Credit Scores vs. Insurance Scores

Insurance scores are not used in isolation to set pricing, nor to deny insurance to any consumer.

Insurance scores are not used in isolation to set pricing, nor to deny insurance to any consumer.

A credit risk score is a number, indicating the likelihood that you'll be very late paying your bills. It is produced by evaluating information in your credit report at a credit reporting agency. The FICO® Scores are used by most lenders. They are available to lenders from any of the major credit reporting agencies (Equifax, Experian, and TransUnion) which calculate the scores using mathematical models built by FICO. Credit scores are used by financial institutions and retail credit grantors for all kinds of decisions, such as whether you get a credit card, or what mortgage interest rate you will receive.

A different kind of score is used by most insurers in most states to help evaluate the risk of insurance applicants and policyholders. This score, generally called a credit-based insurance score, indicates whether you are more or less likely to have insurance claims in the near future that will result in a loss for the insurer.

There are obvious similarities between your credit risk score and your insurance score. They are both based on your current credit report data. Also they are both calculated using scoring models that FICO built.

However there are important differences. Credit risk scoring models are built to predict the likelihood that consumers will become seriously delinquent in repaying borrowed money. The insurance risk scoring models, by contrast, are built to predict the likely "loss relativity" of any individual. Loss relativity measures whether the cost of your insurance claims relative to your premiums will be higher or lower than average.

While many insurers use insurance scores, they don't use the scores in isolation to set pricing, nor are they used to deny insurance to any consumer.

Insurance scores are used differently from the way a credit grantor would use a credit risk score. For example, an insurance score is most often just one of many factors used in an insurer's underwriting evaluation. Most insurers use an insurance score along with a motor vehicle report, claims history report, home inspection and other kinds of information in their decision-making process.

In fact, for nearly two decades insurers have used credit-based insurance scores in most states because of the benefits they bring. Among the advantages of insurance scores:

  • Consistency. Insurance scores are usually applied to help automate strightforward decisions, in combination with the insurer's underwriting rules and other criteria. All applicants are therefore treated according to a consistently applied standard.

  • Fairer decisions. Insurance scores are completely non-discriminatory and use no data on gender, nationality, ethnicity, address or income. Only credit-related information is included, and its use is governed by the federal Fair Credit Reporting Act.

  • Better decisions. Insurers can better forecast future performance and thus make sure that each person pays a rate that more closely corresponds to the risk of loss they represent. This means that if you are less likely to have claims that will result in losses for the insurance company, you will pay a lower premium. Similarly those people who will likely have larger claims will end up paying higher premiums. In this way insurance scores help your insurance company make sure that you won't end up paying more than you should to help cover someone else's future claims. Because most people have good credit, even during turbulent economic times, most people will pay less for insurance when insurance scores are used as part of the insurer's policy premium decision.

  • Efficiency. Their use of insurance scores helps insurers streamline their operations and use key underwriting information and other resources better. This allows insurers to pass savings along to you. Also, because insurance scores are easy to use, you enjoy the added benefit of faster underwriting decisions—meaning you'll get better service, quicker.