and protected classes of citizens (gender, religious background, disabled, race)
• Credit report data can often be inaccurate
• Credit reports can be adversely impacted by things outside the direct control of the insured
• Credit scoring methodology is difficult for consumers to understand & varies from company to company
• Credit scores have only been shown to be productive of claim frequency, but not severity

Question 9

Reasons to approve using credit score as RV

Answer 9

• Credit scores show the relative risks of the consumers correlated to the score ranges. They allow insurers to price insurance better based on the consumer’s relative risks
• Scores allow the insurer to compete better in the market, creating insurance availability.
• A majority of policyholders benefit from the use of credit scoring, having lower rates than they would have in the absence of credit scoring
• Allows insurer to write more business
• Credit based scores are predictive of future loss experience
• reduces subsidies between high and low risks, won’t lower rate level overall

Question 10

Downturn in the economy for CBIS

Answer 10

• Consumers: Credit scores may decrease (uniformly, in segments), Premium increases temporarily, assuming companies adjust accordingly, Might not be impacted if company does not rerun score for renewal
• insurance company: Will see a change in credit score distribution, uniform or otherwise, Will need to examine relativities among risks, Will need to decrease/increase overall loss cost estimate, depending if loss costs are assumed to have changed or stayed the same, Might be temporary increase in profit due to increased rates
• Regulators: Increased complaints from consumers, Need to apply additional scrutiny to rate filings, May reexamine use of credit scores in rating models, May see availability decrease and increased residual market
• regulators would be concerned that insureds would have increase in prem and without change in inherent risk, would lead to less availability of insurance, unfair or inequitable

Question 11

Options in pricing to reflect impact of downturn

Answer 11

• If the current rate relativities between score classes remains valid, and CBIS scores are dropping in essentially a uniform fashion, the pricing actuary would respond to distributional shift via an offsetting change to the base rate. There would be no long term impact on the premium collected just from the CBIS shift.
• Remove CBIS from rating by using a proxy to replace it or recalibrating other rating variables absent the CBIS
• Incorporate the rising premiums into the premium trend selection, which will result in a decrease in the overall indication
• Use CBIS only in accept/reject or tier placement underwriting decision making instead of in rating

Question 12

Cost-based condition for rates to be considered equitable & McCarty

Answer 12

• Rate of policy should be proportional to expected losses. It should be ‘cost-based’ in that policies with higher costs have higher rates, Rates must vary based on differences in individual risk
• McCarty: Should not disproportionately impact Protected Classes, Rating variables are characteristics that are influenced by insured, Should not be subject to inaccuracies, believes consumer should understand how their characteristics/risk factors and behavior will impact their rates

Question 13

Vehicle telematics allows insurers

Answer 13

to use true causal risk factors to accurately measure risk, and develop precise UBI plans

Question 14

Because the UBI premiums will better reflect risk

Answer 14

policyholders will be motivated to adopt risk minimizing behaviors. This will benefit not only the consumers and insurers, but society as a whole

Question 15

Benefits of Telematics: consumers

Answer 15

• Possible lower premiums (due to participation discounts, improved driving performance, or voluntary reductions in mileage driven). Savings are also achieved from eliminating the subsidy for high risk/ high mile drivers. Lower income drivers should benefit from the subsidy elimination, as many are lower mileage drivers.
• Ability to control premiums: programs convert fixed costs into variable costs. It is therefore more transparent to consumers how their driving behavior & usage impact the premium.
• Enhanced safety & improved claims experience
• Households with young drivers will appreciate the focus on education and promoting safety, including coaching on their riskier driving behaviors
• Consumers may also receive benefits due to the continuous connection of the telematics device, including: Faster emergency response time, Road side assistance, Stolen vehicle recovery, Fuel efficiency, Vehicle maintenance support

Question 16

Benefits of Telematics: insurers

Answer 16

• insurer benefits include: Reduced claim costs, Better risk pricing, Mitigate adverse selection and moral hazard, Modify risky behavior, Improved brand recognition/ awareness & loyalty, Differentiate their product offerings, Create new revenue streams
• Insurers that offer Telematics based UBI will have several competitive advantages: can identify the lowest risk drivers and increase the retention for this group, may gain more business, as potential customers may be attracted by the potentially lower premiums. For example, they may attract the younger drivers who are more willing to adjust their behavior to reduce their premiums, Insurers are provided with new methods in which to communicate with policyholders. This should build stronger relationships, Claims management will be enhanced. The programs seamlessly transmit the driving data to the insurer, which will increase the speed and efficiency of claims processing, Since the insurer can analyze the real time driving data, it can more accurately estimate accident damages and reduce fraud & claims disputes, Programs will help for stolen vehicles to be tracked & recovered, Early adopters will benefit from the rich driving behavior data that will be collected. Competitors who lack similar data will struggle to price appropriately

Question 17

societal benefits of UBI

Answer 17

People are encouraged to drive less, resulting in Fewer accidents, Less congestion, Lower carbon emissions & dependence on fossil fuels, Rates that are more socially equitable (eliminate the cross subsidy between low mileage and higher mileage drivers)

-ability of PAYD UBI programs to provide societal benefits will be based program’s ability to change consumer behavior.

Question 18

In order to impact behavior, relationship between behavior and pricing must

Answer 18

be understandable by consumers

-However, the driving score is often based on a number of factors that are used in complex algorithms, which can make it more difficult for consumers to understand which behaviors are impacting their premium the most

Question 19

way UBI might unfairly discriminate

Answer 19

When the telematics device is purchased by the consumer those with low- income may not be able to afford it, low-income drivers are more likely to operate older vehicles that may not be able to use the telematics device, Those with certain disabilities may need to use a vehicle tailored to their needs, which limits their ability to carpool or use public transportation, which results in higher usage of their vehicle

Question 20

Consumer Concerns

Answer 20

• Privacy and the insurer’s ability to protect their personal data
• Distribution of data by insurers for purposes other than loss mitigation and pricing, including using the information in claims settlements when useful to insurers, but not utilizing it when helpful to consumers
• Reduced offerings of UBI programs to consumers in low & moderate income, and minority communities
• Failure to achieve material loss mitigation, due to the black box approach
• Use of telematics as just another data mining exercise that penalizes consumers because of where and when they drive, which is heavily impacted by where they work and live
• Limited regulatory oversight to date

Question 21

consumers have 2 main goals for insurance

Answer 21

Ensuring that all consumers have access to essential insurance products bc provides financial security and allows for economic development and asset preservation & insurance is core method for loss reduction and risk mitigation

Question 22

Regulator Concerns of UBI

Answer 22

• Regulators are concerned about the storage & reporting of private data, in addition to the rating factors used to calculate the UBI premiums
• Regulators should be concerned if the insurer is using a third party to collect and handle the data
• Regulators concerned that if different telematics equipment are used by different insurers based on the type of vehicle, it is possible that the same data may not be collected, or the data may not be recorded in the same manner

Question 23

Regulators should ensure that insurers are not considering any factors that are

Answer 23

prohibited, or that would result in rates that are inadequate, excessive or unfairly discriminatory. However, this is difficult in a file-and-use or use-and-file environment. Also, insurers may be reluctant to file the GLMs that are used, as they could contain confidential information

Question 24

regulators should emphasize

Answer 24

Requirement that rates not be excessive, inadequate or unfairly discriminatory and Need for public disclosure & transparency

Question 25

Birnbaum believes regulators should provide regulatory structure for telematics programs

Answer 25

that provides transparency and fairness to consumers, in addition to greater confidence by consumers that their data would not be used against them. This should result in lower losses and more fairness in pricing

• Establish data ownership & privacy standards
• Establish standards for permitted and prohibited uses of consumer data
• Collect & analyze granular data on offers and sales of UBI programs related to prohibited risk classification factors (including race and income)
• Require that insurers include variables for race and income in GLMs
• Create standards for disclosure of telematics results and ratings programs, to ensure that consumers have the necessary feedback to alter their behavior
• Stop offering “discounts” unless the rating factor can be correlated with lower claims, as opposed to just a redistribution of income

Question 26

Criticisms of UBI

Answer 26

• Just another black box rating factor for insurers. By keeping these black box items secret it defeats the key function of risk classification
• Limited regulatory oversight
• Reliance on a third-party vendor which raises issues of privacy, data accuracy, and misuse of data by internal and external parties
• Large insurers may have access to more and better telematics data, potentially making the marketplace less competitive as smaller insurers are driven out
• Use of different vehicle input devices may lead to issues where the devices may not record the same data. Some devices are only available for newer vehicles

Question 27

Insurers could demystify their telematics programs by releasing information

Answer 27

about data collection, use, ownership, storage, protection and dissemination to regulators and policyholders. This can be disclosed to regulators via filings, and to policyholders via participation agreements

-participation agreements identify driving factor being measured, why it is being measured, and explanation of factors that impact safety