Credit Based Insurance Scores Explained

Credit Based Insurance Scores Explained

What is a Credit-Based Insurance Score and Why Does it Matter?


An insurance score– also called an insurance credit score – is a numerical point system based on select credit report characteristics.  There is no direct relationship to financial credit scores used in lending decisions, as insurance scores are not intended to measure creditworthiness, but rather to predict risk.  Insurance companies use insurance scores for underwriting decisions, and to partially determine charges for premiums.  Insurance scores are applied in personal product lines, namely homeowners and private passenger automobile insurance, and typically not elsewhere.


Your credit-based insurance score is not the same as your personal credit score, nor is it a measure of your credit worthiness.  The credit-based insurance score is a number that measures your likelihood of having an insurance claim.  Studies have shown that consumers with higher credit-based scores are useful as a rating factor but in those states where it is used, it is only one of many factors used.  It is also important to note that insurance scoring will have no impact on your financial credit score like a bank, car loan or credit card company would when running a credit score for a new loan.


Insurance scoring provides companies with a way to try to predict who will submit claims.  They do not charge customers a standard rate but rather one that is based on each individual’s potential risk.  Actuarial studies have found that a person’s financial rating serves as a good indicator for making these predictions, helping insurers determine a person’s insurance risk and calculate premium charges equal to that risk.  That is, people with good credit are typically less likely to have or submit a claim than those with poor credit.  The criteria this is based on includes some of the following:  payment history, credit history or type, length of payment and credit history, outstanding debt, available credit, items of public records (bankruptcies, etc) – up to 45 different criteria can be used (each state has different regulations).  If you have a good insurance score your premium could go down and sometimes quite a bit.  If you choose not to have your policies credit scored your rate will be based in the middle and there is no consequence except that you could pay less if you have a good score.


How much do insurance scores matter?


Keep in mind that insurance scores are not the only criteria used to determine if you qualify for insurance and what rate you pay.  Insurers also look at motor vehicle reports, your driving record, claims history, home condition or auto features, as well as other information.  So an insurance score alone will not dictate the price you’ll pay for insurance or whether or not you qualify.


Because your personal credit history affects your credit-based insurance score, it is important to regularly review it and make sure it’s accurate.  The Fair Credit Reporting Act (FCRA) allows you to order one report for free from each of the major credit reporting agencies each year.  You may also purchase a 3-in-1 report to review your scores from all three major credit bureaus – Equifax, Experian and TransUnion.


*Information obtained from articles by Lending Tree,  Safeco Insurance  Company and Wikipedia(the free encyclopedia)