Have you ever wondered why your neighbor pays less for auto insurance than you, even though you both drive similar cars and have similar driving records? The answer might lie in something called an insurance score. Just like your credit score impacts your ability to secure a loan or credit card, your insurance score can have a significant influence on your insurability and the premiums you pay for both home and auto insurance. Below, we'll dive into the world of insurance scores, explaining what they are, how they're calculated, and why they matter more than ever in today's insurance market.
Understanding Insurance Scores
Insurance Scores vs. Credit Scores: Before we proceed, it's essential to clarify that insurance scores are not the same as credit scores. While credit scores focus on your creditworthiness for loans and credit cards, insurance scores are specifically designed to assess your risk as an insurance policyholder.
Statistically speaking, those with higher credit scores are less likely to file a claim with their insurance company. As such, insurance companies use information from major credit rating bureaus to create their own rating system, akin to a credit score for insurance. This rating system is called a credit-based insurance score. Your insurance score helps your insurer determine your risk as a policyholder. Because premiums are determined based on risk, your insurance score can impact how much you pay for insurance.
The Factors That Matter:
Insurance companies calculate your insurance score using various factors, including:
Previous Credit Performance (40 percent): Your track record of making payments on time or missing them can significantly impact your insurance score.
Outstanding Debt (30 percent): The amount of money you owe plays a crucial role in assessing your likelihood of regularly paying premiums and filing claims.
Credit History Length (15 percent): The length of time you've had credit, including credit cards, loans, and mortgages, contributes to your insurance score.
Pursuit of New Credit (10 percent): Applying for new lines of credit, even if you manage your existing ones well, can suggest increased risk.
Credit Mix (5 percent): The variety and number of credit lines you have can affect your insurance score.
The Impact of Insurance Scores
Your insurance score is more than just a number; it has tangible consequences. Below are 4 areas your Insurance Score may affect your coverage:
Getting Coverage:
Insurance companies use your insurance score to determine whether they will provide you with coverage in the first place. A low score can lead to difficulty obtaining insurance.
Premium Pricing:
Perhaps the most significant impact of your insurance score is on the premiums you pay. The higher your score, the more likely you are to receive favorable premium rates.
Policy Renewals and Cancellations:
Insurance scores can also affect whether your policy gets renewed or canceled. A low score might put your policy at risk of non-renewal.
Rate Increases:
If your insurance score declines due to financial mismanagement or other factors, you may face rate increases when it's time to renew your policy.
What Constitutes a Good Insurance Score?
Insurance scores typically range from 200 to 997, with scores above 775 considered good. However, please note that insurance companies may have different underwriting standards, so what constitutes a "good" score can vary from carrier to carrier.
An example of scores are:
776 - 977: Good
626 - 775: Average
501 - 625: Below Average
200 - 500: Poor
Improving Your Insurance Score
Thankfully, there are strategies to enhance your insurance score, many of which align with improving your credit score:
Pay your bills on time.
Keep your credit utilization rate below 30 percent.
Work on paying down debt.
Be responsible with financial agreements and contracts.
Checking Your Insurance Score
Unlike your credit score, your insurance score isn't reported monthly, but there are ways to find out where you stand:
Request a copy of your insurance score using the LexisNexis Consumer Disclosure Report. https://consumer.risk.lexisnexis.com/consumer
Review your credit score and work to improve it. 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.
Remember that several states have regulations governing the use of credit history when determining insurance rates, denials, renewals, and cancellations.
Conclusion
In today's insurance landscape, insurance scores wield considerable influence. They impact your eligibility for coverage, the premiums you pay, and the overall financial wellness of your insurance portfolio. By understanding the factors that contribute to your insurance score and taking steps to improve it, you can potentially save money on your insurance policies and secure the coverage you need.
Understanding the intricacies of insurance scores is essential for anyone looking to navigate the evolving world of insurance coverage. Don't let your score hold you back—take control of your financial future today.