Kucera Credit

Question 1

Insurers like to use credit scores for:

Answer 1

• as an UW criterion
• for assignment to tiers
• as a rating variable

regulators: credit scores may be unfairly discriminatory

Question 2

Arguments for credit scores

SMORe

Answer 2

• Statistical significance (in predicting expected loss costs)
• Manipulation (credit scores are difficult to manipulate because they are calculated by 3rd part companies, not self-reported)
• Objective (credit scores are based on numerical data)
• Removal (removing credit scores won’t change aggregate premium, provided an off-balance is applied)
• e - nothing

Question 3

Concerns a regulator might have regarding credit scores in an economic downturn

Answer 3

• an unwarranted increase in aggregate premiums if the average credit score got worse
• a distributional shift in individual premium that doesn’t reflect true cost differences (losing your job doesn’t mean you’ll have more car accidents)

Actuarial responses:
* we can apply an off-balance factor to keep aggregate premium unchanged
* we can stop using credit score (at least temporarily) and redo the classification analysis after the economy has stabilized