Actuaries Have Special Role When Explaining Credit Scores and Losses
National News • November 16, 2007
By explaining why there is an association between credit scores and insurance losses, insurers and actuaries can promote a better understanding of why credit scores are a useful underwriting tool, ...
Insurance Journal is not responsible for the content of the message below.
Subject: RE: The other WHY of Credit Scoring
Posted On: November 16, 2007, 2:15 pm CST
Posted By: Patrick Butler
Comment:
Here's a letter I sent to participants of the CAS modeling meeting reported on:
Dear Participant,
Re: Exhibit about the FTC Report on Credit-Based Automobile Insurance Scores
NOW's seminar exhibit supplies the economic logic noted but not developed in the recent FTC Report to explain what causes the correlation of more claims with lower credit scores.
Not only lower credit scores but every group indicator of tight budgets (such as lower income zip codes and lower paid occupations) must predict more miles per car for the group and therefore more claims per 100 car years. WHY? Because pay-by-the-car, all-you-can-drive premiums cause financially constrained drivers to insure fewer cars and drive each more miles. This explanation is further documented by these two items:
1) Texas NOW fact sheet (2003) "Mandatory Automobile Insurance . . . Why high premiums for low-credit-score or low-income drivers can't be regulated away!" Side 2 describes the free-market, cents-per-odometer-mile remedy. (#736 on website)
2) Short paper (2007) "Why Low Credit Scores Predict More Auto Liability Claims: Two Theories" (to appear in the Journal of Insurance Regulation and available at the exhibit). (The negligent driver theory discussed in the paper is supported by the biological correlates study by Credit Scoring Update panelists Brockett and Golden.)
Although the FTC Report presents a truncated version of the economic logic (page 32, citing a 2006 academic paper of mine), it does not consider the inevitability of the correlation of more claims with lower credit scores caused by a need to economize on car insurance. Furthermore, the report states without discussion that "companies find it difficult to capture information on 'miles driven' with a great deal of accuracy," and ignores the study published in the 1993 CAS Forum (referenced in my 2006 paper) on the practical application of per-mile premiums under state insurance law and the 1972 Federal Odometer Act.
For high car insurance prices there is no such thing as "no cause." By default, drivers with financial problems are currently assumed to be negligent drivers. NOW posits instead that these drivers are no different from other drivers but are economizing by insuring fewer cars, which, as illustrated by the enclosed fact sheet, must lead to high car insurance prices.
Please stop by the NOW exhibit for further information. I can also be reached at 202.628.8669, ext. 148, or by email: pbutler@centspermilenow.org.
Sincerely,
Patrick Butler
Subject: RE: The other WHY of Credit Scoring
Dear Participant,
Re: Exhibit about the FTC Report on Credit-Based Automobile Insurance Scores
NOW's seminar exhibit supplies the economic logic noted but not developed in the recent FTC Report to explain what causes the correlation of more claims with lower credit scores.
Not only lower credit scores but every group indicator of tight budgets (such as lower income zip codes and lower paid occupations) must predict more miles per car for the group and therefore more claims per 100 car years. WHY? Because pay-by-the-car, all-you-can-drive premiums cause financially constrained drivers to insure fewer cars and drive each more miles. This explanation is further documented by these two items:
1) Texas NOW fact sheet (2003) "Mandatory Automobile Insurance . . . Why high premiums for low-credit-score or low-income drivers can't be regulated away!" Side 2 describes the free-market, cents-per-odometer-mile remedy. (#736 on website)
2) Short paper (2007) "Why Low Credit Scores Predict More Auto Liability Claims: Two Theories" (to appear in the Journal of Insurance Regulation and available at the exhibit). (The negligent driver theory discussed in the paper is supported by the biological correlates study by Credit Scoring Update panelists Brockett and Golden.)
Although the FTC Report presents a truncated version of the economic logic (page 32, citing a 2006 academic paper of mine), it does not consider the inevitability of the correlation of more claims with lower credit scores caused by a need to economize on car insurance. Furthermore, the report states without discussion that "companies find it difficult to capture information on 'miles driven' with a great deal of accuracy," and ignores the study published in the 1993 CAS Forum (referenced in my 2006 paper) on the practical application of per-mile premiums under state insurance law and the 1972 Federal Odometer Act.
For high car insurance prices there is no such thing as "no cause." By default, drivers with financial problems are currently assumed to be negligent drivers. NOW posits instead that these drivers are no different from other drivers but are economizing by insuring fewer cars, which, as illustrated by the enclosed fact sheet, must lead to high car insurance prices.
Please stop by the NOW exhibit for further information. I can also be reached at 202.628.8669, ext. 148, or by email: pbutler@centspermilenow.org.
Sincerely,
Patrick Butler