Insurance Scoring, Credit Scoring and Your Insurance Rates
The use of credit information is a fact of life today. Whether a consumeris applying for a credit card, renting an apartment, seeking a job or askingfor cable service, credit history is used in the decision-making process.Credit says a lot about an individual. It tells employers, banks, utilitycompanies - and now insurance companies - how a consumer handles his or herfinancial responsibilities. Today, more than 90 percent of property and casualtyinsurers use insurance scoring as part of the underwriting and rating process.
What is insurance scoring?
In layman's terms, insurance scoresmeasure personal responsibility. Actuarial research in the industry has shownthat insurance scoring relates to how responsibly people manage other importantaspects of their lives, such as maintaining their car or home. For example, someone who is financiallymore responsible will be more likely to lock the door, turn off the stove, putout a cigarette or pick up toys on the front lawn to prevent potentialclaims.
Insurance score vs. credit score
Both an insurance score and a credit score arederived from the same source - a credit report -- but they are distinctlydifferent. Insurance scores, for example, do not factor in a consumer's income.
Unlike a mortgage company, an insurance company isnot assessing a customer's credit-worthiness. Instead, an insurance company only considers those items ona credit report that will indicate future loss potential. An insurance score,for example, considers amounts currently past due, total number of collectionsor number of inquiries in the past several years.
The primary factorsconsidered for an insurance score include: payment history, bankruptcies, collections, new applicationsfor credit, amount of outstanding debt, types of credit in use and length ofcredit history.
An insurance score does nottake into account age, address, employer, employment history, occupation,ethnic group, religion, gender, marital status, nationality or income.
According to III, the use of creditin underwriting and rating makes insurance rates more accurate, fair andobjective. In addition, this tool benefits most consumers because it preventssubsidizing the worst insurance risks.
For more information about insurancescoring, log onto the III Web site at www.iii.org.Each insurance company uses their own insurance scoring model based on theexperience of their policyholders. Contact your agent to explain the model theyuse.
CommonMyths about Insurance Scoring
Myth #1 Insurance scoringdiscriminates.
Fact: There is no evidence supporting the contention that insurancescoring discriminates. Industry experts, such as Robert Hartwig from theInsurance
Information Institute, have thoroughly researched this topic and foundno indication that insurance scoring discriminates. In addition, stateguidelines prevent insurers from using race, ethnicity, religion or income whenconsidering an insurance scoring.
Myth #2
Insurance scoring hurts Policyholders.
Fact: Insurance scoringbenefits most consumers, since most people manage their finances wisely andhave good credit histories. Insurance scoring makes insurance more fair.Because of insurance scoring, insurers can properly rate the risk based on theexposure and collect the appropriate premium - rather than charging everyonethe same price which would be unfair for good Policyholders.
Myth #3
If a Policyholder is divorced, they will pay more for insurance.
Fact: When considering an applicant'sinsurance score, an isolated instance of a late payment will not have asignificant impact on the applicant's eligibility. Insurers look at long-termpatterns and overall responsible use of credit.
Myth #5
Consumers can't improve their insurance score.
Fact: By using credit wisely - paying bills on time, keeping balanceslow, applying for credit only as needed and closing old accounts, Consolidatingdebt by paying off credit cards with the highest limits first - over timeinsurance scores can improve. Credit bureaus recommend that consumers checktheir credit report annually to ensure the information is up-to-date andaccurate. Consumers can obtain a copy of their insurance score, directly fromcredit bureaus such as Experian, Equifax or TransUnion.
Equifax
1-800-685-1111
Experian
1-888-397-3742
TransUnion
1-800-888-4213