By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
SmartData Collective
  • Analytics
    AnalyticsShow More
    data science anayst
    Growing Demand for Data Science & Data Analyst Roles
    6 Min Read
    predictive analytics in dropshipping
    Predictive Analytics Helps New Dropshipping Businesses Thrive
    12 Min Read
    data-driven approach in healthcare
    The Importance of Data-Driven Approaches to Improving Healthcare in Rural Areas
    6 Min Read
    analytics for tax compliance
    Analytics Changes the Calculus of Business Tax Compliance
    8 Min Read
    big data analytics in gaming
    The Role of Big Data Analytics in Gaming
    10 Min Read
  • Big Data
  • BI
  • Exclusive
  • IT
  • Marketing
  • Software
Search
© 2008-23 SmartData Collective. All Rights Reserved.
Reading: Is Big Data Causing Insurance Actuaries to Move Away from Using Credit Scores?
Share
Notification Show More
Latest News
ai in automotive industry
AI Is Changing the Automotive Industry Forever
Artificial Intelligence
SMEs Use AI-Driven Financial Software for Greater Efficiency
Artificial Intelligence
data security in big data age
6 Reasons to Boost Data Security Plan in the Age of Big Data
Big Data
data science anayst
Growing Demand for Data Science & Data Analyst Roles
Data Science
ai software development
Key Strategies to Develop AI Software Cost-Effectively
Artificial Intelligence
Aa
SmartData Collective
Aa
Search
  • About
  • Help
  • Privacy
Follow US
© 2008-23 SmartData Collective. All Rights Reserved.
SmartData Collective > Analytics > Predictive Analytics > Is Big Data Causing Insurance Actuaries to Move Away from Using Credit Scores?
AnalyticsBig DataPredictive Analytics

Is Big Data Causing Insurance Actuaries to Move Away from Using Credit Scores?

Annie Qureshi
Last updated: 2018/05/23 at 7:14 PM
Annie Qureshi
5 Min Read
big data predictive analytics credit score
Shutterstock Licensed Photo - By Panchenko Vladimir
SHARE

Insurance companies have literally spent decades fine-tuning their actuarial models. In the 1990s, they began using credit scores to assess the risks of customers and set premiums accordingly. Laws permitting credit score use with insurance companies vary from state to state. However, around 95% of auto insurance companies use credit scores in their actuarial algorithms.

Contents
Insurers have a more nuanced understanding of consumer credit risksInsurers may start abandoning credit scores in the near future

Advances in consumer analytics are challenging this 20-year-old convention. Big data may render credit-based insurance policies obsolete.

Here are some reasons big data is disrupting the insurance industry.

Insurers have a more nuanced understanding of consumer credit risks

Credit scores were developed long before the era of big data. Since brands could only assess a much more limited amount of data at a time, they needed to condense consumer credit worthiness into a single figure. After reviewing policies on the PolicyBazaar App, we can see the implications of some of these new big data models already.

More Read

data security in big data age

6 Reasons to Boost Data Security Plan in the Age of Big Data

How Big Data Is Transforming the Maritime Industry
Predictive Analytics Helps New Dropshipping Businesses Thrive
Utilizing Data to Discover Shortcomings Within Your Business Model
Small Businesses Use Big Data to Offset Risk During Economic Uncertainty

While credit scores have proven their value over the years, they provide an eclipsed picture of customers actual credit risk. Here are a couple of issues with the traditional credit scoring system:

  • Due to the way that credit scores are weighted, a minor or one-time issue can significantly bias the model against an otherwise credit worthy individual. For example, an individual that has suffered a serious medical emergency can face overwhelming medical debt, which adversely affects their score for years to come. That impact may have a little bearing on their real credit risk.
  • Approximately 30% of the credit score model is based on the longevity of their existing lines of credit. Some experts have criticized this model, because it may actually be biased against the most creditworthy individuals. These people may have lower credit scores come in because they never actually took out a credit card or a loan. This may be an indicator that they are being penalized for being frugal and living within their means.

This model is obviously imperfect for financial lenders, credit card companies and retailers that need to issue lines of credit. It is even less dependable for insurance providers. The fact that a person never took out a credit card or has extensive outstanding debt from a decade ago has a little relevance to their ability to pay their premiums or demonstrate that they are responsible as a driver or homeowner.

This is why insurers are using big data to make more nuanced decisions about the credit risks that their customers present. They may find that certain variables that are incorporated into credit scoring algorithms overstate a customers dependability. A customer could have a high credit score, because they have made the vast majority of their payments on time over the past seven years and have used little of their debt. However, they may have recently started using or if their credit card debt and missed three of the last seven payments on their existing insurance policy. This could be an indication that they have recently suffered a job loss or other financial setback, which is not reflected in their current credit score.

There are other reasons that insurers are skeptical of using credit scores in the age of big data. One analysis shows that big data has helped insurers recognize that credit-based insurance policies are increasing the risk of unjust racial profiling.

Insurers may start abandoning credit scores in the near future

The exact implications of big data for insurance companies are still unclear. However, new analytics models are revealing the limitations and fallacies of credit-based insurance models. This could cause them to upend existing underwriting policies and start relying on a more data-intensive approach.

TAGGED: big data, big data helps insurance industry, predictive analytics
Annie Qureshi May 22, 2018
Share this Article
Facebook Twitter Pinterest LinkedIn
Share
By Annie Qureshi
Follow:
Annie is a passionate writer and serial entrepreneur. She embraces ecommerce opportunities that go beyond profit, giving back to non-profits with a portion of the revenue she generates. She is significantly more productive when she has a cause that reaches beyond her pocketbook.

Follow us on Facebook

Latest News

ai in automotive industry
AI Is Changing the Automotive Industry Forever
Artificial Intelligence
SMEs Use AI-Driven Financial Software for Greater Efficiency
Artificial Intelligence
data security in big data age
6 Reasons to Boost Data Security Plan in the Age of Big Data
Big Data
data science anayst
Growing Demand for Data Science & Data Analyst Roles
Data Science

Stay Connected

1.2k Followers Like
33.7k Followers Follow
222 Followers Pin

You Might also Like

data security in big data age
Big Data

6 Reasons to Boost Data Security Plan in the Age of Big Data

7 Min Read
How Big Data Is Transforming the Maritime Industry
Big Data

How Big Data Is Transforming the Maritime Industry

8 Min Read
predictive analytics in dropshipping
Predictive Analytics

Predictive Analytics Helps New Dropshipping Businesses Thrive

12 Min Read
utlizing big data for business model
Big Data

Utilizing Data to Discover Shortcomings Within Your Business Model

6 Min Read

SmartData Collective is one of the largest & trusted community covering technical content about Big Data, BI, Cloud, Analytics, Artificial Intelligence, IoT & more.

AI chatbots
AI Chatbots Can Help Retailers Convert Live Broadcast Viewers into Sales!
Chatbots
giveaway chatbots
How To Get An Award Winning Giveaway Bot
Big Data Chatbots Exclusive

Quick Link

  • About
  • Contact
  • Privacy
Follow US

© 2008-23 SmartData Collective. All Rights Reserved.

Removed from reading list

Undo
Go to mobile version
Welcome Back!

Sign in to your account

Lost your password?