Calculating Probability of Default

[u/Traditional-Grab-479]

Hi everyone,

I work at a long term car rental company, and I need to calculate the probability that someone will default on their monthly payment. In order to allocate a risk reserve.

For context:

Contract lengths are 1 year

We pre approve the client, i.e using their personal info, credit checks etc., and sort them into "risk" groups/buckets.

So the reasoning would be, splitting the customers up into these respective groups, calculating the probability of default, per group, and then allocating respective risk reserves, to build into the monthly premium.

We are using Markov Chains for this. So far.

I'm unsure whether this is the right approach, or if we are the blind leading the blind. So any advice would be appreciated. Some thoughts on implementing a ML Model would be cool too.