AAA.CrdSc

Question 1

define credit score

Answer 1

an insurance score using attributes found in a credit report

Question 2

define insurance score

Answer 2

numerical score assigned to an insurance risk based on a risk’s underlying characteristics

Question 3

what are credit scores used for

Answer 3

• uw criterion
• rating variables
• assignment to tiers (RSP or FARM)

Question 4

2 arguments in supporting of using credit score

Answer 4

1) statistically significant:
- high cs individuals have lower claim costs so it improves segmentation and afforability
2) good rating variable: easy to calculate, objective, verifiable

Question 5

3 arguments against using credit score

Answer 5

• unfairly discriminatory: poor families, recent immigrants
• privacy concerns: too invasive
• accuracy: credit bureau errors or identity theft may cause inaccurate credit data
• high cs insureds: often pay small claims out of pocket so their true costs may be understated

Question 6

regulators’ concerns in economic crisis

Answer 6

1) on aggregate premium
- an unwarranted increase: a new rating variable alone should not increase aggregate premium
2) on individual premium
- a distributional shift (when economic crisis causes every insured’s score to worsen) that does not reflect true cost differences

Question 7

actuary’s response to regulator’s concerns over credit score use after economic crisis

Answer 7

1) for aggregate premium:
- insurers use insurance scores to determine appropriate rate relationships between risk classes, not overall premium needed
- apply OBF to reverse aggregate change
2) for individual premium:
- stop using cs (at least temporarily)
- redo classification analysis after economy has stabilized

Question 8

S2016Q3
provide support in favour of using the number of dental visits in the past 12 months as a insurance rating criterion

Answer 8

• number of dental visits is statistically significant and predictive of claim costs
• easy to calculate, objective, verifiable

Question 9

S2016Q3
regulator approves to use number of dental visits as a rating variable. 5 years later, a study recognizes that increase in dental fees has led to 10% reduction to annual dental visits. Defend the regulator’s decision to maintain this rating variable.

Answer 9

• The number of visits is reduced across the driving population, therefore when calculating the rate differential using new data, the relative proportion will not change.
• Total aggregate premium will not change because of the reduction. Actuary will regularly review data available and make sure rating calculation is updated accordingly
• OBF will be used to adjust the overall premium level if necessary

Question 10

S2016Q3
The privacy commissioner rules that number of dental visits in the past 12 months constitutes personal information and requires informed customer consent. Identify 2 elements that should be included in the consent request to the customer.

Answer 10

• what personal information will be collected
• the circumstances under which personal information may be disclosed to other parties

Question 11

F2017Q2
insurer believes recent improvements in economic conditions reduce the need to segregate by credit because “most phs are now in a good economic situation”.
Fully discuss the appropriateness of using credit based insurance scores for risk differentiation

Answer 11

• credit score is statistically significant to the expected loss, it is easy to obtain/verify and hard to manipulate by insured.
• even if credit scores at the aggregate level are on the rise and high for most phs, the relative risk difference between two credit scores will not change.
• this will not lead to overall increase in premium, but rather a better distribution among risks and avoid subsidization between low and high risks.

Question 12

F2017Q2
insurer believes recent improvements in economic conditions reduce the need to segregate by credit because “most phs are now in a good economic situation”.
discuss the need to review cs consent forms for all phs, citing an outcome from a landmark decision

Answer 12

• If the company finds that its consent form is deficient, it will likely be required to follow the results of the PIPEDA report. - It will need to update its current consent form, inform all current phs of the new consent form and obtain consent.
• The insurer will not have to obtain from all historical phs, as this would put strain on the company and broker network.

Question 13

F2017Q2
insurer believes recent improvements in economic conditions reduce the need to segregate by credit because “most phs are now in a good economic situation”.
Discuss the need to review credit based insurance scores after a change in economic conditions

Answer 13

• a change in economic condition will cause distributional shift in credit scores
• this will be addressed by pricing actuaries, and they will adjust the rates accordingly
• cs is not used to set overall premium, just to redistribute it fairly according to expected loss. so the overall premium will not be impacted