Orlando Harmon
An insurance score is a number used to predict the likelihood of filing an insurance claim and the potential cost of that claim. It is calculated from information on your credit report, such as financial habits and choices, and is used by insurance companies to determine insurance premiums. While insurance scores are confidential, they are considered effective predictors of risk, with a higher score potentially resulting in lower insurance rates.
| Characteristics | Values |
|---|---|
| Purpose | To predict the odds of filing a claim and the cost of that claim |
| Calculation | Based on credit history and other factors like driving experience, previous claims, and vehicle age |
| Impact | Used to determine insurance premiums and rates |
| Confidentiality | Scores are confidential and not disclosed to consumers |
| Regulation | Legal in most states with some having restrictions or bans |
| Predictive Ability | Strong correlation with profitability and risk of loss |
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What You'll Learn
How insurance scores are calculated
An insurance score is a metric used by insurance companies to predict the likelihood of a customer filing a claim. It is calculated using a variety of factors, including credit history, driving experience, previous claims, and vehicle age. While the exact methods used to calculate insurance scores are proprietary and vary between companies, we do know that they are based on the same credit information that goes into a standard credit score.
Credit-based insurance scores are not intended to measure creditworthiness but rather to predict risk. Insurance companies use these scores for underwriting decisions and to determine charges for premiums. A person's credit history, including their payment history and amount of debt, can account for up to 40% of their insurance score. Other factors that may influence a person's credit-based insurance score include the age of their oldest account, the number of inquiries in 24 months, the ratio of total balance to total limits, the number of open retail credit cards, and the number of revolving accounts with balances greater than 75% of limits.
Actuarial studies suggest that an individual's financial habits are a good indicator of how likely they are to file an insurance claim. As a result, insurance companies analyze credit history to determine insurance scores. However, it is important to note that insurance scores are confidential and not available to consumers. While a person's FICO credit score may give them a general sense of their insurance score range, they cannot access their exact insurance score.
In addition to credit history, insurance companies consider other factors such as driving experience and previous claims when developing a comprehensive risk profile. The weighting of these factors may vary between companies, with some placing more emphasis on certain aspects than others. Ultimately, insurance scores are used to determine premium rates, with higher scores corresponding to lower premiums.
While the use of credit information in insurance pricing and underwriting is disputed, it is currently legal in most states. However, some states, such as California, Hawaii, Maryland, and Massachusetts, have prohibited or restricted the use of credit history in calculating insurance scores.
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What insurance scores are used for
An insurance score is a rating used by insurance companies to assess a potential insured consumer's level of risk. It is a numerical point system based on select credit report characteristics. It is one of the primary determinants of how much monthly insurance premium the consumer will be assessed.
Insurance scores are used to predict the probability of a client filing an insurance claim while covered. They are also used to determine the cost of that claim. In other words, they are used to predict risk. Actuarial studies suggest that how people manage their finances is a good indicator of how likely they are to file an insurance claim. Thus, insurance companies use credit report information, along with other factors such as driving experience, previous claims, and vehicle age, to develop a picture of a consumer's risk profile and establish premium rates.
The exact methods used to calculate insurance scores are proprietary and vary from carrier to carrier. However, it is known that they are based on the same credit information that goes into a FICO credit score. FICO breaks down insurance scores as follows: payment history (40%), credit mix, and the amount of debt.
A low insurance score can be costly, especially for auto insurance coverage, which is legally required for car drivers in 49 of the 50 states in America. People with lower scores are typically charged higher premiums. While most health, homeowners, and life insurance companies have a similar process for computing consumers' insurance scores, auto insurance companies have different standards for what they consider a good score. Some may offer lower premiums for scores in the 800 range, while others will only require scores in the 700 range to qualify for certain discounts.
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How insurance scores differ from credit scores
An insurance score is calculated using a lot of the same information as a credit score, and both scores are three-digit numbers. However, they are not the same, and insurance scores differ from credit scores in several ways.
Firstly, credit scores typically place more emphasis on credit mix, or the variety of credit accounts one has. On the other hand, insurance scores consider payment history, outstanding debt, credit history length, pursuit of new credit, and credit mix, with the first two factors carrying more weight.
Secondly, while both scores are calculated using similar information, they use this information in different proportions. For example, insurance scores do not use any personal information to determine your score.
Thirdly, the ranges of insurance scores vary depending on the agency providing the data. TransUnion's insurance scores range from 300 to 900, while the LexisNexis Risk Classifier assigns a range of 200 to 997.
Fourthly, the definition of a "good" insurance score varies from company to company. For instance, one insurance company might consider a score of 750 or better as good, while another might require a score of 700 or better for its best price.
Lastly, insurance scores are used by insurers to determine premiums, and they are only used in states where it is legally allowed. Credit scores, on the other hand, are used more broadly and are not solely used for premium determination.
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The legality of insurance scores
Hawaii has banned the use of credit information in personal automobile underwriting and rating, and other states, including California, Maryland, Massachusetts, Michigan, Oregon, and Utah, have strict limitations on the use of credit information in auto or homeowners insurance policies. These states prohibit or heavily restrict insurers from using credit-based insurance scores to deny, cancel, or refuse to renew policies or to determine rates.
In most states, insurance companies can use credit-based insurance scores when making decisions about whom to insure and how much to charge. These scores are based on an individual's credit report and are designed to predict the likelihood of filing an insurance claim. Insurance companies view credit history as a statistically significant risk factor and may weigh it more heavily than other factors when determining rates.
While the use of credit information in insurance pricing and underwriting is heavily disputed, insurance companies and organizations such as the American Academy of Actuaries (AAA) and the Insurance Information Institute (III) support it. Opponents include state insurance departments, regulators, and consumer protection organizations, who argue that the benefit of credit reports to consumers has not been established.
It is important to note that insurance scoring models are considered proprietary and confidential, varying from company to company, and consumers do not have the right to know their insurance score. However, individuals can take steps to improve their credit-based insurance scores by improving their credit history, such as by paying bills on time and lowering their debt-to-credit ratio.
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Improving your insurance score
An insurance score is a credit-based metric used by insurance companies to predict the risk of a customer filing a claim. It is a numerical point system based on credit report characteristics, such as financial habits and choices. While insurance scores are confidential and vary across companies, they are based on similar credit information as FICO credit scores.
- Make any mortgage, credit card, and other loan payments on time.
- Keep accounts in good standing and maintain a strong credit history.
- Avoid numerous credit applications in a short period.
- Avoid hard credit checks before shopping for insurance.
- Opt for paperless billing or electronic payments.
- Take a defensive driving course.
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Frequently asked questions
An insurance score report is a confidential credit-based metric used by insurance companies to predict the risk of issuing quotes for insurance. The report is based on credit report characteristics and is used to predict the likelihood of filing a claim.
An insurance score is calculated using information on your credit report. This includes financial habits and choices such as the age of the oldest account, the number of open retail credit cards, and the ratio of total balance to total limits.
While both insurance scores and credit scores are used to predict risk, they measure different things. A credit score predicts your ability to repay debt, while an insurance score predicts the likelihood of filing a claim and the cost of that claim.
A higher insurance score may result in lower insurance rates. A better credit history and financial habits can lead to a higher insurance score, which insurance companies use to determine premium rates.
Unlike credit scores, which individuals have a right to know and correct, insurance scores are confidential, and individuals cannot access their insurance score. However, insurance companies can be asked if a credit-based insurance score was used in their underwriting process.
