December 11, 2008
The use of credit information is a fact of life today. Whether a consumer is applying for a credit card, renting an apartment, seeking a job or asking for cable service, credit history is used in the decision-making process. Credit says a lot about an individual. It tells employers, banks, utility companies – and now insurance companies – how a consumer handles his or her financial responsibilities. Today, more than 90 percent of property and casualty insurers use insurance scoring as part of the underwriting and rating process.
What is insurance scoring?
In layman’s terms, insurance scores measure personal responsibility. Actuarial research in the industry has shown that insurance scoring relates to how responsibly people manage other important aspects of their lives, such as maintaining their car or home. For example, someone who is financially more responsible will be more likely to lock the door, turn off the stove, put out a cigarette or pick up toys on the front lawn to prevent potential claims.
Insurance score vs. credit score
Both an insurance score and a credit score are derived from the same source – a credit report — but they are distinctly different. Insurance scores, for example, do not factor in a consumer’s income.
Unlike a mortgage company, an insurance company is not assessing a customer’s credit-worthiness. Instead, an insurance company only considers those items on a credit report that will indicate future loss potential. An insurance score, for example, considers amounts currently past due, total number of collections or number of inquiries in the past several years.
The primary factors considered for an insurance score include: payment history, bankruptcies, collections, new applications for credit, amount of outstanding debt, types of credit in use and length of credit history.
An insurance score does not take into account age, address, employer, employment history, occupation, ethnic group, religion, gender, marital status, nationality or income.
According to III, the use of credit in underwriting and rating makes insurance rates more accurate, fair and objective. In addition, this tool benefits most consumers because it prevents subsidizing the worst insurance risks.
For more information about insurance scoring, log onto the III Web site at www.iii.org.Each insurance company uses their own insurance scoring model based on the experience of their policyholders. Contact your agent to explain the model they use.
Common Myths about Insurance Scoring
Myth #1 Insurance scoring discriminates.
Fact: There is no evidence supporting the contention that insurance scoring discriminates. Industry experts, such as Robert Hartwig from the Insurance 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 scoring benefits most consumers, since most people manage their finances wisely and have good credit histories. Insurance scoring makes insurance more fair. Because of insurance scoring, insurers can properly rate the risk based on the exposure and collect the appropriate premium – rather than charging everyone the 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’s insurance score, an isolated instance of a late payment will not have a significant impact on the applicant’s eligibility. Insurers look at long-term patterns 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 balances low, applying for credit only as needed and closing old accounts, Consolidating debt by paying off credit cards with the highest limits first – over time insurance scores can improve. Credit bureaus recommend that consumers check their credit report annually to ensure the information is up-to-date and accurate. Consumers can obtain a copy of their insurance score, directly from credit bureaus such as Experian, Equifax or TransUnion.
Equifax
www.equifax.com
1-800-685-1111
Experian
www.experian.com
1-888-397-3742
TransUnion
www.tuc.com
1-800-888-4213
Insurance Scoring, Credit Scoring and Your Insurance Rates
December 11, 2008
The use of credit information is a fact of life today. Whether a consumer is applying for a credit card, renting an apartment, seeking a job or asking for cable service, credit history is used in the decision-making process. Credit says a lot about an individual. It tells employers, banks, utility companies – and now insurance companies – how a consumer handles his or her financial responsibilities. Today, more than 90 percent of property and casualty insurers use insurance scoring as part of the underwriting and rating process.
What is insurance scoring?
In layman’s terms, insurance scores measure personal responsibility. Actuarial research in the industry has shown that insurance scoring relates to how responsibly people manage other important aspects of their lives, such as maintaining their car or home. For example, someone who is financially more responsible will be more likely to lock the door, turn off the stove, put out a cigarette or pick up toys on the front lawn to prevent potential claims.
Insurance score vs. credit score
Both an insurance score and a credit score are derived from the same source – a credit report — but they are distinctly different. Insurance scores, for example, do not factor in a consumer’s income.
Unlike a mortgage company, an insurance company is not assessing a customer’s credit-worthiness. Instead, an insurance company only considers those items on a credit report that will indicate future loss potential. An insurance score, for example, considers amounts currently past due, total number of collections or number of inquiries in the past several years.
The primary factors considered for an insurance score include: payment history, bankruptcies, collections, new applications for credit, amount of outstanding debt, types of credit in use and length of credit history.
An insurance score does not take into account age, address, employer, employment history, occupation, ethnic group, religion, gender, marital status, nationality or income.
According to III, the use of credit in underwriting and rating makes insurance rates more accurate, fair and objective. In addition, this tool benefits most consumers because it prevents subsidizing the worst insurance risks.
For more information about insurance scoring, log onto the III Web site at www.iii.org.Each insurance company uses their own insurance scoring model based on the experience of their policyholders. Contact your agent to explain the model they use.
Common Myths about Insurance Scoring
Myth #1 Insurance scoring discriminates.
Fact: There is no evidence supporting the contention that insurance scoring discriminates. Industry experts, such as Robert Hartwig from the Insurance 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 scoring benefits most consumers, since most people manage their finances wisely and have good credit histories. Insurance scoring makes insurance more fair. Because of insurance scoring, insurers can properly rate the risk based on the exposure and collect the appropriate premium – rather than charging everyone the 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’s insurance score, an isolated instance of a late payment will not have a significant impact on the applicant’s eligibility. Insurers look at long-term patterns 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 balances low, applying for credit only as needed and closing old accounts, Consolidating debt by paying off credit cards with the highest limits first – over time insurance scores can improve. Credit bureaus recommend that consumers check their credit report annually to ensure the information is up-to-date and accurate. Consumers can obtain a copy of their insurance score, directly from credit bureaus such as Experian, Equifax or TransUnion.
Equifax
www.equifax.com
1-800-685-1111
Experian
www.experian.com
1-888-397-3742
TransUnion
www.tuc.com
1-800-888-4213