What is insurance scoring?
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Insurance scoring is one of many tools that some insurance companies use to appropriately match price to insurance risk. Your insurance score is developed from a formula that weighs and measures credit information such as number of collections, bankruptcies, your outstanding debt, your credit history, the number of new applications for credit and types of credit.
Your insurance score is an additional factor used to develop your premium. Other factors, such as motor vehicle record, annual miles driven, type of car you own, and application information are also used to develop your premium.
Insurance scoring is just one item insurance companies use to ensure that you get the right rate based on your personal and unique circumstances. Not all companies use insurance scoring.
What does my credit have to do with how I drive?
An insurance score, considered with other factors, has been shown to provide a clearer picture of yourpotential insurance risk. Studies show that people who are responsible with their money also tend to be more responsible behind the wheel. Insurance scoring alone cannot determine your level of risk, but it does provide additional information that some companies use to determine the right price for your insurance policy.
Is an insurance score different from a credit score?
YES. An insurance score is not the same as a credit score. Banks and mortgage lenders use credit scores to predict the likelihood that you will repay a loan or some other form of credit debt. Insurance companies use insurance scores to help predict the probability that you may have a loss and file an insurance claim.
Does every company use insurance scoring?
NO. Not all companies in New Jersey use insurance scoring. If a company decides it wants to use insurance scoring, it must get permission from the New Jersey Department of Banking and Insurance. In addition, companies that do use insurance scoring must notify you of the practice. The use of insurance scoring and other factors vary among companies, so consider shopping around for the company, policy and price that are best for you.
Is there specific information that is used in calculating my insurance score?
YES. Insurance scores are based on information such as your payment history, collections, bankruptcies, outstanding debt, types of credit, and the length of credit history. If you pay your credit card bills, loans payments and mortgage on time, it will improve your insurance score. On the other hand, if you make late payments and collections have started, it may have a negative impact on your insurance score and the cost of your insurance policy.
Does my income affect my insurance score?
NO. Your income is not used in determining your insurance score. Use of personal information including your race, religion, gender, marital status and where you live, is not considered.
Will insurance companies keep my credit information private and confidential?
YES. Most insurance companies do not directly participate in the process of developing your insurance score. Insurers generally hire vendors to look at information provided by major credit bureaus, such as payment history and other related data, and use it to develop an insurance score for you. The vendor then gives your score, not your credit report, to your insurance company.
Is my insurance score always the same?
NO. Your insurance score may vary by company. It may be different because every company uses different information and its own formula to calculate your score. That is why it is important for you to shop around before buying an insurance policy.
Will my insurance score alone determine the amount I pay for insurance?
NO. Your insurance score is an additional factor used to underwrite an insurance policy. Other factors, such as motor vehicle records, annual miles driven, type of car you own, and application information are considered along with your insurance score to develop your premium for automobile insurance.
If there is a mistake on my credit report that affects my insurance score, can I correct it?
YES. You should regularly check your credit report. Under the New Jersey Fair Credit Reporting Act, New Jersey residents can get one copy annually, free of charge, from each of the major credit reporting bureaus.
Credit reports can be ordered from:
If a credit report has an error, and it is corrected by the credit reporting agency, you can ask your insurance company to recalculate your insurance score.
Your insurer will notify you if your policy or premium was in any way affected by your credit information. You can check your credit report at any time to make sure it is accurate.
If something happens in my life that affects my credit, will companies take that into account?
YES. Different companies handle life events differently. Some of the life events companies may consider include catastrophic illness or injury; death of a spouse, child or parent; temporary loss of employment; divorce, and identity theft.
Remember, insurance scores may vary by company because they may use different information and formulas to calculate your score. So, changes to your credit report may also change your insurance score.
That is why it is important for you to shop around when buying an insurance policy.
Is there anything I can do to improve my insurance score?
YES. Consumers with the best insurance scores generally pay bills on time, keep credit balances low and apply for credit only as needed. You may be able to improve your insurance score over time if you wisely use the credit given to you.
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The use of insurance scores: Under Federal law, companies may use consumer reports such as credit reports to help determine policy rating and eligibility. The following information explains how the use of insurance scores helps us determine program eligibility as well as the premium an individual will pay.
Why we use insurance scores
Insurance scores have proven to be effective predictors of insurance losses. This is important to you as a customer, because these scores help the company offer the best coverages and prices to consumers who are less likely to incur numerous losses, and keep the policy rates competitive.
Insurance scores are not the same as credit scores
Although the insurance score is based on credit information, it is important to understand the difference between insurance scores and credit scores:
- An insurance score measures the potential for future loss
- A credit score predicts how likely someone is to repay a loan or other credit obligation
- Because they have different focuses, credit-report information is used differently to calculate the credit score than it is to calculate the insurance score
How insurance scores are calculated
An insurance score is developed from a mathematical formula that weighs and measures the credit information available at a particular point in time. State and federal laws permit companies to consider factors such as payment history, length of credit history, delinquent accounts, the number of collections, bankruptcies, the number of applications for new credit, and outstanding debt and account balances. These factors help identify credit patterns that indicate the probability of future losses. When Foremost uses models or formulas owned by third party vendors, Foremost does not have access to the formulas that were used to determine the scores.
How we use insurance scores
At Foremost, the insurance scores are divided into varying rating levels. These rating levels are based partly on the insurance score, but this score is NOT the sole factor in determining the premium. Traditional rating factors depend on the type of policy involved and may include:
- Coverages the customer has selected
- Limit amounts chosen for those coverages
- Motor vehicle driving records
- Claim history.
If you have not received our best rate, you will receive a separate notice in your policy packet explaining this, in accordance with the Fair Credit Reporting Act.
Frequency of insurance scoring
Foremost does not use insurance scores for all products. For those products that do apply insurance scores, Foremost obtains the score at the time the customer applies for insurance. It is possible that we may obtain a new score at renewal, or we may continue to use the rating level determined when the policy was first issued. This depends on the state laws and regulations and the design of the state-specific program. Many states require that we review the insurance score at least once every three years.
Little or no credit information
The lack of credit history or the inability to calculate an insurance score will not be the sole factors used to determine premium or to deny, cancel or non-renew a policy.
Corrections to your credit information
If you find an error on your credit report and have it corrected through the reporting agency/credit bureau, that agency/bureau will send you a document stating the correction has been made. After you receive that document, you may call your agent or representative to request that Underwriting re-score your policy. Please be sure to have the correction verification document and your policy number when you call.
Improving your insurance score
If you have received our notice called “Important Information about Consumer Reports – Adverse Action Notice,” please take a moment to read the section titled “Further Explanation of Insurance Score Reasons.” This section gives important information regarding the specific factor(s) that have had the most impact onyourinsurance score, as well as general information on how you might address each factor.
Inquiries for insurance scoring
Foremost’s request to view your credit information for insurance scoring purposes is considered a “soft inquiry.” This means you may see our inquiry listed on your report; however, our inquiry will not have any affect on your insurance score.
Customer satisfaction is important to us. If you have any questions, please contact the agent or representative shown on your Declarations Page. Your representative will be happy to review your policy and coverages with you.
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Credit-Based Insurance Scores
Last Updated 7/27/18
Issue: Insurance companies often use consumer credit information in determining if they will offer a consumer automobile or homeowners’ insurance policy and how much that policy will cost. A credit-based insurance score is a rating based in whole or in part on a consumer’s credit information. Credit-based insurance scores use certain elements of a person’s credit history to predict how likely they are to have an insurance loss. Credit-based insurance scores were introduced by the Fair Isaac Corporation (FICO) in the early 1990s. FICO estimates approximately 95% of auto insurers and 85% of homeowners’ insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor.
Overview: Insurers use credit-based insurance scores primarily in underwriting and rating of consumers. Underwriting is the process by which the insurer determines whether a consumer is eligible for coverage and rating is the process that determines how much premium to charge a consumer. The credit-based insurance score models used by insurers are designed to predict the risk of loss. Insurers use credit-based insurance scores for underwriting to assign consumers to a pool based on risk and then for rating by deciding how to adjust the premium up or down.
Insurers argue that the use of credit-based insurance scores is necessary to properly evaluate risk and charge individual policyholders rates that most closely align with their true risk. They also note that not using credit-based insurance scores could result in lower-risk individuals bearing some of the costs from higher-risk individuals.
Typically states will not allow credit-based insurance scores to be used as the sole basis for increasing rates or denying, cancelling or not renewing policies. Some states prohibit credit-based insurance scores being used as the sole basis in underwriting or rating decisions. Some states require insurers to notify applicants or insureds that adverse credit-related decisions have been taken regarding pending applications or existing coverage based on the consumer’s credit score. A few states, (Georgia, Hawaii, Maryland, Oregon, and Utah), have established prohibitions on the use of credit history information in certain circumstances.
Consumer groups continue to have concerns with the use of credit based insurance scores, including the fact that most consumers do not understand the concept of credit-based insurance scoring or how or why it works. Many consumers are not even aware that their credit characteristics are being used to create a score that will then affect their purchase of an insurance policy. Even if they have the knowledge of the existence of credit-based insurance scores, it is not intuitive for consumers to understand how credit-based insurance scores work or why they work.
Some groups allege that the use of credit-based insurance scores falls disproportionately on certain minority and low income groups. Moreover, the use of credit-based insurance scores may not appropriately encompass unforeseen life events (events outside consumers’ direct control).
Status: State insurance regulators continue to monitor the impact of credit-based insurance score on consumers. A Credit Based Insurance Scoring Symposium was held at the 2011 NAIC Fall National Meeting to discuss the use and impact of credit-based insurance scores. The Symposium featured representatives from two credit information vendors as well as consumer representatives.
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Insider Information: How Insurance Companies Measure Risk
Insurance companies use a methodology called risk assessment to calculate premium rates for policyholders. Using software that computes a predetermined algorithm, insurance underwriters gauge the risk that you may file a claim against your policy. These algorithms are based on key indicators about you and then measured against a data set to weigh risk. Insurance underwriters carefully balance the insurance company’s profitability with your potential need to use the policy.
Resources such as MoodyвЂ™s Risk Analysis contain detailed data sets that help insurers segment potential customer groupsвЂ™ predictive behaviors. For example, third-party software vendors can pull verified data from this source to quickly calculate decisions about the creditworthiness and risk assessment of certain subsegments of their audience. Subsegments could be males under the age of 25, a family history of certain illnesses or single women who fall into a particular income bracket.
Insurance underwriters seek to protect both policyholders and the companies that back these policies. Using verified research data helps underwriters evaluate an insurerвЂ™s potential exposure to claims that could result in expensive payouts. Economic forecasting, wage and industry trending and market stability assessments all are part of the data that is ultimately used to calculate your insurance premium.
If there are criteria present that tend to result in more payouts, your payment increases. For example, smoking is a high-risk behavior because it is known that smokers are likelier to need hospitalization. Health insurance companies may charge smokers more because there is a statistical likelihood that the policyowner will cost them money.
All drivers are required to carry auto insurance that covers potential costs related to an accident or theft. The costs may include repair or replacement of vehicles, or medical care that is related to injuries sustained in an accident. If law enforcement deems a driver at fault in an accident, that driver’s insurer picks up the tab. Auto insurance underwriters use a list of several criteria to determine whether you are likely to cause an accident.
Insurance companies vary, but there are common criteria that underwriters examine when calculating your premium.
- Credit history: Good credit indicates that you are responsible and can be trusted to pay your bills on time. Research has also shown that adults with lower credit scores tend to be poorer drivers, making bad credit a risky behavior. The Federal Trade Commission found that regardless of external factors like ethnicity or income level, drivers with lower credit scores mean policyholders who make more claims against insurers. This undisputable data plays a significant role in the price of your premium.
- Age: Younger drivers have been proven to be more accident-prone than experienced drivers. Consequently, it is a blanket rule that drivers are charged higher premiums until age 25. If you believe that you are a low-risk driver in spite of your age, it is up to you to demonstrate this in order to take advantage of discounts offered by insurers. Students with good grades, for example, are often offered a discount to offset the high premium. Discounts may also be offered to teens at age 21 if the driver has maintained a clean driving record.
- Address: City dwellers pay more for insurance because there are more people in cities, raising the likelihood of theft, accidents or vandalism. In fact, which city you call home may also affect your premium rates. The 2012 Allstate AmericaвЂ™s Best Drivers Report examined the rates of auto insurance claims in 200 U.S. cities. If you live in Philadelphia, statistics say that you are likely to have an accident every 6.1 years. That number is 64.1% higher than the national average, and Philadelphia residents pay the premiums to prove it.
- Driving record: Your personal driving record strongly impacts your premium. If you have a history of speeding tickets, accidents or a DUI charge, the loss potential for your insurer is greater. The best indicator of future behavior is seen in the past; if you have a poor driving record you will pay high auto insurance premiums in addition to fines and fees. When you have maintained a good driving record long enough for your insurer to safely risk lowering your premium, you may be rewarded with вЂњgood-driver discount rates.вЂќ
- Marriage status: Married drivers are considered more likely to drive with loved ones in the passenger seat; fewer accidents are reported in this group, perhaps because of a reluctance to take needless risks when children and family members are in their cars. A study in New Zealand proved that never-married drivers are twice as likely to file a claim for collision, making single drivers a high-risk group regardless of their safety measures.
- Gender: Insurance premiums for men are skewed higher. While the practice may seem unfair, the Insurance Institute for Highway Safety conducts annual statistical analysis of various criteria among drivers. In 2010 men drove more miles on average than their female counterparts, automatically raising the likelihood of collision. Men were also shown to drive under the influence, speed or refuse to wear seat belts.
Men typically drive more miles than women and more often engage in risky driving practices including not using seat belts, driving while impaired by alcohol, and speeding. Crashes involving male drivers often are more severe than those involving female drivers.
- Prior coverage: Driving without insurance is considered irresponsible and so it results in higher premiums. Automobile insurance is required by every state. While you cannot be penalized for driving an uninsured vehicle after the fact, insurance underwriters correctly view this as illegal. Prior law-breaking is also a statistical indicator that poor decisions may be made again, such as reckless driving in this scenario. You must show proof of prior insurance to avoid being cast in this high-risk group.
Auto insurance companies weigh these factors and others including your occupation, military service or your education level to determine your premium payment. Your ethnicity, religion or income cannot be used against you. If you are judged a high risk, you may be denied insurance. Most states offer a high-risk alternative source of insurance; your driving mistakes will cost you dearly in these cases because you have demonstrated that you are likely to cause insurer payouts.
A life insurance policy is insurance that pays out to your beneficiaries upon your death. A life insurance underwriter will examine your lifestyle to determine your life expectancy. High-risk criteria for life insurance policies include bad credit, which is statistically aligned with accident-prone behavior. Your family health history and personal health status also weigh heavily as future indicators of cost for the insurance company.
Age and gender also come into statistical play, along with dangerous hobbies like skydiving, mountain climbing or motorcycle riding. All can significantly increase your premiums. Military service members may have a war clause added to a life insurance policy in the event of death in combat. Military branches offer life insurance to soldiers who are unable to obtain private insurance.
Homeowners and Rental Insurance
Nearly 98% of U.S homeowners are covered by the basic homeownerвЂ™s insurance package required by mortgage companies. Unfortunately, few homeowners realize just how minimal these basic plans really are. Until recently, standard plans covered just about any вЂњact of natureвЂќ. Insurance companies dropped this coverage because of the incidence of flood disasters rose dramatically over the last ten years. Now, you must purchase coverage for disasters such asВ floods,В storms or earthquakes separately.
Homeowners are choosing not to pay more for additional coverage. Now that insurance companies have eliminated flood coverage, only 12% of homes in flood prone areas are actually covered. The percentage of homes covered against earthquakes in California is also just over 10%, according to theВ Insurance Information Institute.
You can buy plans that will cover home damages of up to $250,000 from theВ National Flood InsuranceProgram. Flooding can happen anywhere, but if you happen to live in a lower-risk area, you can protect your home for as little as $300-$400 each year. The cheapest earthquake coverage might run slightly higher, from $300-$500. Either way, insurance underwriters will determine your coverage costВ after evaluating the construction and stability of your home. Location in relation to fire stations, fire hydrants or sources of flooding is also factored intoВ the equation.
Your credit history and your occupation, as well as the length of time you have held stable work, will also be judged as indicators of your responsibility. In areas prone to flooding, flood coverage is often mandatory. Rental insurance covers the contents of a rented dwelling and is generally priced based on the number of rooms in the home.