Auto Insurance Scoring: Unlocking The Calculation Mystery

Auto insurance scores are used by insurance companies to predict the likelihood of future claim filings and determine whether to offer a policy and at what rate. These scores are calculated using information from credit reports, including credit history, previous claims, and accident history. While the specific calculation methods vary across companies, factors such as payment history, outstanding debt, and length of credit history are typically considered. A higher auto insurance score indicates lower risk and results in more favourable insurance rates, while a lower score can lead to higher premiums or even denial of coverage.

Credit history

There are several factors that contribute to credit history, and these are used by insurance companies to calculate an individual's risk level. These factors include:

• Payment history: The frequency of late and on-time payments, as well as the average length of time between the bill's due date and payment.
• Length of credit history: The average length of an individual's credit history, including how long they have used credit cards, loans, and other sources of credit.
• Credit mix: The different types of credit used, such as auto loans, mortgage loans, and credit cards.
• Outstanding debt: The amount of debt currently held.
• Pursuit of new credit: Recent attempts to open new lines of credit, including credit cards, mortgages, and loans.

An individual's credit history is used by insurance companies to calculate their "credit-based insurance score", which is different from a typical credit score. This score is used to predict the likelihood of an individual filing an insurance claim. A higher credit-based insurance score indicates a lower risk of filing a claim, which usually results in better car insurance rates.

It is important to note that the use of credit-based insurance scores is controversial and banned in certain states, including California, Hawaii, Massachusetts, and Michigan. Additionally, credit history is not the only factor considered by insurance companies when determining rates. Other factors, such as driving history, the type of car, and location, also play a role in calculating insurance premiums.

Accident history

Your driving record can include a history of minor and major traffic violations, including speeding tickets, accidents and/or arrests for more serious violations such as driving under the influence.

In the US, the Department of Motor Vehicles in your state can provide copies of your driving records, typically for a fee. The type of driving record you request may depend on the purpose, such as a background check or court appearance.

In the US, your driving record can affect what you pay for car insurance premiums, though accidents and other traffic violations can eventually age off your driving history. The length of time an accident can stay on your driving record depends on state law, but it is typically between three and five years.

In the US, if you have an accident on your record, the passage of time could help you secure better insurance rates if you have no new accidents or violations.

Previous claims

In the UK, car insurance claims are recorded on the Claims and Underwriting Exchange (CUE), which serves as a central record of all car insurance claims made in the country. While these claims technically remain on your record indefinitely, they do not necessarily affect your insurance rate forever. The impact of previous claims on your insurance rate depends on how far back your insurer looks when assessing your application. Some insurers may only be interested in claims made in the last three years, while others may go back as far as seven or even ten years. Typically, insurers will ask about claims made in the last five years.

It is worth noting that even if you have had an accident but did not make a claim, this information can still be accessed by your insurer through the CUE. Such incidents can still influence your insurance rate to some extent, although they should not prevent you from obtaining a no-claims bonus.

When evaluating previous claims, insurers also consider whether you were at fault or not. At-fault claims are likely to have a more significant impact on your insurance score and result in higher premiums. Additionally, the cost of your previous claims can also affect your insurance rate. Making multiple large claims in a short period can indicate a higher risk to insurers, leading to increased premiums.

The impact of previous claims on your auto insurance score and, subsequently, your insurance rate, can vary depending on the insurance company and the specific circumstances of your claims. It is always a good idea to shop around and compare quotes from different insurers, as the weight given to previous claims may differ between companies.

Personal information

Although personal information is not allowed to be used in calculating insurance scores, it is important to note that some of these factors may still impact the rates offered on insurance products. For example, car insurance companies may take into account the age and gender of the policyholder when determining premiums.

Additionally, while insurance scores are based on credit scores, they are not the same thing. Credit scores are used to determine how likely someone is to repay a loan, whereas insurance scores focus on aspects that correlate more closely with filing claims, such as total outstanding debt, length of credit history, and frequency of new credit applications.

Credit score

The credit-based insurance score is calculated using various factors related to an individual's borrowing history and current debt situation. These factors include:

• Payment History: This includes information on how frequently an individual makes debt payments and the amount paid off. A consistent track record of on-time payments is favourable for achieving a higher insurance score.
• Outstanding Debt: The total amount of debt an individual currently owes is considered. A lower debt amount reflects positively on the insurance score.
• Length of Credit History: A longer credit history is generally preferable and contributes to a higher score.
• Pursuit of New Credit: Recent applications for new lines of credit can impact the insurance score. Multiple applications for new credit within a short period may be viewed negatively.
• Credit Mix: The diversity of credit types, such as credit cards, auto loans, and mortgage loans, is considered. A balanced mix of credit sources can contribute to a higher score.

It's important to note that the specific weights assigned to each factor may vary between insurance companies, and the exact calculation methods are often proprietary. Additionally, factors such as age, gender, marital status, address, and occupation are not included in the credit-based insurance score but may be considered by insurers when setting rates, where permitted by law.

The Impact of Credit Score on Auto Insurance Rates

An individual's credit score can significantly impact their auto insurance rates. Generally, a higher credit score corresponds to lower insurance rates, while a lower credit score may result in higher premiums. This relationship is based on the assumption that individuals with better credit histories are less likely to file insurance claims. As a result, insurance companies often offer more favourable rates to customers with good credit scores, considering them lower-risk. On the other hand, drivers with poor credit scores may be viewed as higher-risk and, consequently, face higher insurance rates.

The impact of credit score on auto insurance rates can vary across different states and insurance companies. Some states, such as California, Hawaii, Massachusetts, and Michigan, have banned or restricted the use of credit scores in determining auto insurance rates. In these states, insurance companies rely primarily on driving records, location, and other characteristics to set insurance premiums.

Improving Credit Score to Reduce Auto Insurance Rates

Improving one's credit score can be a worthwhile endeavour to reduce auto insurance rates. Here are some strategies to achieve that:

• Pay Bills on Time: Maintaining a consistent track record of timely bill payments is essential for improving one's credit score and, consequently, their insurance score.
• Keep Credit Utilization Low: Aim to keep the credit utilisation ratio below 30%. This ratio represents the amount of available credit being used, and a lower ratio is generally favourable for improving credit and insurance scores.
• Pay Down Debt: Focus on reducing any outstanding debt, such as credit card debt or car loans. Lower debt amounts can positively impact both credit and insurance scores.
• Monitor Credit Score: Regularly check your credit score to track your progress and identify any discrepancies or errors that may need correction.
• Limit Hard Credit Inquiries: Hard credit inquiries, such as those associated with loan or credit card applications, can negatively impact your credit score. Space out applications to minimise the impact on your score.
• Maintain Old Lines of Credit: Keeping long-standing credit accounts open can benefit your credit score. The duration of your credit history is a significant factor, and closing unused credit cards may shorten your credit history and negatively affect your score.

Frequently asked questions