What Are Insurance Credit Scores?
Insurance credit scores are used by insurance companies to determine the risk of issuing you some sort of policy. They use credit report and non-credit report information, including previous claim data. The credit report data includes all sections except personal data such as age, income, address, sex, gender, marital status, nationality, or race. It uses the credit information such as past due accounts including bankruptcies and collections, length of credit history, new credit inquiries or applications, use of certain types of credit, and credit utilization (how close you are to your credit limit). Medical information is no longer allowed to be used in insurance credit scoring systems, which includes medical collections.
The claims data is the dollar amount of the claim and the premium; this determines the account profitability. The claims data is not one of the factors in the score, because it is not on the credit report. The claims data is used to determine the credit characteristics of those more likely to file a claim.
The result is an insurance credit score that predicts the likelihood of filing an insurance claim. The scores are usually three digit scores, with high score being a low risk of filing a claim. The most current information has the most impact on the score.
There are separate scores for auto and property insurance. They are developed the same way, except claims information is specific for each. For example, auto claims information is used to develop the auto insurance score.
Insurance credit scoring is used in a variety of ways – for underwriting (including rating tier selection), rating (or premium development), coverage eligibility, marketing, and payment plan eligibility. The scores aren’t the only information used to determine risk for auto and property insurance. Insurance underwriters use other information such as age, gender, type of car, your MVR record (for auto insurance), claims information, and application data.
Your credit report is used to calculate your insurance score which impacts also impacts your insurance premium and your insurance credit score. This is another reason to make sure your credit report is accurate and you pay your bills on time and strive to have good credit.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.