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Presentation to the Casualty Actuarial Society Predictive Modeling Conference on October 11, 2007, Las Vegas, Nevada PowerPoint Presentation
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Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works Patrick Brockett ( brockett@mail.utexas.edu ), and Linda Golden ( mkllg@mail.utexas.edu )

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Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring WorksPatrick Brockett(brockett@mail.utexas.edu),andLinda Golden(mkllg@mail.utexas.edu)

Presentation to the Casualty Actuarial Society Predictive Modeling

Conference on October 11, 2007, Las Vegas, Nevada

reference for details
Reference for details:
  • Brockett, Patrick L. and Linda L. Golden “Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring Works,” Journal of Risk and Insurance, Vol 74(1), March 2007. 23-63.
  • Available electronically from JSTOR, Blackwell Publishing, accessible from www.ARIA.org, or by emailing the authors
  • 75 Copies available at the meeting
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The most important development in the past two decades in personal lines of insurance may well be the use of an individual’s credit history as a classification and rating variable to predict losses.
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Empirical Relationship Demonstrated

The statistical evidence between insured losses and credit score has been repeatedly demonstrated.

Very strong correlation between a bad credit score and increased insurance losses.

Research Examples. . . . . .

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Tillman and Hobbs (1949): drivers with bad credit history have repeated crashes at a rate six times higher than those with good credit history.
  • Washington state study (1968): within the group with a history of no automobile accidents, 64% had good credit and 35% had bad credit-- among group with two or more automobile accidents, 35% had bad credit, -- almost twelve times the percentage (3%) who had good credit
  • Other correlates: divorce, legal problems, job turnover, lower education
a man drives as he lives

“…a man drives as he lives.”

Research Results Summarized

Tillman and Hobbs, 1949

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The purpose of this research is to present a “missing link” explaining why credit scores are associated with insurance losses.

The outcome of the debate over the use of credit scoring has implications for the social acceptability of Actuarial Standard #12, and has implications for other variables useful for underwriting.

heuristic model
Heuristic Model
  • Insured Loss = f(X1,X2)
  • Credit Score = g(Y1,X2)

Where:

X1 denotes a vector of automobile specific characteristics,

X2 denotes a vector of person specific psychological (and possibly biological) characteristics, and

Y1 denotes a vector of credit specific attributes

  • Proposition: The correlation between Insured Losses and Credit Score is high and positive because of the common vector factor X2 (which is in turn correlated with both X1 and Y1 ).
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Bio-

chemical

Psycho-

behavioral

Profile

Insured

Auto

Losses

Risk Taking

Behavior

(Driving)

Risk Taking

Behavior

(Financial)

Credit

Score

Simplified Model of Conjunctive Influences between

Insured Losses and Credit

the core idea
The Core Idea
  • Connector between risk taking behavior in automobile insurance losses and credit scores and financial risk taking is the psychological dimension.
  • Most easily identified psychological characteristic is the personality type known as “sensation seeking” or “novelty seeking.” It is related to responsibility and risk taking.
psychobehavioral profile of sensation seeking novelty seeking

Reduced Deliberation

Reduced Perceived Risk

Overestimation of Skills

Increased Perceived Benefits

Risky Behaviors

Risky Driving

High Risk Occupations

Drinking/

Drug Use

High Risk Sports

Drinking/ Driving

Reduced Personal Responsibility

1These terms are often used interchangeably in the literature. The “sensation seeking” term comes from Zuckerman (1979) and “novelty seeking” is attributable to Cloninger (1987).

Psychobehavioral Profile of Sensation Seeking/Novelty Seeking
if serotonin is the brakes dopamine is the accelerator in the drive to risky behavior
“If serotonin is the brakes, dopamine is the accelerator in the drive to risky behavior.”

A Biological Component

Zuckerman and Kuhlman, 2000

biochemical and psychobehavioral profile of sensation seeking novelty seeking

Low Levels of MAO-A

Low Levels of MAO-B

High Levels of Norepinephrine

Corticosterone

High Levels of Dopamine

High Levels of Testosterone

Low Levels of Serotonin

Low Levels of Cortisol

Marriage

Stress

Depression

Exploration

Employment

Impulsivity

High SES

Amplifies reaction to stimuli

Arousal

Antisocial Behavior

LEGEND

Low Intellect

Biochemicals

Low Education

Risk Taking Responses

SENSATION SEEKING

Low Occupational Status

Socio-cultural Outcomes

Mediating Factors

1These terms are often used interchangeably in the literature. The “sensation seeking” terms comes from Zuckerman (1979) and “novelty seeking” is attributable to Cloninger (1987).

Biochemical and Psychobehavioral Profile of Sensation Seeking/Novelty Seeking
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Influences on sensation seeking and novelty seeking have implications for automobile insurance losses.
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Potential Biochemical Influeners

Driver Psycho-behavioral Profile

Risky Driving Behavior

Accident Characteristics

Post-Accident Decisions and Influences on Loss Amount

Loss Incurred by Insurer

Monoamine Oxidase

Impulsive Driving Decisions

Insured’s Possible Claim Size Build-Up

Risk Appraisal Judgments

Cortisol

3rd Party at Fault Accident

Inattentive to Details or Environment

Serotonin

Risk Perceptions Judgments

Actual Paid Insurance Losses

Norepinephrine

At Fault Accident

Actual Loss to Insured

Reported Loss to Insurer

Distractibility/ Lack of Focus

Dopamine

Insured’s Reporting Decision

Sensation Seeking/Novelty Seeking

Accident Caused by Act of God

Corticosterone

Aggressive/ Antisocial Behavior

Prior Policy Limits & Policy Coverage Decisions by Insured

Insured’s Loss

Mitigation Activities

Testosterone

Irresponsibility Regarding Driving Behavior

Biochemical Psycho-behavioral System Feedback

Vehicle Characteristics

Prior Deductible Choice by Insured

Other High Risk- Taking Behaviors

Driver Psychological and Economic Profile Influences

Driver Characteristics & Demographics

Age, Gender, Marital Status, Education, SES, Rural/Urban/Inner City Dweller

Comprehensive Overview of Biochemical and Psychobehavioral Influences Related to Paid Automobile Insurances Losses
slide18
Financial decision making is also

related to psychobehavioral and

biochemical variables.

slide19
Brown and Harlow (1990) examined blood samples and determined that financial risk taking is related to blood chemistry.

Other research has shown sensation seeking/novelty seeking is related to financial decision making……….

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Reduced risk perception and risk appraisal play an important role in the individual’s propensity for sensation seeking which, in turn, is an integral part of the individual’s financial decision making.
  • Risk tolerance is evident in both the filing of insurance claims and excessive credit card use (impulse buying which may be linked to MAO and dopamine or financial stress linked to serotonin, cortisol, dopamine, and norepinephrine).
  • Debt and poor money management create and are the result of financial stress which may be linked to serotonin, cortisol, dopamine, and norepinephrine.
  • Each of these decisions directly impacts the individual’s credit score which is often used as a variable in predicting losses in automobile insurance coverage.
  • Miraplex and chemically induced risk taking
comprehensive overview of biochemical and psychobehavioral influences related to credit score

Potential Biochemical Influencers

Psycho-behavioral Profile

Risky Financial/

Credit Behavior

Credit History Record

Monoamine Oxidase

Impulsive Financial/Purchase Decisions

Total Credit Card Debt to Credit Line Ratio

Cortisol

Defaults on Debts or Derogatory Public Records

Risk Appraisal Judgments

Inattentive to Details or Environment

Serotonin

Length of Credit Record

Risk Perception Judgments

Norepinephrine

Distractable/Unable to Focus

Missed Payment History

Credit

Score

Dopamine

Late Payment History

Sensation / Seeking Novelty Seeking

Irresponsible Regarding Financial or Credit Obligations

Corticosterone

Number of Credit Lines Open

Testosterone

Credit Inquiries in Past 30 Days

Economic Exigencies

Medical Exigency

Divorce

Unemployment

Comprehensive Overview of Biochemical and Psychobehavioral Influences Related to Credit Score
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Notice that: The same risk taking correlates show up across realms from driving to financial decision-making.

Why?

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Target Risk Theory: an adaptation of risk homeostasis that necessitates the adjustment of driving behavior so that perceived risk is in line with target risk.

(Wilde 2002)

Possible Theoretical Explanations

Risk Homeostasis Theory: all behaviors hold some level of risk and the challenge of driving is to maximize the overall benefits of the behavior. The driver learns to adjust behaviors when a discrepancy is observed between the observed level of risk and

the target level of risk.

(Burns and Wilde 1995; Wilde 2002)

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The biochemical mechanisms coupled with Wilde’s Homeostasis Theory suggests an intrinsic biological mechanism at play in the relationship between risk taking and behavior of all types.

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Irrespective of the viability oftheoretical explanations,we can graphicallysummarize the biochemical and behavioral commonalities between credit scores and insuredloss generation. . . .

slide27

Low Levels of MAO-A

High Levels of Norepinephrine

High Levels of Dopamine

High Levels of Testosterone

Low Levels of Serotonin

Low Levels of Cortisol

Corticosterone

Exploration

Depression

Amplifies reaction to stimuli

Impulsivity

Stress

Arousal

Antisocial Behavior

SENSATION SEEKING

Impulsive driving decisions

Impulsive financial/purchase decisions

Risk Appraisal Judgments

Risk Perception Judgments

Inattention to details or the environment (road conditions, road signs, traffic conditions)

Inattention to details or the environment (interest rates, penalty fees, payment due dates)

Risky Driving Behavior

Risky Financial/Credit Behavior

Distractibility/ lack of focus

Distractibility/lack of focus (no financial planning, no savings)

Credit History

Irresponsibility regarding driving behavior (drinking, speeding, light/sign running, unsafe lane changes

Irresponsibility regarding financial or credit obligations (extravagance, overextended on credit cards)

Insurance Losses

Credit Score

Putting All The Relationships Together, We Have . . .

Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses