Risk Pricing

Systems of risk do not simply disperse through the consumer credit industry and according to their own interminable logic as more rational, more efficient means of governing consumers. Crucially, the systematic statistical constitution of default risk is itself perceived by its experts as being beset by perpetual risks which require the constant reappraisal of methods and procedures and the periodic renewal of models within which risk assessments are created.

In the mid 1990, credit risk pricing became more common as more sophisticated risk modeling techniques and lower computerization storage costs made such a process practicable. Since 1995 risk defined premiums have increased for numerous types of consumer credit, most prominently first home mortgages, automobile loans and credit cards.

The extension of risk based pricing is related to the profit motivated expansion of consumer credit allowing as it does for market growth in two directions: individuals formally excluded for being unacceptably risky are now included at a higher price, even among conservative creditors, while indivduals formerly included are now offered credit at a lower price and so are given the potential to consume more of it. Risk pricing is thus seem to enhance the general welfare-rewarding the low risk with low rates and allowing the high risk the opportunities of credit formerly denied to them (Johnson 1992:28).

Eventually with the development of more creditors due to the perceived saturation of the mainstream credit market for good risks began to specialize in differentiating between bad risks, offering credit ot the more acceptably risky with restrictive terms including high interest rates, low credit limits, collateral deposits and swingeing penalties and fines.

However, success of banks accepting higher risks with higher rates were clouded bz accusations of predatory lending, illegal colection practices, and exploitation leading to class-action suits and company settlements. A similar down market process is discerned for their analysis of the contemporary insurance industry through either pricing different levels of risk or concentrating on a particular risk nich market. Substandard risk are profitable once they are adequately priced. Therefore rather than risky being supressed they are actively engaged with, in a sense , that there are no longer bad risks, seeking new ways within which individuals as consumers can be understood and acted upon as risks.

There are still exclusion and the question then arised as to the fate of the excluded; that risk residuum deemed to lack the responsibilitz to pay for their own risk, what to do about those not in a position to aspire to pay for their own risk, what to do about those not in a position to aspire to the seductions of commodities- the unemployed, the incompetent, the criminal and the DISPOSSESSED.

They are denied access to the seduction of the market, excluded from circuits of credit consumption through their paltry or blackened credit record and the manifestation of personal attributes - occupation income, neighborhood -objectively indicative of their lack of credit worthiness. For them the second-tier financial services await the pawn broker, the payday lender which envelop them within more coercive mechanisms that ensure their repayment: the pledge of collateral, the holding of a customer's post-dated, guaranteed check or the scheduling of incremental rental contracts that mask the rights of the individual as a credit consumer.

Risk pricing ensures that the individual is made capable for the costs of their own risk and those who share it. deserving consummers pay less while, by implication, undeserving consumers pay more.





References:
Leach, W., 1993, Merchants, Power, and the Rise of a New American Culture, NewYork: Pantheon

Lewis, E.M. 1992b, Credit scoring and credit control from four points of view, in Credit scoring and credit control, Oxford: Clarendon Press

Johnson, W., 1992, Legal, social a and economic isues in implementing scoring in the US, Credit scoring and credit control from four points of view, in Credit scoring and credit control, Oxford: Clarendon Press

Garison, L., 1976, Credot-ability for women, The family coordinator 25(3)

Simon, J., The emergence of a risk societz: Insurance, law and the stateö Socialist Review, 95




Individual Risk propensity

Based on a random survey of the British population, it was shown that there is no statistically significant difference between respondents’ risk propensities according to either the means of retirement saving or the type of pension plan. This is an important finding in that DB and DC pension plans have very different characteristics as regards the distribution of risk—in DB plans the risk of retirement benefit value is borne by the plan sponsor whereas in DC plans the risk of retirement benefit value is borne by the participant. Pension plan participants do not appear to appreciate their relative insulation from, or their vulnerability to, the risks of different plan types. This finding suggests that UK pension plan participants are often ignorant of the basic structure and risk profiles of different types of retirement saving institutions.

The results of this paper have three implications for the design and implementation of supplementary pensions. The first follows from the fact that respondents do not appear to distinguish their risk propensities by the means of retirement savings and the type of pension plan: on this most basic of issues, plan sponsors may need to improve their education and information programmes. If important for those already enrolled in a pension of a certain type, it is crucial that plan participants be able todistinguish between plan types when confronted with the choice of continuing with anemployer-plan, and with a DB pension as opposed to the offer of a DC alternative.Given that DB pension plans are closing and employers are seeking to redistribute therisks associated with offering pension benefits, confusion on these two counts couldsignificantly disadvantage many people. This suggests the need for information andeducation programmes that recognise the likely existence of such confusion anddeliberately seek to foster informed decision-making (see, more generally, Cutler1997). Should our results be replicated in larger samples with closer analysis of theattitude-behaviour nexus, financial and consumer regulators may be called upon to make-up the advisory deficits in those programmes.

A second implication is that the design of education and information programmes may benefit from a greater appreciation of the socio-demographic characteristics of those involved. Many programmes treat plan participants as individual decisionmakers with idiosyncratic preferences and interests—many programmes are not attuned to the role of gender, age, income, and household status in affecting riskrelated attitudes and behaviour. Most importantly, to the extent that these characteristics systematically influence the risk propensities of particular types of people, there may be a role in designing education and information programmes to suit. The third implication of our analysis is that pension education and information programmes may be less relevant to those that make financial decisions within the context of the household (spousal pension entitlements). Similarly, education and information programmes that treat participants as if socio-demographic and spousal pension entitlements were irrelevant run the risk of glossing-over the plight of those with the biggest stake (low income women) in planning for an adequate retirement income while being irrelevant to the more sophisticated household retirement income strategies of higher income men and women.

Source:

Clark, G., Center for the Environment, Oxford Univ.,

Pension-related individual risk propensity, and the effects of
socio-demographic characteristics and a spousal pension

http://www.ouce.ox.ac.uk/research/transformations/wpapers/wpg07-02.pdf
entitlement


Pressures from risk management
Corporations causing environmental damage or human rights abuses generate significant financial risks for themselves (World Business Council for Sustainable Development, 2004; Dowell, Hart, & Yeung, 2000). The ‘social, environmental and ethical risk’ faced by corporations has been well enunciated by the Association of British Insurers. Their 2004 Report points to the financial implications of the ‘social and environmental risks and opportunities for companies’, which are to be found ‘in every sector’ (Cowe, 2004, p.4). Environmental or social misconduct in breach of the law leaves firms vulnerable to civil claims and criminal fines. But crucially such behaviour, even if legal, threatens corporate reputation. Risks to reputation are increasingly recognized as important. They may lead to adverse reaction from consumers and investors and consequent financial loss. These risks will be especially marked when firms derive much of their value from their brand. Recognising that risks to the business can ‘arise not only from corporate rivals or competing technologies but also from damage to reputation’, managers may seek to protect their companies and their shareholders from the adverse financial consequences of reputational damage (Financial Times Editorial, 2004).

Source: David Graham, Ngair Woods, Making corporate self regulation effective in developing countries, Oxford Univ, May 2005
http://www.globaleconomicgovernance.org/docs/Graham%20and%20Woods%20-%20Corporate%20Self%20regulation.pdf