CREDIT-BASED INSURANCE SCORES

Question 1

SECT A: CREDIT-BASED INSURANCE SCORES

DEFINITON OF CBIS

Answer 1

NUMERICAL VALUE/RANKING OF RELATIVE RISK OF APPLICANT BASED ON UNDERLYING CHARACTERISTICS & ITEMS FOUND IN CREDIT REPORT

Question 2

SECT A: CREDIT-BASED INSURANCE SCORES

USES OF CBIS (3)

Answer 2

PREVENT RATE SUBSIDIZATION/ACTUARIALLY UNFAIR RATES/ADVERSE SELECTION BY
1. DETERMINE WHETHER RISK QUALIFIES TO BE WRITTEN
2. TREAT AS RATING FACTOR/RISK CLASSIFICATION FACTOR TO SEGMENT RISKS
3. ASSIGN TO APPROPRIATE TIER OF EXPECTED COST

Question 3

SECT A: CREDIT-BASED INSURANCE SCORES

USES IN RATING

Answer 3

(+) Prevent rate subsidization/actuarially unfair rates/adverse selection by
(+) Determine whether risk qualifies to be written
(+) Treat as rating factor/risk classification factor to segment risks
(+) Assign to appropriate tier of expected cost
(-) Sole basis for decision
(-) Cancel/non-renew/increase rates
(-) Ban use in renewals
(-) Ban use in auto insurance

Question 4

SECT A: CREDIT-BASED INSURANCE SCORES

IMPACT ON ECONOMIC CRISIS

Answer 4

1. Aggregate premium -> no long-term impact on overall prem
    assume
2. Same rate relativities
3. Economic crisis causes every insured’s CBIS to worsen
    Distributional shift -> actuary would adjust overall rate levels
    Overall premium constant with rate relativities intact
4. Individual premium – insurers will adjust classification plans so that rate differentials reflect change, but data doesn’t suggest change in rate differentials
    May need more time to see impact
    Renewals (bulk of insurers’ book) are less impacted

Question 5

SECT A: CREDIT-BASED INSURANCE SCORES

PROS & CONS

Answer 5

(+) strong correlation with expected costs
(+) actuarially sound estimate of expected value of all future expected costs of risk transfer
(+) avoid rate subsidization
(-) strong correlation with race/ethnicity
(-) no significant diff in severity; only higher frequency among lower CBIS => wealthier/higher CBIS can afford to pay out of pocket on smaller losses
(-) unfairly discriminates against those with poor credit
1. recent divorcees
2. recent grads
3. recently naturalized citizens
4. elderly
5. religious groups that do not use credit
(-) financial crisis magnified differences among vulnerable populations; applies to COVID too
• unemployment increased
• foreclosures increased
• inflation of goods increased

Question 6

SECT A: CREDIT-BASED INSURANCE SCORES

FORMS OF STATE SANCTIONS ON CBIS (4)

Answer 6

1. BAN USE IN AUTO INSURANCE
2. BAN USE IN RENEWALS
3. PROHIBIT USE TO CANCEL/NON-RENEW/INCREASE RATES
4. DISALLOW USE AS SOLE BASIS FOR DECISION