35%Real lending data from an open research dataset
Does the price follow the risk?
of the variation in rates charged explained by the risk justified rate
- What was observed
- Rates charged across a lender's book, set against the rate each customer's risk would justify, characteristic by characteristic with the others held fixed.
- What a generic approach says
- Assume the rate card prices risk.
- What the engine read
- The risk justified rate explained 35% of the variation in rates charged. Card utilisation raised the price 2.29 points per standard deviation where its risk justified a fall of 0.22; a high bureau score lowered it 5.73 points where its risk justified 3.31; returning customers got 0.57 points off where their risk justified 1.64.
- What it meant for the decision
- Gaps like these are where price and risk part ways. Our risk model saw 15 fields (AUC about 0.67), not the lender's own score, so part of any gap is information it lacked; the result is cross validated, not out of time.