Do You Know Your Insurance Credit Score?
Last Updated: September 25, 2017
If there weren't already hundreds of credit scoring models, your insurance credit score is another alternative credit score being used to evaluate your credit history. Insurance credit scores are used by insurance companies to determine the risk of issuing you some sort of insurance policy. An insurance credit score is similar to a credit score, wherein it is based on the same credit report information, but it is just calculated differently and there are separate scores for auto and property insurance. This score is used to determine your rates and detect possible claims fraud.
Generic Insurance Credit Scores
There are two primary types of insurance scores, generic and custom. FICO and LexisNexis have built the most commonly used generic insurance scoring models available to consumers and insurance companies. The score is based on the Equifax credit report and there are two scores: Attract Home Insurance Score and Attract Auto Insurance Score.
TransUnion also developed a generic insurance score called the TransUnion Insurance Risk Score which uses the TransUnion credit report. There are two versions available: Home Score and Auto Score. These are available to both consumers and insurance companies to see.
There are also generic insurance scores not available to consumers but only to the insurance industry. These are InScore, which is an Experian version, FICO Insurance Score, and a FICO Insurance Risk Score.
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Custom Insurance Credit Scores
Custom insurance scores are developed by insurance companies by a third party using the insurance company's data and developed solely for their use. These scores are more predictive for the individual company since it is tailored for them. Most of the large insurance companies develop their own custom scores.
Insurance Credit Scores — Are They Legal?
Many states prohibit the use of your credit report by the insurance industry for setting rates or fees. The changes in this arena are constant so it is best if you check the statutes in your state to see if your state allows this or not. When FICO first rolled out their insurance score algorithm, everyone was on board. As the years have gone by, more and more lawsuits have been brought against insurers and more and more insurers dropped the use of this score to determine rates and whether or not they would issue someone a policy.
Where allowed by law, insurance companies can use your credit report to calculate your insurance score when you apply for insurance. They will check your credit every time you apply for say, life insurance, and they may check it again every time your policy is up for renewal. The people who look at your insurance score can be:
- an insurance broker,
- an insurance underwriter,
- and you.
Many states now restrict how your credit report is used, and therefore your insurance score, can be used in the underwriting and rate-making process. In addition, many states require insurers to notify you when they obtain your credit report.
Do Insurance Scores Work?
According to a lot of the bean counters, your credit report data can predict whether or not you will file a claim on your auto or property insurance policy. They contend that if you are careless in the handling of your finances, you may be the same way with the way your drive your car, take care of your home, or take care of your health. Regardless of why it is predictive, it has been proven to be, in fact, predictive.
The use of insurance scores to determine rates and whether or not to issue you an insurance policy, has been an ongoing battle between consumer groups, politician and the insurance industry. The Federal Trade Commission (FTC) filed a report titled, "Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance." The results of their study were that credit-based insurance scores were in fact effective predictors of risk in insurance policies, and were predictive of the number of claims a consumer would file. Bottom line, the FTC felt using insurance credit scores would assist the insurance companies in making decisions faster and cheaper thus passing this savings on to its customers.
Most state legislatures feel credit should not be tied to insurance rates, fees, underwriting or issuing policies. Some states in fact restrict the using credit reports as the sole tool to assess risk and whether or not an insurer can deny someone an insurance policy.
We are sure this debate will go on for years to come. Your best bet is to make sure your credit report is in good shape and check your state's statutes to see if they allow insurance companies to pull your credit before issuing you an insurance policy.