What Is Insurance Score & Does Credit Affect Insurance?

An insurance score, also known as an Insurance Credit Score, is a rating computed and used by insurance companies that represents the probability of an individual filing an insurance claim while under coverage. What Is Insurance Score & Does Credit Affect Insurance? You may ask!

The score is based on the individual’s credit rating and will affect the premiums they pay for the coverage.

Low scores reflect higher risk, so a high points will result in lower insurance premiums. Conversely, a low score will result in higher premiums.

The cost of auto and home insurance depends on a number of factors considered by carriers when evaluating a prospective customer.

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In most states, age, location and past claims history are significant rating factors, but another factor that can play an important role in determining rates is your credit-based insurance score.

Whether you are a new insurance shopper or only want to switch providers for a better deal, your credit-based insurance score can help determine the price you have to pay for your policy.

Having a basic understanding of what goes into your insurance score. How it is utilized can help you save money on your auto and homeowners insurance. By reducing your risk as a customer.

What is an Insurance Score?

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Based on the information provided by major credit rating bureaus, insurers may use this information to create their own scores, known as credit-based insurance scores, to help determine your risk as a policyholder.

The higher your score, the less likely you are to file a claim, and lower scores represent a greater risk to the insurance company that you’ll file a claim, based on actuarial data.

Because premiums are determined based on risk. This is why your insurance score can impact how much you pay for insurance.

However, not all states allow the use of credit as a factor for determining auto insurance rates. The states that prohibit credit from being used are:

• Hawaii,
• California,
• Michigan, and
• Massachusetts.

Here are the states that prohibit credit from being used for homeowners insurance rates:

• California,
• Maryland, and
• Massachusetts.

Understanding Insurance Scores

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An insurance score is a key component in determining the total premium that an individual pays for health, homeowners, auto, and life insurance policies.

Insurance companies determine an individual’s score, in part, by using property claim databases like the Automated Property Loss Underwriting System (A-PLUS) and the Comprehensive Loss Underwriting Exchange (CLUE).

The Points range between a low of 200 and a high of 997. Insurance scores of 770 or higher are favorable, and scores of 500 or below are poor. Although rare, there are a few people who have perfect insurance scores.

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Scores are not permanent and can be affected by different factors. There are several ways for a consumer to increase their low scores (and possibly lower their premiums).

To begin, a consumer will benefit by improving their credit score and paying bills on time, in addition to reducing any type of debt.

A consumer may also try to limit the number of insurance claims filed over a certain period in order to boost their points.

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How To Calculate Insurance Score?

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Insurers use several factors to determine your insurance score. Everything from payment history to outstanding debt to credit mix is calculated into your score.

Each of these variables can be obtained from your credit report. Below are the most critical factors, as listed by the National Association of Insurance Commissioners (NAIC).

The percentage shows how much of your points is determined by each variable.

• Credit History Length (15%): The amount of time you have had a line of credit, whether credit cards, loans, mortgages or another format, goes into determining your insurance score.
• Payment History (40%): Everything from missed payments to punctual payments is the primary factor used in insurance and credit scores because it helps insurers from an idea of your premium payments.
• Outstanding Debt (30%): How much money you owe at the time of the report is of great importance to the insurance provider because it tells the company how likely you are to pay premiums regularly and file a claim.
• Pursuit of New Credit (10%): New applications for new lines of credit can imply increased risk. Even if you are handling your current credit limits and debts well, adding another line of credit could destabilize your rating.
• Credit Mix (5%): While this has the smallest impact amongst all other factors, the variety and number of credit lines you have can affect your insurance score.

What is a Good Insurance Score?

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Insurance scores range from good to bad. What Is Insurance Score & Does Credit Affect Insurance?

The higher your points, the better an insurer will rate your level of risk in states where insurance scores are a rating factor.

According to Progressive, insurance scores range from 200 to 997, with everything below 500 considered a poor score, and everything from 776 to 997 considered a good score.

So, what is a good insurance score? Anything over 775. However, please note all insurers have different underwriting standards for rating auto and home policies.

Why is an Insurance Score Important?

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Insurance Scores play a significant role in calculating the cost of your insurance premiums, according to the Insurance Information Institute (Triple-I).

Insurance companies assess how much risk they incur to provide coverage to a customer. This expected cost, amongst other factors. Its used to determine how much the company should charge a customer in premiums to avoid losing money.

The vast majority of insurers in the U.S. are private businesses and cannot survive without making a profit.

Without the use of insurance scores, companies would have less accuracy in predicting a customer’s cost. To offset this increased margin of error, companies would likely need to raise the rates on all customers.

How to improve your Insurance Score

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Thankfully, there are many ways to improve your points.

For the most part, strategies and techniques for improving credit scores will also increase your credit-based insurance score.

The primary approach is to treat your credit and bills with as much financial responsibility as you can.

This means paying bills on time, keeping your credit utilization rate at or below 30%, quickly paying down debt and meeting financial agreements and contracts.

To see your credit score and track when and how much it is improving, you can go to www.annualcreditreport.com for free copies of your credit reports.

When you use this link, you will be given copies of your credit report from each of the three primary credit bureaus. If your credit score is improving, it’s likely your insurance score is as well.

Because of the pandemic, you are allowed to access your credit reports weekly through this site. Instead of annually as had been the process previously.

What Credit Factors can affect an Insurance Score?

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Favorable credit information results in lower premiums because both above-average and below-average factors are evaluated. You still have the opportunity to get a lower rate, even if there are some below-average items in your credit history.

Favorable Credit Factors might include:

• Low use of available credit
• Long-established credit history
• No late payments or past due accounts
• Numerous open accounts in good standing

Unfavorable Credit Factors might include:

• Collection accounts
• High use of available credit
• Numerous past-due payments
• Numerous recent applications for credit

These factors vary by state to comply with the laws of each state.

How can I improve an unfavorable Insurance Score?

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While there are some things that are out of your control.

Having a short credit history, for instance. You can generally improve your insurance score with by:

• Making loan and mortgage payments on time,
• Keeping accounts in good standing, and
• Avoiding numerous credit applications in a short period of time.

Also, look at how much credit you have available. If you are using all or nearly all of your available credit. It could be regarded as an unfavorable factor.

Frequently asked questions: What Is Insurance Score?

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a). Is my Home Insurance Score the same as my Auto Insurance Score?

Typically, your insurance score is the same whether the product is home or auto insurance.

However, this can vary depending on your insurer’s underwriting process, and whether the same company provides your home and auto insurance.

It can also depend on what state you reside in and if there are regulations prohibiting usage of credit as a rating factor.

b). Does an Insurance Score affect all policy types?

In most states, insurance scores are used to determine your auto and home premium.

However, some states have laws limiting which policy forms can use credit reports to calculate premiums.

For example, some states limit the use of an insurance score to auto or home insurance. While other states allow your points to be used with all insurance policies.

c). Are they the same as credit scores?

No. A credit score is based on your ability to repay amounts you have borrowed.

An insurance score predicts the likelihood of you becoming involved in a future accident or insurance claim. It is based on information gathered from policyholders with similar credit characteristics who have had previous claims with us.

When banks and other lenders determine credit scores, they may factor in your income, job history and other matters that might affect your ability to repay a loan.

Banks also can deny you a loan based on your credit score. We do not consider income or job history, and we won’t deny you a policy based on your insurance score.

d). How is it different from my Credit Score?

Your insurance score is calculated from your credit report to determine how expensive you are to insure.

Your credit score is calculated from the same report but to determine how likely you are to go delinquent on a debt.

Each uses overlapping variables, but the formula, outcome and purpose are all different. Please note that all insurers engage proprietary underwriting guidelines so how they use insurance scores to determine your rate can vary.

e). Do all states use an Insurance Score?

Like California and Massachusetts, some other states prohibit insurers from using credit-based insurance scores when calculating auto and homeowners rates.

Maryland prohibits insurers from using insurance scores when calculating home insurance rates but allows its usage for auto insurance rates.

Oregon limits what credit information can be used to calculate your rates. The laws vary by state; however, most states allow credit-based data to help determine rates.

f). What makes your Insurance Score decrease?

Anything that makes your credit score worse will negatively impact your points

Being late on your bills and debt payments, taking out excessive lines and types of credit and maintaining a high credit utilization rate can reduce (worsen) your insurance score.

What Is Insurance Credit Score & Does Credit Affect Insurance?