Why Low Credit Scores Predict More Auto Liability Claims: Two Theories Discussant Comments Sharon Tennyson

Correlations Poor credit score correlated with higher liability claims frequency (Miller & Smith, 2003) Poor credit score correlated with risk-seeking personality traits (Brockett & Golden, 2007) Butler: Are there other important correlations?

Conceptual Framework Accidents per Car (per year) = [Accidents per Mile] x [Miles per Car/year] psych & pers char driving purpose other drivers # drivers location, traffic… location…

Testable Hypothesis? Relationship between driving intensity and income, SES  Are factors associated with low credit scores also associated with increased miles driven? Impact of insurance price on driving intensity  Do higher prices reduce number of cars insured and increase miles driven per insured car? National Household Travel Survey (FHA)  Households with lower income have older cars  20.3% of households with lower income have no car (vs 8% national average)

Policy Implications Butler’s theory supports the idea that low income markets are “difficult to serve” Butler’s solution: per-mile premiums  Change in incentives should lower driving intensity per car but raise number of insured cars (Vickrey) Socially beneficial if shift from uninsured to insured Increase traffic density if insurance cost constrains car ownership “Marginal” cars enter insurance pool  Increase consumer premium uncertainty  Increase insurer monitoring costs