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)
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. . . . . .
Chart 6
Incurred loss
(dollars)
Average Incurred Loss es Within Each Decile
for Policies Grouped by Credit Score Decile
1,000
$918
900
1st credit sco re decile = lo west credit score
$846
800
700
10 th credit sco re decile = h ighest credit score
$791
$707
$668
$703
$681
$631
600
$584
$568
$558
8th
9th
10 th
500
400
300
200
100
-
/\/\/\/\
No credit
score
available
1st
2n d
3rd
4th
5th
6th
7th
------ Credit score decile ------
Excerpted from University of Texas study conducted for Texas legislature, 2003
Chart 5
Average Relative Loss Ratios By Credit Scores
for Standard Market Data Set
Av g. relative
loss ratio
1.8
1 st credit sco re decile = lowest credit score
1.53
1.6
1 0th credit sco re decile = h ighest credit score
1.4
1.2
1.28
1.07
1.06
1.00
1.0
0.99
0.88
0.84
0.8
0.78
0.72
0.76
9 th
1 0th
0.6
0.4
0.2
0.0
/\/\/\/\
No credit
score
available
1 st
2 nd
3 rd
4 th
5 th
6 th
7 th
8 th
------ Credit score decile ------
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
Research Results Summarized
“…a man drives as he lives.”
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 ).
Simplified Model of Conjunctive Influences between
Insured Losses and Credit
Insured
Auto
Losses
Risk Taking
Behavior
(Driving)
Biochemical
Psychobehaviora
l
Profile
Risk Taking
Behavior
(Financial)
Credit
Score
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
Increased Perceived
Benefits
Overestimation of Skills
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).
A Biological Component
“If serotonin is the brakes, dopamine is
the accelerator in the drive to risky
behavior.”
Zuckerman and Kuhlman, 2000
Biochemical and Psychobehavioral Profile of Sensation
Seeking/Novelty Seeking
Low Levels
of MAO-A
High Levels of
Norepinephrin
e
Low Levels
of MAO-B
Low
Levels of
Serotonin
Corticosterone
High Levels of
Dopamine
High Levels
of
Testosterone
Low
Levels of
Cortisol
Marriage
Stress
Depression
Exploratio
n
Amplifies
reaction to
stimuli
Impulsivit
y
Arousal
Employment
High SES
Antisocial
Behavior
Low Intellect
LEGEND
Biochemicals
Low Education
Risk Taking Responses
Low Occupational
Status
Socio-cultural Outcomes
Mediating Factors
1These
SENSATION
SEEKING
terms are often used interchangeably in the literature. The “sensation seeking” terms comes from Zuckerman (1979) and “novelty seeking” is attributable to Cloninger (1987).
Influences on sensation seeking and
novelty seeking have implications for
automobile insurance losses.
Comprehensive Overview of Biochemical and Psychobehavioral Influences
Related to Paid Automobile Insurances Losses
Potential Biochemical
Influeners
Driver Psycho-behavioral
Profile
Monoamine
Oxidase
Cortisol
Risk Appraisal
Judgments
Post-Accident Decisions and Influences
on Loss Amount
Loss Incurred
by Insurer
Insured’s
Possible
Claim Size
Build-Up
3rd Party at
Fault Accident
Inattentive to
Details or
Environment
Risk
Perceptions
Judgments
At Fault
Accident
Actual Loss
to Insured
Distractibility/
Lack of Focus
Dopamine
Corticosterone
Accident
Characteristics
Impulsive Driving
Decisions
Serotonin
Norepinephrine
Risky Driving
Behavior
Sensation
Seeking/Novelt
y Seeking
Aggressive/
Antisocial
Behavior
Insured’s Loss
Mitigation
Activities
Testosterone
Irresponsibility
Regarding Driving
Behavior
Insured’s
Reporting
Decision
Accident
Caused by Act
of God
Age, Gender, Marital Status, Education,
SES, Rural/Urban/Inner City Dweller
Prior Policy
Limits &
Policy
Coverage
Decisions
by Insured
Vehicle
Characteristics
Prior
Deductible
Choice by
Insured
Other High RiskTaking Behaviors
Driver Characteristics & Demographics
Actual
Paid
Insurance
Losses
Reported
Loss to
Insurer
Driver Psychological and Economic
Profile Influences
Biochemical
Psycho-behavioral
System Feedback
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…
Comprehensive Overview of Biochemical and Psychobehavioral
Influences Related to Credit Score
Potential Biochemical
Influencers
Psycho-behavioral Profile
Monoamine Oxidase
Risky Financial/
Credit Behavior
Impulsive
Financial/Purchase
Decisions
Risk Appraisal
Judgments
Serotonin
Risk Perception
Judgments
Inattentive to
Details or
Environment
Distractable/Unabl
e to Focus
Length of Credit Record
Missed Payment History
Late Payment History
Dopamine
Corticosterone
Total Credit Card Debt to
Credit Line Ratio
Defaults on Debts or
Derogatory Public Records
Cortisol
Norepinephrine
Credit History Record
Sensation /
Seeking Novelty
Seeking
Irresponsible
Regarding
Financial or Credit
Obligations
Testosterone
Economic Exigencies
Medical Exigency
Divorce
Unemployment
Number of Credit Lines
Open
Credit Inquiries in Past 30
Days
Credit
Score
Notice that: The same risk taking
correlates show up across realms from
driving to financial decision-making.
Why?
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)
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)
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 of
theoretical explanations,
we can graphically
summarize the
biochemical and behavioral
commonalities between credit
scores and insured
loss generation. . . .
Putting All The Relationships Together, We Have . . .
Biological and Psychobehavioral Correlates of Risk Taking,
Credit Scores, and Automobile Insurance Losses
Low Levels of
MAO-A
Low Levels
of Serotonin
High Levels of
Norepinephrine
Low Levels
of Cortisol
High Levels of
Testosterone
High Levels of
Dopamine
Corticosterone
Exploration
Depression
Stress
Impulsivity
Amplifies
reaction to
stimuli
Arousal
SENSATIO
N SEEKING
Impulsive driving decisions
Risk Appraisal
Judgments
Antisocial
Behavior
Impulsive financial/purchase decisions
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
Thank you very much for your attention.
Questions?
Comments?