Cookies help us display personalized product recommendations and ensure you have great shopping experience.

By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
SmartData CollectiveSmartData Collective
  • Analytics
    AnalyticsShow More
    big data analytics in transporation
    Turning Data Into Decisions: How Analytics Improves Transportation Strategy
    3 Min Read
    sales and data analytics
    How Data Analytics Improves Lead Management and Sales Results
    9 Min Read
    data analytics and truck accident claims
    How Data Analytics Reduces Truck Accidents and Speeds Up Claims
    7 Min Read
    predictive analytics for interior designers
    Interior Designers Boost Profits with Predictive Analytics
    8 Min Read
    image fx (67)
    Improving LinkedIn Ad Strategies with Data Analytics
    9 Min Read
  • Big Data
  • BI
  • Exclusive
  • IT
  • Marketing
  • Software
Search
© 2008-25 SmartData Collective. All Rights Reserved.
Reading: Is Big Data Causing Insurance Actuaries to Move Away from Using Credit Scores?
Share
Notification
Font ResizerAa
SmartData CollectiveSmartData Collective
Font ResizerAa
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
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 Mining Book Review: Competing on Analytics
Automation and the Danger of Lost Knowledge
Signals sinchronizer and its role in automated perceptural voice quality testing
Key Tips to Writing Linux Device Drivers for Big Data Environments
Cutting-Edge Strategies to Better Utilize Financial Data

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 databig data helps insurance industrypredictive analytics
Share This Article
Facebook Pinterest LinkedIn
Share
ByAnnie 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

financial data
Engineering Trust into Enterprise Data with Smart MDM Automation
Big Data Exclusive
christina wocintechchat com 6dv3pe jnsg unsplash
How CIS Credentials Can Launch Your AI Development Career
Exclusive News
big data analytics in transporation
Turning Data Into Decisions: How Analytics Improves Transportation Strategy
Analytics Big Data Exclusive
AI and fund manager software
AI And The Acceleration Of Information Flows From Fund Managers To Investors
Artificial Intelligence Exclusive

Stay Connected

1.2kFollowersLike
33.7kFollowersFollow
222FollowersPin

You Might also Like

predictive analytics and cryptocurrency trading
Blockchain

Can Predictive Analytics Identify Future Crypto Profitability?

10 Min Read

The Big Data Industry in Detail: Biggest Players, Biggest Revenues and More [INFOGRAPHIC]

2 Min Read

Fight Back Against Black Swan Fatigue

5 Min Read

Analytics and Big Data – Press pause on the Stairmaster

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 chatbot
The Art of Conversation: Enhancing Chatbots with Advanced AI Prompts
Chatbots
AI and chatbots
Chatbots and SEO: How Can Chatbots Improve Your SEO Ranking?
Artificial Intelligence Chatbots Exclusive

Quick Link

  • About
  • Contact
  • Privacy
Follow US
© 2008-25 SmartData Collective. All Rights Reserved.
Go to mobile version
Welcome Back!

Sign in to your account

Username or Email Address
Password

Lost your password?