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Why credit scores are on the decline
- major economic crisis has imposed considerable hardship on individuals and businesses
- severe tightening of the credit markets
- increasing number of Americans are experiencing loss of income
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Arguments for the use of credit-based insurance score
- there is a strong correlation between CBIS and the expected costs associated with the risk
- Principle 4 of CAS Ratemaking SoP: rate is an actuarially sound estimate of future costs
- ASOP No. 12, Risk Classification: relationship of risk characteristics and expected cost
- removal of CBIS will not lower overall premium, but only redistribute it so risks with lower expected costs will pay more, and those with greater expected costs will pay less.
- most companies report that the use of CBIS have allowed them to write more risks from the general population
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Effect of economic conditions on CBIS
- impact on aggregate premium: actuaries would observe the distributional shift and adjust overall rate levels so that the total premium collected remains the same
- impact on individuals’ premium: insurers can adjust classification to reduce differentials
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