A - AAA Credit Scores

Question 1

AAA CREDIT SCORES

2 uses of credit scores in insurance

Answer 1

1) U/W (accepting risk or not)
2) Rating, Risk Classification, Risk Tiering
3) RSPs

Question 2

AAA CREDIT SCORES

Perceived vs Actual impact from removing credit-based insurance scores from a rating structure

Answer 2

1) PERCEIVED : removal of score would lower premium

2) ACTUAL : Premium subsidization from less risky clients to more risky clients

Question 3

AAA CREDIT SCORES

2 concerns that regulators have about credit-based insurance scores in a period of economic crisis.
For each concern, discuss the role of the actuary

Answer 3

○ IMPACT ON AGGREGATE PREMIUM
1) concern that a downward trend in credit scores will make insurance scores more expensive
2) actuaries will adjust for this distributional shift in ACTUARIAL RATE REVIEW, by ensuring total premium collected by insurance company remains the same. This problem is not unique to insurance scores (home value)
○ IMPACT ON INDIVIDUAL PREMIUM
1) Regulators may have concerns that shift in credit scores will become less predictive of insurance costs in the future
2) But such shifts are common in insurance and are corrected by rate differential analysis
3) It is possible that harm is done before a new analysis can correct the situation
4) There is no evidence so far of a dramatic shift in credit scores

Question 4

AAA CREDIT SCORES

4 advantages of credit-based insurance scores as seen by insurers

Answer 4

1) Statistically reliable tool for segmentation
2) Match better premium and costs
3) Strong correlation between scores and costs
4) Allows expansion of availability through its use in multivariate rating

Question 5

AAA CREDIT SCORES

Define credit-based insurance score

Answer 5

-Insurance score using various attributes in a credit report:
-number of inquiries to open new accounts
accounts 30 days or more past due
-They are strongly correlated with the expected costs

Question 6

AAA CREDIT SCORES

Define insurance score

Answer 6

numerical score assigned to an insurance risk, based on the risk underlying characteristics

Question 7

AAA CREDIT SCORES

Arguments for the use of Credit Scores

Answer 7

• statistically significant relationship to expected loss
• easily obtainable
• objective variable that cannot be manipulated
• allows insurers to insure more people

Question 8

AAA CREDIT SCORES

Arguments against the use of Credit Scores

Answer 8

• discriminatory to various groups (young, recent immigrants, elders)
• seen as invasion of privacy
• extraordinary event can impact credit info (divorce, ID theft) but should not impact insurance premium
• expensive to obtain