November 9th, 2010
Insurance Scores: Believe it or not, your credit affects your insurance premiums
Here is yet another item to add to the list of what is influenced by your credit health: your insurance.
How much you’ll pay for insurance premiums, as well as your access to homeowner and car insurance, is directly affected by your credit history.
It’s called your insurance score, and while many are unaware that insurance companies use your credit history when making insurance decisions, now is the time to start paying attention.
What is an insurance score?
Just like credit scoring models, insurance scoring models produce a unique numerical insurance score that insurers use to predict risk and calculate your premiums.
Similar to the way lenders use credit score models, insurance scores also 1) look at your credit history, 2) use a scoring formula based on aspects of your credit report and history, and 2) predicts the level of insurance risk you represent.
While insurance score models differ from company to company and state to state, your insurance score will affect whether you qualify for insurer’s underwriting programs and how much you will pay for insurance premiums.
The practice of using credit histories to set insurance rates has been around for 15 years. Some states, like California, don’t allow credit history to be used at all for insurance purposes. There is also an on-going debate in several states as to the legitimacy of using credit information to make insurance decisions, and whether credit history and responsibility can be positively linked.
What is the correlation between credit and insurance?
There is an assumed correlation between credit behavior and the likelihood of an insurance claim, of your credit history being a predictor of your future financial behavior. The basic assumption is that those with good credit are less likely to make a claim, suffer a loss, and cost insurers money than a poor credit consumer.
Your financial stability—based on factors like your payment history and debt level— suggests to insurers the level of your insurance risk. Insurers then calculate rates and premiums equal to your risk level. Technically called the “loss ratio relativity”, the model measures how much they stand to lose in claim money versus how much they stand to collect in premiums. If the model calculates that your insurance claims may be higher or lower than average, insurers price your premiums accordingly to make sure profit is still made.
As with most credit-related models, it is not an exact science. But if insurance companies are pricing your policy based on your credit, your wallet will suffer unless you build better credit.
I have poor credit… what do I do?
Those with less-than-perfect credit can look on the bright side: your insurance score isn’t the sole determinant of your insurance policy and rates. Non-credit factors such as your driving history, past accidents, where you live, and claims history are also considered.
However, now you have an additional reason to better your credit health. Bettering your chances of the best insurance policy and rates is the same true-and-tested strategies of building good credit. Your best bet is to improve your credit score, which will better your credit health as a whole and likewise perk up your insurance score.
Related posts:
- The Truth Behind Insurance Scores: Do They Really Work? The next time you shop for insurance, you may be new to the fact that credit history is on hand...
- The Great Car Insurance Switcheroo – How do the savings stack up? Picking the right car insurance company is all about savings—how much time, money, and customer service benefits you can get...
- From Renter’s Insurance To Disability Insurance, Find The Best Insurance For You It’s often tricky to navigate which kinds of insurance you do and don’t need. So, LearnVest breaks it down with...
- A New Generation of Credit Scores: Credit Undergoes A Makeover Credit scores are undergoing a makeover. Both FICO and VantageScores are revising their credit score models to fit consumers' more...
- How Credit Scores are Calculated Have you ever wondered what your credit scores really mean, or how they are calculated? Your credit scores are numerical...
I have a TransRisk score of 727 (good), a Vantage score of 803 (B), and I haven’t had an insurance claim in decades. Yet you list me as being a “very poor” insurance risk (765). Why? What on earth have I done to merit a “very poor” score when everything else is favorable?
Something seems to be off with the way CreditKarma computes the insurance score. For me, Transrisk = 90th percentile, vantagescore=97th percentile, but insurancescore=32nd percentile.
If the driving history is not taken into account, how can the difference be explained?
Would my credit score drop from 760 to 744 because I added a driver on my car insurance policy?
I’m just brainstorming here, but I have a good credit score of 735 but am in the poor insurance risk category according to this scoring model. My two ideas about why this might be is, first, that the inputs may be differently weighted. I still have a fairly large amount of credit card debt, but my ratios are good and my payment history spotless. Maybe for auto risk they look at the actual cash amount of debt outstanding on its own? Second, the home page on Credit Karma describes the score as a measurement of the risk that the insurance company will lose money on a claim that you file. I have a ridiculously low insurance premium, so any claim I file will automatically send the insurance company into a loss position on my account. Maybe the actual current premium amount is factored in. That wouldn’t make sense really, because if you’re using the score to determine the rate, the rate can’t be one of the inputs. It makes the score a moving target. Anyway, like I said, just brainstorming…
I’m also puzzled as to how my Transrisk and Vantage scores can be in the top percentiles, but the insurance score is only mediocre. Can you explain how the different components of the insurance score are weighted, and how I can improve it?
I don’t think CreditKarma’s insurance score assumptions can be trusted.
Mine is “very poor”. Yet I’ve been with Wawanesa for nearly 6 years with no lapse. The only thing that caused my rate to go up recently was the purchase of a new car. No “punishment” hikes, nothing. And their premium is significantly lower than any other insurance agency.
To the point, I think the score *might* be what the larger organizations are using to assess the premium – State Farm and GEICO quote nearly twice what Wawanesa does. But that’s fine. I’ll be with Wawanesa for the foreseeable future, and if they are rightfully using driving history to assess my risk instead of my credit score, they’ll continue to get not only my business but my referrals. Screw the big ones.
I am upset. I have never had an accident and never had filed a claim. Just because my credit isnt that great doesnt mean Im at risk for filing a claim!
My credit score is 517. Yet my Insurance score is decent at 851. I’ve also had a minor accident in the past 3 years & my drivers license suspended for not paying a ticket, but reinstated as soon as I realized it.
If the State forces you to get car insurance, the State should also offer LOW COST auto insurance & should mandate insurance companies NOT to insure by a credit score as was done for YEARS – and the insurance companies STILL made billion dollar profits. This isn’t right. I have never lapsed my auto insurance – ever. Yet, I have had life problems beyond my control which has brought my credit score down from the 900′s. Car insurance, forced by the State, should NOT be subject to a credit score. This just is not right. It worked without credit scores before – there’s no reason why it shouldn’t work again.
I guess I’m not alone… my credit score is Good/B, yet my AutoScore is “very poor” – I always pay off loans/bills/credit cards on time, I’ve not had a claim against auto insurance (or home) but as a fairly recent “import” to the US I’ve (on paper) only had a credit and driving history for 4 years (despite actually having 25 years history, just spread across 3 countries)
Is the score accurate at the moment (or still going beta tweaks) or is this something a consumer statement on the credit report might help (at the moment we don’t have the break-down of advice that the Transrisk data gets so it’s hard to know…)
This need to base everything on one’s credit score nonsense is getting out of hand. Did it ever occur to the insurance companies that correlation doesn’t prove causation, or that maybe they’ve just got it backwards (credit scores drop AFTER claims due to massive unplanned expenses)? If we ever do locate a habitable planet in another solar system with evidence of a fallen civilization forget nuclear war or global warming. I bet the collapse will have been caused by their financial industries driving them morally and economically into oblivion.