Frequently Asked Questions About Insurance Scoring
Why do insurers use insurance scores? Insurance companies use financial history, along with a host of other factors, to properly classify insureds according to their potential for future losses. Studies have shown a strong correlation between a consumer’s financial history and his or her future insurance loss potential. Thus, insurance companies believe the use of credit information helps them to underwrite and rate applicants at a cost that reflects their anticipated chance of loss. Insurance scores provide an objective tool that insurers use along with other applicant information to better predict the likelihood of a consumer filing claims. Scores also help to streamline the decision making process, so that policies can be issued more efficiently. By accurately predicting the likelihood of future claims, insurers can better control their risk, thus enabling them to offer insurance coverage to more consumers at a fair cost most specific to that consumer’s exposure.
What information is contained in an insurance score? An insurance score considers primarily:
- Payment history
- Bankruptcies, liens and judgments
- New applications for credit
- Amount of outstanding debt
- Length of credit history
What is an insurance score? How does it differ from a financial credit score? In order to correlate insurance score to claims activity, an applicant’s insurance score is compared to the performance of a group of consumers with profiles similar to the applicant’s profile. A mathematical formula, or algorithm, assigns various weights to factors in the credit report in order to produce an insurance score, which is then used to determine eligibility for insurance or the appropriate price. The score predicts the likelihood of certain events occurring in the future. The main difference between an insurance score and a credit score is that insurance scores only look at certain variables of a credit report that have historically been more indicative of future insurance loss potential. Insurance scores also do not take into account a consumer’s income. Unlike a mortgage company, an insurance company is not assessing a customer’s credit-worthiness and therefore doesn’t consider income. Instead, an insurance company only considers those items on a credit report that are predictive of the potential for future loss. Research has shown that people who manage their credit well and pay their bills on time are more likely to be safer drivers or take better care of their home and therefore will have fewer losses. Insurers look at long-term patterns and overall responsible use of credit when determining an individual’s insurance score.
What variables are used in calculating an insurance score? Variables that are primarily used in calculating an insurance score include: outstanding debt, length of credit history, late payments, new applications for credit, types of credit used, payment patterns, available credit, public record, and past due amounts. A credit report typically contains both positive and negative information.
What variables are NOT used in calculating an insurance score? Race, color, religion, national origin, gender, marital status, sexual orientation, age, address, salary, disability, occupation, title, employer, date employed and employment history are NOT used for scoring purposes. Inquiries made for account reviews, promotions or insurance purposes are not used in calculating an insurance score. Insurers look at long-term patterns and overall responsible use of credit.