Posted: 04.17.2007
Credit has become an important factor in underwriting for home and auto insurance because it helps make assessing risk more accurate.
Insurers use credit scores differently than lenders, however.
Lenders use a “credit score” to judge your credit-worthiness; they are trying to judge your ability to pay off a loan and assess how much you can afford to pay.
By contrast, insurers want to know whether you’re making payments regularly, and if they’re on time. They are interested in how many open accounts you have, whether you’re regularly adding more accounts and if your open accounts are at or near their limits. Insurers also want to know if you’ve filed for bankruptcy. All of this data is compiled and an “insurance score” is generated. This score directly affects the premium prices you pay, as it is a measure of risk tolerance.
The insurance score also is a measure of stability in your life. There is strong statistical evidence, based on years of analysis, that people with high insurance scores - that is, people with more stability in their lives - suffer fewer accidents. The opposite is also true: people with lower insurance scores as a group tend to file more insurance claims.
In our insurance system, which is regulated by individual states, drivers and homeowners who are higher insurance risks should pay more for insurance. Those who are lower risks should pay less. The use of credit, together with other rating factors such as the number of claims you’ve filed, where you live and drive and what kind of house or car you own, helps insurance companies better determine the appropriate rates to charge.
Be aware, however, that not all insurance companies use credit scores the same way, and some don’t use credit scores at all in determining your rates. Many companies use credit when you first apply for insurance. You are grouped with people of similar scores and remain there; you will not be re-scored unless you ask. If your credit score has improved since your last insurance purchase, ask your agent to re-score your account to see if your rates can be improved.
Source: Insurance Information Institute
