08 JanUndertstanding Your Insurance Score
What Is An Insurance Score? How Is It Determined? How Does it Affect My Premium?
Your insurance score is a snapshot of your specific ‘insurance risk’ at a particular point in time – but it is important to know that it is not the same thing as your credit (FICO) score, although they are similar in nature. As a standard underwriting consideration, an ‘insurance score’ is a rating used by insurance companies to assist in determining insurance premiums and which is made up of several factors, just one of which is your FICO score (which is why you and all other members of the policy are often required to provide a social security number when requesting a new insurance quote). Other factors, depending upon the type of insurance, may include your driving record, past claims history, occupation, property data, and many more ‘data points’. Evaluating these factors together helps insurers determine if you qualify for their underwriting programs, and at what rate. Although there are a few common data points that all carriers are required by law to utilize in order to maintain a consistent basis of measurement, such as your FICO score and driving record for auto insurance, each insurance company still has its own proprietary formula for determining a customer or prospective customer’s insurance score depending upon the company’s own ‘appetite’, target market, and underwriting parameters. For example, a standard company such as Safeco Insurance may place a higher value or ‘weight’ on a person’s FICO score than on their driving record or claims history to determine premium while a company such as Progressive Insurance, which handles both standard and ‘non-standard’ drivers, may do just the opposite and place a higher weighted average on the driving record and past claims history than on the FICO score itself. In both scenarios the same data is used, but it is up to the individual company to decide how it is used as it relates to their desired customer base, insurance products, and appetite for risk.
While many people complain about the use of their credit scores when determining insurance rates, it is often because they either don’t understand the reasoning behind this scoring or they have simply have lower FICO scores themselves which leads to higher insurance rates. Regardless, the complaints are unfounded and moot as carriers still require the use of this information regardless of its popularity. The reason is simple. The insurance industry is founded and operated on statistical probabilities and actuarial data – not ‘gut feelings’ – and it is a well-proven fact that an individual’s FICO score has a direct correlation with the likelihood and severity of future claims. Generally speaking, the lower the FICO score, the higher the probability is that a claim, or multiple claims, will be filed.
‘Soft Hits’ and What Your Agent Actually Sees
Unfortunately, there are two very prevalent, but false, myths surrounding the use of credit-based insurance scores. The first myth is that your agent sees your credit report and the second is that shopping for insurance affects your credit (FICO) score because of the credit inquiries.
To begin with the first myth, your agent never sees your credit report at all and he or she has absolutely no idea whatsoever as to what is or isn’t contained in your credit file. From an agent’s perspective, all he or she ever sees is a numerical score, usually ranging from 01 to 31 (with 01 being the best at 31 being the worst) that appears on the quote itself. The agent has no idea what data points are being used to comprise this score or which ones are the most heavily weighted. The agent doesn’t even have the ability to research this data and it is completely confidential. In other words, the agent is ignorant of any of the facts and data behind the score and all he or she sees is the premium provided by the insurance company itself.
Regarding the second myth, the fact that insurance companies are pulling data from your credit report does not affect or lower your FICO score because of ‘excess inquiries’. When an insurance company requests your credit data, it is coded as an insurance-based inquiry which is treated as a ‘soft hit’ by the credit reporting bureaus. This means that it does not count against your credit score because the pre-existing data is being requested for the purpose of determining an insurance rating, not because you are actively seeking to obtain new credit – as in the case of applying for a new credit card or purchasing a new home or automobile. This inquiry is no different than if you were applying for a new job and your employer ordered a credit report to verify your financial history and indebtedness. It is a ‘non-issue’.
What Happens if You have No Insurance Score?
Finally, if you are searching for new insurance, there is a small likelihood that the insurance carrier may not be able to locate you in the credit reporting system and no insurance score can be determined. This is referred to as a ‘no hit’. These ‘no hits’ most commonly occur:
- when an incorrect social security has been entered;
- after a recent marriage or name-change when credit files may not be fully updated; and
- with youthful drivers or immigrants who may have no established credit history.
In the event of a ‘no hit’ situation, the insurance company providing the quote will automatically default to the highest-risk insurance tier (and premium) for the risk in order to offset their inability to pull data and accurately determine the correct premium and risk category.
When Are Insurance Scores Re-Evaluated?
Generally speaking, insurance scores are automatically reevaluated each time a policy is renewed or when a new insurance quote is requested. You cannot request that an insurance company reevaluate your insurance score mid-term during the time that a policy is already in force. It will be reviewed only at renewal.
Do All Insurance Companies Use Insurance Scores?
Yes and No. All ‘standard’ insurance companies utilize insurance scores when determining premiums and quoting news risks. However, there is a separate part of the insurance market, referred to as ‘non-standard’ companies, which do not normally use this scoring model and which may operate with different underwriting guidelines and under a different section on the state insurance code. These companies specialize in those individuals and business with either low FICO and insurance scores, excessive loss histories, or which represent an increased risk. Examples include drivers with no prior insurance, numerous accidents and moving violations, or those without a state-issued driver’s license (such as a Mexican National with a Mexican ‘Matricula Consular’ – which is issued to Mexican Nationals living outside of Mexico). The excess and surplus lines market is also considered ‘non-standard’.
The companies doing business in this part of the insurance market offset their risk in not using insurance scores by reducing the available coverage options available in their polices (thereby substantially reducing their risk in the event of a loss) and by establishing initial base premiums which are usually much higher than those found in the standard market.