Kucera.Credit

At an NAIC hearing in 2009, Jeff Kucera (AAA member) discussed credit scoring as a rating variable. Although credit scores can be distorted by downturns in the economy, he felt that credit score is a good rating variable.

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Pop Quiz

For a medical procedure, informed consent means that the doctor explained the procedure and risks to the patient, then verified that the patient understood. The same thing applies to a P&C insurer planning to use a customer's credit score. Is informed consent satisfied if an insurer states somewhere on their website that credit score may be used in rating?

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• how an economic downturn relates to the use of credit scores
• ...

reference	part (a)	part (b)	part (c)
E (2017.Fall #1)	economic downturn: - adjustments for	credit scores: - other regulator concerns	credit scores: - actions limiting use
E (2016.Fall #2)	economic downturn: - regulator concerns	economic downturn: - impact on rate filing	economic downturn: - rate caps & pricing principles
E (2014.Spring #5)	credit scores: - advantages	credit scores: - reasons for not using (McCarty)	economic downturn: - xxxx

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In Plain English!

Definition of Credit Score

This is a pretty easy paper. An insurance score is a numerical score assigned to an insurance risk based on a risk's underlying characteristics. And a credit score is an example of an insurance score that uses attributes found in a credit report. (2014.Fall #4a)

When I hear the term credit score, here is what pops into my head:

Credit scores are highly predictive of claims costs, but many people think their use is unfair. The use of credit scores as a rating variable is banned in many jurisdictions.

Let's try to understand what this is all about. First, what specifically would insurers like to use credit scores for: (2012.Fall #3a)

• as an U/W criterion
• as a rating variable
• for assignment to tiers (and/or RSPs or FARM (Facility Association Residual Market))

So, if you have a low credit score, you may be outright rejected or you may be charged a high rate. But it also works the other way: If you have a good credit score, you'll likely get a lower rate. The issue that regulators have is that credit scores may be unfairly discriminatory and that would violate one of the main principles of actuarial pricing.

mini BattleQuiz 1 You must be logged in or this will not work.

Social Concerns

The use of credit scores can have an impact on the aggregate premium a company collects, and/or on the individual premium of a specific customer. (Keep this distinction in mind.) Here is a straightforward exam question from (2017.Fall #2a).

Question: what are some arguments for and against the use of credit scores

for: credit scores are statistically significant and that removing credit scores won't change aggregate premium.

against: credit scores are unfairly discriminatory (poor families, recent immigrants), and privacy concerns.

An interesting question that has appeared twice (2014.Fall #4bc), (2012.Fall #3b) is about regulators' concerns over credit scores in an economic downturn. This is important to consider given the cyclical nature of the economy. There could be:

• 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 you job doesn't mean you'll have more car accidents)

Of course, the actuary always has a great response to regulators! Alice the actuary would simply tell them:

1. We can apply an off-balance factor to keep the aggregate premium unchanged.
2. Regarding individual premiums, we can stop using credit score (at least temporarily) and redo the classification analysis after the economy has stabilized (this may incur a significant lag time however)

In the next mini BattleQuiz, it looks like I've included duplicate questions, but if you click on the "E" to see the actual exam problem, you'll see the way they asked the question is different.

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Related Syllabus Readings

To round out your study of credit scoring, take a quick look at IBC.Code

Recall also that in Land.Cases, legal case #11,PIPEDA Report of Findings, concerned the use of credit scores in Ontario property insurance.

• Note that in Ontario, the use of credit scores for property insurance is legal, but for auto insurance it is not.

PIPEDA BattleQuiz You must be logged in or this will not work.

BattleCodes

Memorize:

• defn of credit score
• uses of credit score
• arguments for and against using credit scores
• regulators' concern in an economic crisis & actuary's response

Conceptual:

• Can you integrate the info from this reading with the other parts of the syllabus that are related?

Calculational:

• none

Full BattleQuiz You must be logged in or this will not work.

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POP QUIZ ANSWERS

No. Burying information in a website does not satisfy informed consent. See the PIPEDA BattleQuiz in this article.