Insurance Scores FAQ

How Credit Based Insurance Scores Work

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Do you need  the motivation to improve your credit? Of course, you’ll have better luck with loan products and rates if you have great credit. However, your credit can affect insurance rates and products too. Insurance scores allow insurance companies to look at credit related information and decide how profitable you’re likely to be. Bad credit and insurance scores can price you out of the market, or make some products unavailable to you.

Insurance Scoring Background

High credit scores indicate that you’re less likely to cause headaches for the lender – so they’ll loan you more, more quickly, and at better rates. The lending industry has spent years and dollars refining a system that they’re quite happy with. It gives them an idea of how likely each borrower is to default on a loan.

Evolution of Insurance Scores

Businesses find that the same type of analysis used on borrowers can be used elsewhere. By having computers slice and dice massive amounts of data, companies can discover patterns that help them save money (or make greater profits). Most often, these systems use multivariate analysis – a way of looking at how inputs affect an output. This technique is used in a lot of different places.

Insurance companies have been on this bandwagon for a while. They look at credit related information and make judgments about your profitability as an insurance policy owner.

While they may look at a FICO credit score, they’re even more impressed with insurance scores. Companies like ChoicePoint build insurance scores so that insurance companies can quickly and efficiently evaluate potential (and existing) customers.

What’s the Big Deal?

If your insurance scores are bad, it can really cost you.

Insurers will periodically review your scores when a policy is up for renewal, and they might change your rates or deny you coverage. Occasionally you hear nightmare stories about families who had to do without insurance because of insurance scoring – that’s risky business.

What’s in an Insurance Score?

Insurance scores, like credit scores, are top-secret. There’s no way to know exactly how insurance scores work. Nevertheless, they have a wealth of information that comes from your standard credit reports. This information is sliced and diced, and a software program spits out an insurance score.

Not all insurance scores are the same. They can come from a variety of sources, depending on who builds the software. An insurance company might have its own score that incorporates credit related information along with other data – such as details you provide on your insurance application.

How do I Improve an Insurance Score?

Because insurance scores are generated with a secret formula, you can’t know for sure. However, you can make some educated guesses. For starters, the things that improve your credit score are likely the same things that improve your insurance scores.

Avoiding bankruptcy, late payments, and tax debts will most likely keep you looking good. In addition, having well-aged accounts and minimizing inquiries can only help.

You should also remember there are other factors that might affect your rates. Information stores such as the Medical Information Bureau and ChoicePoint’s CLUE database may have information on you – this could be a good thing or a bad thing. Insurers will look at reports from these organizations in addition to your insurance scores.

Now you know more than most people about insurance scores. Next, consider some tough questions.


Is Insurance Scoring Accurate?

You might wonder why your credit related history has anything to do with your insurance rates. Are they related in any way? According to some insurers, yes. They report that they make good business decisions by incorporating scored generated from your credit reports. A number of studies have tried to make a final judgment, but of course the results differ depending on who you ask.

Note that insurers may not understand completely how insurance scores work. Just like lenders, they don’t need to know about the nuts and bolts behind the scores. Lenders have some understanding of how credit scores work, but they mostly just use them because they like the results they get. The same thing goes for insurance scores. As long as there appears to be a correlation, they don’t seem to care what the actual cause and effect relationship is.


Is Insurance Scoring Unfair?

Insurance scores are not well understood. As a result, there’s room for abuse. Some argue that scores are not based on anything but smoke and mirrors, and that they’re used to discriminate against some segments of the population. Lower income families and some minority groups seem to suffer from insurance scores more than higher income folks. The exact reason is a mystery. It could be that insurance scores are discriminatory, or it could be that historical inequalities are still affecting some groups.

You’ll hear plenty of arguments from both sides in the coming years.

Regulators have looked at insurance scores to see if there are any signs of discrimination. They have not announced that the scores are unfair. Again, several organizations have tried to study insurance scores, and the results differ depending on who you ask.


Can I See my Insurance Scores?

If you want to know how you score, you can try to see your insurance scores. Keep in mind that you never know which type of score a given insurer will use – it could be an in-house model, one built by Fair Isaac, or one built by ChoicePoint. You’ll have to ask your insurer what they use if you want meaningful information. If you’d like to try your luck at ChoicePoint, visit their consumer Website ChoiceTrust. Note that they claim that they are not required to give you a free disclosure, so you’ll have to pay a modest fee for your score.


How do I Get My Money’s Worth?

To have the best insurance scores, you need to make sure they’re scoring you on good information. First, understand how your credit works, and use credit wisely. Take a look at the FICO credit score to get a good idea of what companies may be looking for. Next, make sure you fix your credit report if there are errors. Be aware that you are entitled to one free credit report per year from each credit reporting company. Don’t bee fooled into paying or signing up for a service unless you need to – use the official Website for your free reports. Finally, shop around and get insurance quotes from a variety of sources – some may treat you better than others.