An insurance score is a rating used to predict the likelihood that a customer will file an insurance claim. This score is based on an analysis of a consumer’s credit rating, and the method for calculating it varies from insurer to insurer. While many companies use proprietary formulas to calculate the scores, the factors used in the calculation include the customer’s outstanding debt, length of credit history, payment history, amount of revolving credit versus amount of credit in the form of loans, available credit and monthly account balance.
Unlike a credit rating, which uses personal financial information to determine your ability to repay debts, insurance-score calculations do not factor in your income. This omission means that it is very possible for you to be penalized for taking out a large loan or charging a large amount on your credit cards each month even if your income is more than enough to cover the expenses.
The Logic
Insurance companies justify the use of insurance scores by citing studies that apparently show a positive correlation between credit scores and insurance claims. At some level, this may seem to make sense. At the level of minor traffic accidents, for example, it is reasonable to argue that individuals with poor credit are more likely to file claims, if for no other reason than the fact that they lack the funds to make repairs on their own.
Of course, if we look at the logic behind insurance scores we might want to look at it also from a business perspective: insurance scoring is quite profitable, especially since almost nobody qualifies for the lowest-tier pricing. Keep in mind that insurance premiums are a recurring revenue stream for insurance companies, and the scores help justify higher premiums.
The Insurance Score Is Here to Stay
90% of insurers use insurance scoring in some way
The use of credit history to determine insurance premiums is quite alarming to many consumers, particularly to those who have never filed an insurance claim but still don’t qualify for the lowest available pricing.
How are insurance rates calculated?
1. Area (where you live) due to crime rates, accident stats
2. Your age
3. Your credit
4. Your driving record
5. Your claim history (this can include emergency roadside coverage claims)
6. Any lapses in coverage. There are discounts for longevity
Keep this information in mind the next time you are shopping for insurance.