When you sign on with an insurance provider, you’re given and insurance score – it guides carriers as they make decisions about your home and car insurance. So what is an insurance score and what does it affect?
An insurance score is a numerical score, but it should not be confused with a credit score. Credit scores evaluate the risk of lending someone money – by factoring in things like timeliness of paying bills and the total amount of debt you have – so that lenders are less likely to suffer losses.
Insurance scores are designed to evaluate the risk of granting you coverage by determining the likelihood of your filing a claim. Providers have different formulas for arriving at the scores, and that's why quotes for coverage can vary greatly from carrier to carrier.
What factors into an insurance score?
Here's where it can get confusing. Though insurance and credit scores are different, insurance scores typically use information in your credit report. That's because research shows a correlation between your credit history and claims filed. For example, the worse a credit rating, the more likely a policyholder is to file an insurance claim, and vice versa.
So if it uses information from your credit report, how does your insurance score differ from your credit score? Providers in general look at your payment history, bankruptcies, collections, outstanding debt, and the length of your credit history. However, they weigh these factors differently than credit bureaus, and – as stated above – differently from one another.
Insurance scores also are affected by your claims history. Therefore, the fewer claims you’ve filed in years past, the better your insurance score will be.
Insurance scores typically range from 200 to 997, where scores of 770 and above are considered excellent and scores below 500 are considered poor. A handful of states ban the use of credit scores to determine insurance premiums.
How providers use this information
Insurance scores are used to help determine your premiums – the amount of money you pay monthly, quarterly, biannually or yearly to keep your coverage intact. In general, a policyholder with a better insurance score likely will pay less for coverage than someone with a poorer score, all other factors being equal.
Premiums are usually evaluated annually, so it could change depending on if you’ve filed a claim or not in that time frame.
Small increases or decreases in your premium costs may not seem like much, but they can add up significantly over time. With that being said, it’s important to keep your insurance score in good standing to give yourself a chance to lower your premium payments.
How to Keep a Good Insurance Score
The best way to improve your insurance score is to raise your credit score. So pay all bills in a timely fashion and work toward paying down any debt that you may have. Increasing your credit score can show insurers that you’re taking the initiative to lower your risk to the company, which could, in turn, lead to your agent decreasing your premium payments.
Another way to lower your score is to avoid filing claims, if possible. Start by understanding your deductible – the amount you pay toward a claim before your insurance kicks in, up to your limits. If the payout for the claim isn't going to be impactful anyway, don't file it – cover the costs yourself. But don't that as advice to never file a claim – that's what insurance is for, after all.
It’s crucial that you know the ins and outs of your insurance coverage and that you keep an eye on your credit and insurance scores. Policies can get lengthy and confusing, so seek the help of a licensed agent to explain every facet.
Shannon Ireland writes for SafecoInsurance.com and HomeInsurance.com, an online resource for homeowners and drivers across the country. Offering comparative automobile and home insurance quotes, consumers rely on HomeInsurance.com for the most competitive rates from top-rated insurance carriers. The HomeInsurance.com blog provides fresh tips and advice on a range of financial topics to help homeowners and homebuyers make educated decisions about their insurance purchases.
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