Biological and Psychobehavioral Correlates of Risk Taking, Credit Scores, and Automobile Insurance Losses: Toward an Explication of Why Credit Scoring WorksPatrick Brockett(firstname.lastname@example.org),andLinda Golden(email@example.com) Presentation to the Casualty Actuarial Society Predictive Modeling Conference on October 11, 2007, Las Vegas, Nevada
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
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.
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. . . . . .
Excerpted from University of Texas study conducted for Texas legislature, 2003
Excerpted from University of Texas study conducted for Texas legislature, 2003
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.” Research Results Summarized Tillman and Hobbs, 1949
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 • 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 ).
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 • 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.
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.” A Biological Component Zuckerman and Kuhlman, 2000
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
Influences on sensation seeking and novelty seeking have implications for automobile insurance losses.
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
Financial decision making is also related to psychobehavioral and biochemical variables.
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……….
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
…and financial decision making determines, in part, a person’s 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
Notice that: The same risk taking correlates show up across realms from driving to financial decision-making. Why?
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)
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.
Irrespective of the viability oftheoretical explanations,we can graphicallysummarize the biochemical and behavioral commonalities between credit scores and insuredloss generation. . . .
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
Thank you very much for your attention. Questions? Comments?