AAA.CRDSC

Question 1

define ‘credit score’

Answer 1

an insurance score using attributes found in a credit report

Question 2

what are credit scores used for (3)

Answer 2

• U/W criterion
• rating variable
• assignment to tiers (and/or RSPs or FARM)

Question 3

arguments in support of using credit scores (4)

Answer 3

statistically significant:
- high credit score individuals have lower claim costs
(improves segmentation and availability/affordability)
- note that removing credit score will not change aggregate premium collected
has qualities of a good rating variable (from Exam 5):
- easy to calculate, objective, verifiable

Question 4

arguments against using credit scores (4)

Answer 4

unfairly discriminatory:
- poor families, recent immigrants
privacy concerns:
- too invasive
accuracy::
- credit bureau errors or identity theft may cause inaccurate credit data
high credit-score insureds:
- often pay small claims out-of-pocket so their true costs may be understated

Question 5

regulators’ concerns in economic crisis

Answer 5

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

Question 6

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

Answer 6

for aggregate premium concern:
→ apply off-balance to reverse aggregate change
for individual premium concern:
→ stop using credit score (at least temporarily)
→ redo classification analysis after economy has stabilized (incurs lag time, however)