November 16th, 2010

The Truth Behind Insurance Scores: Do They Really Work?

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auto insurance score

The next time you shop for insurance, you may be new to the fact that credit history—from credit score to debt ratio to past delinquencies—is on hand for most insurers to use to determine how much you will pay. In our last post on auto insurance scores, we discussed what exactly an insurance score is; this week, we’re breaking down the logic and truth behind it.

Here’s the simplified process that connects your credit background to your insurance: your credit background is examined, your predicted risk is calculated based on your credit, you’re placed in an insurance score bracket accordingly, and your insurance score will help price your premiums.

The biggest question in most consumers’ minds is whether or not credit-based scoring actually helps to predict and evaluate insurance risk, and if their premiums are being priced fairly. So, do insurance scores really work?

The Argument for Insurance Scores

In 2007, the FTC issued a report on credit-based auto insurance scores that gives insight into why insurers insist there is a correlation between credit history and insurance risk.

The report analyzed data from several insurance companies that included the credit history and history of claims of insured consumers. According to their insurance score, consumers were placed into different insurance score brackets, and each bracket was analyzed for average number of claims, size of claims, and total amount paid for claims.

Check out the graph below. The key takeaway here is that there is a correlation between credit-based insurance scores to number of claims: as insurance scores increase, the risk of loss in number of claims and claim size consistently decreases, and vice versa.

insurance chart USE

In another example, the FTC reports that insurers paid out nearly twice as much on property damage liability policies of customers with the lowest insurance score as customers with the highest insurance score. According to these numbers, credit-based insurance scores actually predict an individual’s claims as well as how much the insurer will pay in claims.

Conclusion #1: Insurance scores DO work

Insurers aren’t looking at your credit history to determine the likelihood that you’ll pay your premiums on-time; they are interested in how much you will cost to insure. If you have a high insurance score, your expected losses are lower and thus insurers can reduce your premiums; if you have a low insurance score, you have a higher expected loss so insurers adjust your premiums higher accordingly.

Insurers argue for the use of insurance scores because these studies show there is a consistent correlation of credit history (as represented by insurance scores) to potential claims. And since there is a statistical explanation, insurers will continue to price premiums accordingly. Ultimately, it helps to minimize expected losses from risky consumers and maximize appealing premiums to low-risk consumers.

Conclusion #2: Insurance scores DON’T predict responsibility

A common conclusion drawn about insurance scores is that insurers perceive consumers with good credit history to be generally more responsible and stable. They are less likely to file fewer insurance claims and cost insurers less money. However, insurance scores do not claim to predict overall responsibility or creditworthiness—again, that isn’t what insurers are looking for here. Insurance scores predict expected claims and losses, which is a significant factor when determining premiums.

So, what do you think, is it fair for insurers to determine your insurance premiums according to credit-based insurance scores?

Join us on next week’s post as we discuss whether or not insurance scores are a fair practice, and what consumers can do about it.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.

44 Comments

  1. There isn’t anything i can do about my bad credit, and my bad credit has not adversely affected my claim history (had a minor collision claim 20 years ago before my credit went bad; none since), so I don’t see how my insurance score predicts my insurance risk.

    My credit tanked almost ten years ago when a long hospitalization and illness without income brought my $6/hr income to zero and left me unable to make payments.

    All my open accounts were closed and charged off, and these debts are sold and resold and re-aged, keeping my credit score in the tank. (I have not used any credit in more than eight years.)

    I live on a poverty level income so I can’t just pay off the old debt.

    bad Credit Report at 7:43 pm on November 16, 2010
  2. I’m so confused.

    My cerdit score has been holding steady. But, my aut risk score has decresed from 851 tp 814 (poor). No deragaotry information has been added to my credit reports for years. Mt Transrisks is 734 and my Vantage is 728.

    MY CK grade is C

    B – credit using

    A – payment history

    B -account mix

    B -acount age

    B – derogatory remarks

    D – inquires.

    My credit score on Credit.com is A.

    My debt to income ratio is 1%

    Where is the logic?

    John Hoer at 12:22 pm on April 27, 2011
  3. HOGWASH!!!! I have not had an at-fault accident in 8 years; I also have not had a ticket or accident of any kind in 6 years. Credit has absolutely NOTHING to do with driving history.

    tom at 8:23 pm on October 22, 2012
  4. You’re right! This insurance score is completely independent of your driving history. This blog post explains more about why these scores are sometimes used to help set rates.

    bethy at 11:12 am on October 23, 2012
  5. How ridiculous is this. If you don’t charge your ass off they consider you a risk. Insurance scores are NOT a FAIR practice !
    I want to know what we consumers can do about this.
    If we do not try to defend ourselves the insurance companies will keep up their usual practice of gouging us with high premiums on a regular basis……but try to make a claim and see how unfair they are with their pay out. This is just another form of big business screwing the consumer!

    Bertha Baut at 8:45 pm on November 1, 2012
  6. Basically, it is another tool in use-since you it’s mandated for you to have auto insurance- to jack your premiums-and you have no choice but to pay the premiums and they know it. These companies and those like them want the consumer to assume ALL risk. The University of Texas study so often cited for supporting the credit based insurance premiums has been disputed on methodology and how it’s conclusions were made.

    keisha dc at 7:56 pm on December 8, 2012
  7. Believe it or not people, auto insurance scores can alter your yearly premium up to 50% in cost…… YES..FIFTY PERCENT….

    My relative has been an agent for 27 years. She told me someone who has a low auto insurance score and pays lets say $1500.00/year for two vehicles, would be paying 680-740.00/year for the exact same policy if they were at the highest auto insurance score rating…..

    Cory S at 1:26 pm on December 19, 2012
  8. I think it is ridiculous that one can be discriminated against by our own government to have the ability to place these sort of restrictions into place. Why don’t they charge the individuals that file consistent claims a higher rate? What is the point of keeping a good driving history if it is not being used to determine one’s insurability. The same goes for house insurance. My policy has increased almost $500.00 and the reasoning given is because of all the fires in the state. So once again I am paying for another individuals claim status….This is wrong!

    Emily Co at 6:09 am on January 4, 2013
  9. This is ridiculous. My credit is perfect, excellent, nothing wrong, no claims, no accident, no tickets, just nothing and my auto insurance score is poor – 817. They just taking money from us.

    Elvir M at 11:01 am on February 17, 2013
  10. My question is how long it takes to improve the record. I have a couple accidents that will be off my driving record in the next year, but the credit rating is an F. All of my other scores are C or higher. What does it take to improve the score?

    Amber at 11:11 pm on April 8, 2013
  11. hag wash i have no tickets no accidents ive been with my company for over 18yrs never had a claim something wrong with this picture and i pay high prem they really need to do something about this

    rick at 2:10 pm on July 6, 2013
  12. Here is another boon for the rich. If you have funds to fix your car without a claim (those with more available credit = higher credit scores), you can save on insurance – it doesn’t make you a better driver just less likely to use insurance which in most states, you must purchase to drive. Pay but don’t use . . .seems like a racket.

    I wonder what the data shows on income versus credit/insurance scores?

    TheRichGetRicher at 3:34 pm on July 8, 2013
  13. I agree with most comments. We’ve had same insurance company/agent for 38 years.
    We’ve had zero accidents, zero tickets.
    1989 – 1 hail damage vinyl car roof nd we had to pay 50% for repair.
    2005 – 1 roof hail damage & siding (primary home)
    2008 – 1 roof hail damage & siding (lake home)
    All acts of nature not our driving etc. This is not right.
    All our others scores are excellent range.
    What can we do to get this changed? I’m sure many people would agree it has to be changed.

    Lorna at 11:59 am on July 10, 2013
  14. I think any more for a middle class person we will always be paying for the wealthy. This is the American way. The only way to fix this is to get even playing grounds.
    Yes the talk of evolution sounds great but any more every one is talk and not action. We will be here reading and blogging and in turn accomplish no such change. Our system is doomed to fail. At which point those of us who have learned to live with out will thrive.

    LINDSEY at 9:13 am on August 7, 2013
  15. Its all pretty much garbage.. your credit score shouldn’t have anything to do with your insurances rates.. your driving record and claims history should. There is always a “scientific study” (usually paid for by a groups of companies with common interest companies” that give merit to injustice. My I should have a “scientific study” authored stating that since I wear blue boxers instead of black ones, I’m a lower risk and should pay 50% less on my premiums.. I wonder if the insurance companies would contest that that has nothing to do with premiums…haha

    Erik at 4:11 pm on August 18, 2013
  16. I have NO idea why my Auto Insurance score is ‘poor’!!!!!!!!!!!!!!!
    We have full coverage with all our cars plus the highest liability insurance there could possibly be; it is all fully there and more than just that on top of it. We are good drivers, and therefore we have not gotten into any accidents, so of course there are no claims to file! What claims do I need to file, when there is absolutely NOTHING to file????? What is this???????? In addition, we have ALWAYS paid all our insurance fees perfectly on time! So why on earth is my Auto Insurance score ‘poor’?????? It does NOT make any sense whatsoever!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    Eirini at 11:01 am on August 23, 2013
  17. This goes together with what I wrote earlier. In addition, we have NO damages whatsoever (hail, theft, or any other possible thing like that either)!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    Eirini at 11:03 am on August 23, 2013
  18. Jenna

    Eirini, we don’t calculate the scores you see on Credit Karma– we pull them straight from TransUnion. You can learn more about the auto insurance score here: http://blog.creditkarma.com/credit-101/insurance-scores/whats-up-with-my-auto-insurance-score/

    Jenna at 11:41 am on August 23, 2013
  19. This is flat B.S. I have a perfect driving record. Driving 11 years and not one ticket or accident on my record. My credit score jumped 40 points in two months but my insurance score has dropped 14 points in a month and more that 100 since January! If it is based off of your credit score, then why does my credit keep improving but my insurance score continue to drop? I have been with Allstate for six years and my rates continue to rise I have had enough of the insurance companies bull! On top of that No accidents means no claims, Meaning I have never once filled an insurance clam in the 6 years I have had Allstate. Like I said above, There is no way it could possibly be linked to your credit score, because all three scores, including my vantage score has increased between 20 and 45 points in two months, but my insurance score drops? I’m not a mathematics major but hello??

    Phil at 10:12 pm on September 3, 2013
  20. My credit score is increased in July to a higher A yet my auto score is decreased in July to barely a B. I am very upset about this. My home score is a perfect score. I have not had any claims on the auto or the house. How can the scores be so different? Why does the auto score keep dropping? Is there anything I can do to improve it?

    Thanks

    Lydia at 7:08 pm on September 17, 2013
  21. Jenna

    Hey Lydia,

    We don’t have a lot of information about the auto insurance score, as we get it directly from TransUnion, but the reason the scores can be so different is each score uses a different scoring model that emphasizes different aspects. You can learn more about the auto score here: http://blog.creditkarma.com/credit-101/insurance-scores/whats-up-with-my-auto-insurance-score/

    Jenna at 7:32 am on September 18, 2013
  22. The Auto Credit score used here is bogus. It rates me as “poor.”

    First of all, I have a perfect driving record–no accidents, no tickets. EVER!

    Second, I have great credit.

    Elin at 11:49 pm on October 22, 2013
  23. I’m confused…. My credit started off at “0″ in May of this year. I pulled it up to 510 by the end of May, simply by getting an auto loan and insurance thru Geico… I am now cruising at 550 (it’s November) by getting a small credit builder loan thru my bank ($72/mo payment, so I don’t even miss it, but I will have $2550.00 at the end of the 36 mo term). I know my grade is still an “F”, but I’m obviously working on it and making headway—slowly but surely. The thing that boggles me is that while my credit is slowly increasing, my insurance score is DECREASING, in direct correlation to the credit increasing. SO if what you are saying is that a person’s credit score is indicative of the likelihood they will file a claim, then that logic states that if your credit is TERRIBLE, you won’t file one, but if it improves, you WILL?!? How in the heck is THIS logical? No, there is something very wrong with the system here. My credit goes up (althought slight), my insurance score goes down. When my credit was 0, my ins score was the best it has been. Please explain this f*ckery, as it makes absolutely no sense…. None. Zip… Nada…

    Ariana Dee at 5:59 am on November 8, 2013
  24. Nonsense! I’ve never missed a payment and 1 claim(stolen car)in the 1980s. I should have a much higher insurance score. (845-fair)But this really doesn’t mean to much me anyway

    Michael Baum at 1:32 pm on December 11, 2013
  25. I find the whole auto insurance score one of the biggest scams going. I have an EXCELLENT 785 credit score, an A in credit utilization, no accidents or at fault claims in over 5 years,only one hard inquiry (which was for the new car I just bought) an over 25 year credit history, never paid any account late or the minimum ,in other words an enviable credit profile yet my insurance score for some unknown reason is POOR ! How can this possibly true. My insurance cost went up to almost $3000 per year for one car that I drive 20 mile a day so I called them (Geico) and told them unless they came up with a better rate I was changing companies and they lowered my premium to a little Over $120 a month. State Farm came in at $110. So don’t take it lying down. Pick up the phone and shop around and then call you company and threaten to leave them.

    Mark at 4:52 am on December 15, 2013
  26. Let me start by saying that I have HORRIBLE credit. Happens. Long story there, but then again we all have a story so, like I said…happens. With that being said, I have been with the same insurance company as well as agent for 19 years. I have filed claims a total of, carry the 1 …. 0 times. Zero (zero accidents or claims). I have had one ticket in that time. I was a hardened criminal and drove … wait for it …. with one head light out (I’m hard core I know). I got it fixed and even got the ticket dropped the next day, so I am going to say zero as well for tickets. Let me see if my math is correct. 0 accidents + 0 claims + 0 tickets = 0 auto insurance score. Aha! Now I understand why I pay so much for my policy. Its simple math. Why does no one else understand the correlation between credit score and insurance score but me?
    Yes ( to answer your question) i do enjoy sarcasm.

    JP at 4:01 pm on January 8, 2014
  27. I have an excellent credit rating and a poor insurance score. How does this make any sense?

    Larry at 2:06 pm on January 12, 2014
  28. I have an 820 FICO but my auto insurance score is fair. Had a chargeable accident 13 years ago no speeding tickets in over 25 yrs.
    I think the meatheads in the insurance business use a law of averages ie if you haven’t had an accident or moving violation in a long time (whatever their dif. of a long time is) and your still li9ving, your due.

    Dave M at 5:27 pm on February 21, 2014
  29. I am suspect that auto insurance see some kind of medical records that are not available. HIPPA records are private, but after heart surgery my auto score slipped. No claims, accidents, or tickets in over 20 years. So is it age, I am 64, or medical or even the Rx.’s I may take?? My credit score is very good, but auto insurance is fair. I am suspect

    itsburt at 4:16 pm on February 27, 2014
  30. I don’t get any of this. I’ve been driving since I was 16 and I’m 51 now. I’ve had two claims over all this time. The highest claim was $1000.00 and that was when I was in my 20′s. I have also been with the same insurance agent for almost 20 years. So why do I have a poor auto rating?

    Elizabeth at 6:59 pm on March 9, 2014
  31. I and my husband have only filed 1 claim in the 16 yrs we’ve been married and none prior to that. The claim was for a deer that ran into the back side panel of our truck. Our credit rating is in the excellent range. We only carry 2 active credit cards for autopay of rent, phone, electricity and pay the total balance every month automatically out of the bank account. Everything is paid for in cash. No mortgage either. We are financially secure. This site gives us a lousy rating for home and auto insurance yet when I go to the links provided to find out what affects these rates, both links clearly state the people with the credit rating that we have SHOULD have corresponding home and auto rates. Go Figure—-

    StockyMom54 at 11:11 am on March 14, 2014
  32. The articles explanation of auto insurance scoring makes absolutely no sense. If better credit scores translate to better insurability, than one would expect both your credit score and your auto insurance to trend together in the same direction. After all, they’re based on the same credit record. So how can my Transunion score go from 771 to 777 over the past month but my auto score drop from 942 to 924 ? How about providing some concrete examples of the interrelation between these score Credit Karma ?

    Stan at 3:40 pm on March 25, 2014
  33. Its all a scam just to jack up the prices and premiums so they can get away with it. I have a bankruptcy on public record. Been driving since age 17 over 30yrs. Never missed or been late on insurance payment and never been in accident or had tickets. Never filed a claim on any insurance. Yet I am being penalized with their Assnine Credit Theories. People need to start complaining big time in order for things to change. If you do nothing then shut up and take your medicine.

    jeaniene at 12:44 pm on April 2, 2014
  34. I’ve had 1 (one) at fault accident in my life (small repair, backed up into someone)! My auto insurance score is not rated as good. Auto insurers get all excited when I call them and tell them my record and then they come back on the line and say, oh, well, no that quote we gave you is wrong it’s $500 or more or something like that! Be a good citizen, pay your bills on time, vote, go to church, do good for others and get it stuck up you know where when it comes to auto insurance. If you make a mistake somewhere in your credit history, you are SCREWED for years and years. Low insurance rates are only for the lucky few who NEVER had an accident or forgot to make a payment on time – not for mere mortals. They are not Jesus because they WILL NEVER FORGIVE.

    Connie at 5:16 pm on April 13, 2014
  35. Thank your Congressman and Senators who you elected to protect you for this

    Mike at 1:41 pm on May 10, 2014
  36. Where can we APPEAL these poor auto insurance scores occuring while we are maintaining excellent credit?

    Jan at 5:17 pm on May 24, 2014
  37. Credit-based auto insurance scores are total b.s.! Insurers insist there is a correlation between credit history and insurance risk because they just want to get as much of your money as they can. Insurance companies get away with ripping us off because our government is bought & paid for by big business; the government no longer has its citizen’s best interests at heart.

    Uliks at 12:40 am on June 15, 2014
  38. Ridiculous, I’ve never missed a payment, I now owe less than 6 months ago, no accidents, how is it that my score has dipped? Seriously, BS.

    Rose at 5:49 pm on June 24, 2014
  39. I have A credit but only a B in auto. It went down 30 points just because I added a new loan. Im thinking the auto score weighs heavy on cost to debt ratio.

    The Glen at 6:44 pm on July 17, 2014
  40. The Auto Insurance scores are so misleading. I may have missed it but I did not read anything about the demographics of those taking research done, or the age groups involved, or the financial status. These could all (and manbe others)have a direct effect. The scores should not be used. What needs to be used is individual driver/insurance history period. If you have been in many accidents and have had a hard time obtaining insurance VS having had no accidents and have always had insurance….which would you feel has a higher probability of filing a claim? I have had NO accidents, have been driving since I was 18, have always had insurance with premiums always paid, and yet a service truck hit me a few months back, claim was made, trucking company took total responsibility, and yet within a few weeks my premium went up! What the heck! So one really never knows who has the higher probability of laying claims for bad driving until you see the driving and insurance claim history. Seems like we are being credited to death….NO ONE HAS PERFECT OR NEAR PERFECT CREDIT…is there something more to this credit rating system in its entirety than consumers are made to believe or realize? MMMM food for thought.

    yolanda morales at 3:05 pm on July 20, 2014
  41. Wow- This is the only product that we must purchase by LAW! This was passed into law by our voted reps to combat uninsured drivers. We were told that if by law everyone would purchase insurance rates would drop. That never happened and now were told the FTC report says good credit low rate bad credit high rate. Sounds like we need to go back to our voted reps and ask that they prove what they told us or GET OUT OF OFFICE. Remember folks
    “Figures don’t lie but liars do figure”

    bert at 1:19 am on July 22, 2014
  42. A little bit late into the discussion, but wanted to share my thoughts.

    Unfortunately politics and corruption plays a big role into this. And while there are “studies” that proves the correlation with credit scores and claims, its like saying that the deaths of kittens is correlated to users of Internet Explorer.

    I just moved to the US, bought a car, and had a quote for about $80. Once I bought the insurance, it was “adjusted” to $130.

    Probably there is little we can do, since we don’t possess the power insurers have. It’s a shame how these companies prey on us since its required by law.

    Fer at 11:38 am on September 9, 2014
  43. I do not buy that a credit score is an effective predictor for whether or not a person will file an auto or home claim. I think this practice is equivalent to “Red Lining” and is illegal. Sooner or later lawsuits will and should be filed. It is an unconscionable practice.

    Will C. at 8:18 pm on September 25, 2014

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