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Definition of What Constitutes a Credit-Based Insurance Score
- Numerical score assigned to an insurance risk based on attributes found in a credit report, which is used for pricing and UW
- Examples of attributes: # of inquiries into opening new accounts, accounts >= 30 days past due
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2 uses of credit-based insurance scores
- UW: to determine whether an insured qualifies to be written
- Pricing: Segment risks into different groups with similar expected costs for risk classification
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Arguments against credit scores
- Affected by eco downturn
- Causal effect difficult to understand for insured
- Discriminate against certain groups (e.g. recent immigrants)
- Potential errors in reports
- Can be seen as invasion of privacy
- Can be affected by extraordinary life event
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Arguments for credit scores
- Credit scores and expected costs are correlated -> predictive and differentiate between risks
- Used to distribute premium fairly to avoid subsidization, not to determine average rate / total premium
- Easily obtained
- Objective; can’t be manipulated
- Better pricing -> increase availability
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Review of Credit-Based Insurance Scores after change in Eco conditions on p.h. Premiums
- Impact on agg premium
- may cause everyone's score to worsen (distributional shift) leading to increase in avg rates
- but actuary would adjust accordingly so avg rate is not impacted by this as credit score is used to differentiate not to determine overall premium need
- Impact on individuals’ premium
- review if any changes to relationship between credit score groups (if so, differentials would change)
- part of Actuary's job to regularly review differentials for all variables to make sure they are actuarially sound regardless of the circumstances
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