Purchasing insurance can be frustrating sometimes, especially when you don’t understand why you are being asked certain questions or why specific factors may affect your insurance premium. We would like to explain the reason why insurance companies utilize one particular factor – your credit history – in determining your insurance premium. As stated, many insurance companies use credit-based scores to help determine a customer’s insurance premium through something called an insurance score. We would like to help you understand how your score is calculated and how it could impact what you pay for your policy by providing you with the following FAQ from Travelers Insurance. (Please note that the use of insurance scores varies by state.)
What is an insurance score?
Your score is compiled through a review of your credit history and any patterns that result. It may take into account your payment history, any outstanding debts, the length of your credit history, whether you’ve filed for bankruptcy, and any new applications for credit. The score is used to help insurance companies accurately assign an appropriate price available for your policy.
How does insurance scoring work?
Extensive research shows a correlation between credit history and insurance claim history – that those with certain patterns in their credit history are more likely to file insurance claims. Insurance scoring works by giving a higher score to those who are less likely to file claims and a lower score to those most likely to file claims.
An insurance score does not take into account income, race, gender, religion, marital status, national origin or geographic location. It only reviews your credit history.
Why do companies use insurance scores?
When insurance companies know the likelihood that a customer will file a claim, they can set rates that are accurate and appropriate for each customer. This enables carriers to offer insurance coverage to a broader range of customers and helps them determine your price.
Although credit history helps predict the potential for future losses, it’s only one factor used in determining the cost of your policy. A driver’s age and prior claim history are two other important factors.
How do insurance companies use my insurance score?
Insurance companies uses your insurance score together with a number of other factors to determine the appropriate pricing level available to you. Generally speaking, customers who have higher insurance scores and no prior claims or accidents qualify for our better price.
For those customers with prior claims or accidents, a higher insurance score will help them qualify for a better rate than a similar customer who has a significantly lower insurance score. In turn, customers with no prior accidents or claims, but who have low insurance scores, may also qualify for a competitive rate.
What if there is an isolated problem on my credit report?
In most cases, an isolated instance of a late payment will not have a significant impact on your insurance score if you have an established pattern of responsible credit use. However, most insurance companies recognize that sometimes people face difficult circumstances, such as medical issues, divorce, or job loss. Most of our carriers have created Insurance Score Resource Centers (ISRC) to assist customers and independent agents with individual credit issues and circumstances.
The information in my credit history is personal and sensitive. What protection do I have against misuse?
Does my insurance agent have access to my credit report?
No. Your agent will not have access your credit-based insurance score or your credit report. This number is generated by the insurance carrier, not the broker, and ALWAYS remains private.
How can I improve my insurance score?
One of best things you can do is to make sure you pay your bills on time. You can also review the amount of credit you have and whether you’re up to your limit your credit card(s). Consider how to reduce your debt without creating additional credit activity. Also, review your credit report regularly. Additional recommendations on improving your credit score are available from the American Insurance Association (www.aiadc.org).
More information on insurance scores is available from the Insurance Information Institute (www.iii.org) HERE. Please call our office if you have any questions or concerns about how your insurance score or premium is determined. We work very hard on the behalf of our clients to make sure we provide them with the best premium and coverage available. We try to make the process very easy and explain everything along the way.
Source: Travelers Insurance