Understanding Insurance Scores

Posted October 7th, 2010
by HomeownersInsurance.org Staff (no comments)

Insurance companies are rated based on their overall financial health and ability to meet their fiscal obligations. Individuals have credit scores, which basically correspond to the same idea. A consumer’s credit score is a three-digit number that represents the individual’s creditworthiness. It is used when determining whether to loan money to consumers, and is often a good indicator of overall financial health.

Insurance scores are somewhat like consumer credit scores. They are based on information contained in consumer credit reports, but the algorithms they use are proprietary and therefore not made available to the general public. Since the calculations are based on the data in your credit file, though, you have some measure of control over your insurance score, and you can and should work to improve it.

  • Your insurance score is intended to gauge the likelihood that you will file a claim against your insurance.
  • High insurance scores are like high credit scores. The higher the score, the lower the risk you are believed to pose to an insurance company.
  • Insurance scores are used in determining the premiums you’ll pay for all kinds of insurance plans, including auto insurance, homeowners insurance, renters insurance, and more.
  • Some states limit or regulate how consumer credit information can be used when determining insurance premiums.
  • The insurance score most often used by insurance companies was created by FICO and is referred to by different names at the different credit reporting agencies. Equifax calls it InScore®, TransUnion names it Fair Isaac Insurance Risk Score®, and Experian refers to it as Experian/Fair Isaac Insurance Score. All of these calculations are based on the algorithms created by FICO.
  • In calculating your insurance score, your credit information is compared with that of other people. Your insurance score therefore represents a relative risk factor. That is, insurance scores evaluate the claims risk that you pose to an insurer in relation to the risk that other people pose. Your number may be higher or lower based not only on your credit file, but on the general creditworthiness of the consumer market.
  • Data from millions of past individual insurance claims help to isolate the factors that are associated with an increased risk of claims. These are assumed to be effective predictors of future claims risks.
  • Since the calculations are kept secret, no one can say for sure exactly how to improve your credit score. It is believed, however, that the same things that affect your credit score will also impact your insurance score.
  • There are other factors that are likely to have more impact on your policy premiums than your insurance score, but that doesn’t mean insurance scores aren’t important.

Make sure you know what’s on your credit report. Request a free copy annually at a minimum, and be sure to check it for errors. If you use your credit wisely, you can expect to have a strong insurance score and get the lowest premiums possible.

Categories: Insurance Tips

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