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Flashcards in G4. Credit Deck (18):

Describe how insurers use credit-based insurance scores.

-Some insurers use 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)
->May be used to assign risk to the appropriate tier


What constitutes a credit-based insurance score?

-Ranking 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
-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


Briefly describe 2 ways in which credit scores can be used to segment risks into homogenous groups for rating:

1. May be used directly as a rating factor (a.k.a. risk classification factor)
2. May be used to assign risk to the appropriate tier


Briefly describe why credit scores are a statistically reliable tool for segmenting risks with different expected costs:

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


What were the concerns about how the economic crisis would affect overall insurance costs and prices:

Some regulators concerned that if insurance scores worsen, it will lead to unwarranted premium increases


According to Kucera, what is the effect on premiums of not using credit-based insurance scores?

-It will not lower overall insurance premium, 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


Argue for and against the use of credit-based insurance scores in personal lines insurance.

-Scores are predictive of an insured's future claims experience
-Necessary tool for underwriting and/or rating

-Example of imposed discrimination against lower income individuals and protected classes of people
-Studies show use of scores disparately impacts certain classes of people


Explain why a distributional shift is likely to have a smaller effect on renewal business:

Some states / companies only allow use of scores for renewals if it reduces insured's premium


List 4 inherent weaknesses in the credit reporting system:

1. 2000 study by Consumer Reports showed 50% of credit reports contained errors
2. Identity theft
3. Excessive access to credit as evidenced by the problems in the mortgage industry
4. Credit reports disproportionately negatively affect certain parties


2 classes of people adversely impacted by the use of credit scores in insurance:

1. Lower income individuals
2. Protected classes of people


Explain how a downturn in the economy could impact different segments of the population:

It could potentially magnify differences in credit scores among vulnerable populations


List some parties disproportionately negatively affected in the credit scoring process:

-Recent divorcees
-Recently naturalized citizens
-Those with certain religious convictions
-Younger individuals who have not established credit histories


Provide a reason that the consumers with low credit scores file more claims

Possible that frequency of insured loss events is the same across populations, but that those with higher scores are less likely to file a claim


According to empirical data, is there a relationship between the credit score and frequency/ severity of claims:

No significant difference in magnitude of claims, only frequency: Consumers with lower credit scores file more claims


How did the judge respond to the 4 legal challenges that insurers used to oppose the limits imposed by the Florida legislature:

Judge ruled against all but the last. He did agree that "disproportionate impact" needs to be defined more comprehensively


The Florida Legislature limited use of credit-based scores in 2003 for PPA and HO. List the 4 legal challenges that insurers used to oppose these limits:

-FL Office of Reg didn't have the authority to prevent use of credit scoring as underwriting/rating tool
-Office did not have authority to define term "unfairly discriminatory" as in statute
-Insurers didn't have necessary data to demonstrate effect of credit scoring on protected classes
-Definition of "disproportionate impact" was too vague


Two other variables that McCarty is concerned about being used in insurance and why

Occupational ratings and education levels
-Concerned these are proxy for race


Why was McCarty disappointed with 2007 FTC report

-Asked if credit scoring solely a proxy for race
-->clearly not a direct substitute
-Not an objective analysis
-->concerned that data supplied selected to show best case for using scores
-No premium data used
-Narrative appeared one sided