Facts About Insurance Scoring

Different insurance companies differ in their use of insurance scores.

You probably take for granted that when you apply for a loan, a bank will access your credit score to determine the amount of risk they'll be taking in lending you money. Similarly, an insurance company reviews your insurance score to help determine the amount of risk they'll be taking in issuing you a policy.

While insurance scores and credit scores are both based on credit reports, insurance scores are calculated using different variables than those used to calculate credit scores. For example, driver age is a common variable used to determine risk in auto policies. Because younger drivers, as a group, have more accidents and claims than more experienced drivers, they are a greater risk and therefore, must pay a higher rate. Similarily, those with lower insurance scores tend to have more claims than those with higher scores: therefore, those with lower insurance scores pose a greater risk as a group. As with all classification systems, individual performance may vary from that group.

Insurance scoring is fair to all consumers. Studies have shown that all socio-economic levels include people with good insurance scores and people with poor insurance scores.

Insurance inquiries do not affect your score. When you apply for credit, an inquiry appears on your credit report that shows a creditor requested your credit score. This type of inquiry affects your credit score. Insurance scores are different than credit scores and an inquiry from an insurance company does not affect your credit score.

Underwriting becomes more accurate. Insurance scoring adds another level of sophistication to the underwriting process. In the past, many insurance companies have relied on underwriters to make objective judgements about risk characteristics to determine eligibility and premiums. Insurance scoring, an objective evaluation, allows the same factors to be weighed consistently for every customer.

Steps can be taken to eliminate errors.

The Fair Credit Reporting Act and the Fair and Accurate Transactions Act of 2003 protects consumers by prohibiting insurers from using erronous information contained in their credit report. A process has been established that requires customers to be notified of any adverse action as a result of the information contained in their credit report. In addition, customers can obtain a free copy of their credit report and have the right to dispute the accuracy or completeness of any information contained within their credit report.

Insurance scoring can lower your premiums.