The Race to Find the Next Insurance Credit Score (or How, Maybe, to Reinvent P/C Insurance Pricing)
What is an insurance credit score?
What is an insurance credit score? Basically it is a set of algorithms applied to data from credit reports which provide guidance for pricing and underwriting personal lines insurance. Although it has been a source of political and regulatory controversy over the years, the use of insurance credit scores is now widespread.
Much of the controversy has been over possible disparate impacts on various societal groups. But a root cause of the controversy has been the non-intuitive relationship between a given person’s use or misuse of credit on the one hand—and that person’s probability of incurring insured losses on the other hand. It just doesn’t seem to make much sense. But statistically, there are correlations, which in general have passed regulatory review.
Insurance credit score controversies now ancient history (i.e. were settled before most millennials graduated from high school).
But suddenly something interesting is happening.
The race is on to find the next insurance credit score—and the winners (if there are winners) will gain a pricing (and underwriting) edge.
There are only two requirements to enter in this race.
- You have to forget about all the kinds of data and information that insurers have been using to price and underwrite risks.
- You have to use your digital imagination to find some new data and models which provide the same or better lift as the old data and models which you have just thrown out the window. (Lift is the increase in the ability of a new pricing model to distinguish between good and bad risks when compared to an existing pricing model.)