An insurance score, also known as an insurance credit score, is a rating computed and used by insurance companies that represents the probability of an individual filing an insurance claimwhile under coverage. The score is based on the individual’s credit ratingand will affect the premiums they pay for the coverage. Low scores reflect higher risk, so a high score will result in lower insurance premiums. Conversely, a low score will result in higher premiums.
Key Takeaways
- An insurance score is a credit rating used by insurance companies to assess a potential insured consumer's level of risk.
- The insurance score is one of the primary determinants in how much monthly insurance premium the consumer will be assessed.
- Scores range between 200 and 997, with low scores reflecting higher risks.
- What constitutes a good score varies for different types of insurance and rating companies.
Understanding Insurance Scores
An insurance score is a key component in determining the total premiumthat an individual pays for health, homeowners, auto,and life insurance policies. Insurance companies determine an individual’s score,in part, by usingproperty claim databases like the Automated Property Loss Underwriting System (A-PLUS) and the Comprehensive Loss Underwriting Exchange (CLUE).
Insurance scores range between a low of 200 and a high of 997. Insurance scores of 770 or higherare favorable, and scores of 500 or below are poor. Although rare, there are a few people who have perfect insurance scores.
Scores are not permanent and can be affected by different factors. There are several ways for a consumer to increase their low scores (and possibly lower their premiums). To begin, a consumer will benefit by improving their credit scoreand paying bills on time, in addition to reducing any type of debt. A consumer may also try to limit the number of insurance claims filed over a certain period in order to boost their insurance score.
While most health, homeowners, and life insurance companies have a similar process for computing consumers' insurance scores, auto insurancecompanies have different standards for what they consider a good score. Some may offer lower premiumsfor scores in the 800-range, while others will only require scores in the 700-range to qualify for certain discounts.
Data analytic companies like FICO (formerly the Fair Isaac Corporation) and ChoicePoint have different scales for how they interpret the scores of auto insurance companies. FICO's scale ranges between 300 and 900. Scores above 700 are considered good, and anything above 800 is considered exceptional (and of little risk for the company).
ChoicePoint’s scores, on the other hand, range between 300 and 997, with good scores nearing the higher end of the scale. Consumers with ChoicePoint credit files may obtain a free report.
A low insurance score can be costly, especially for auto insurance coverage, which is legally required for car drivers in 49 of the 50 states in America. For example, if an individual’s insurance score causes their auto insurance premium to increase by$25 per month, they will pay approximately $300 more in premiums per year. In four years, the premium difference will be $1,200. Over 10 years, it will cost them $3,000, an amount that could be invested or spent in other ways.
FAQs
An insurance score is a score calculated from information on your credit report. Credit information is very predictive of future accidents or insurance claims, which is why Progressive, and most insurers, uses this information to help develop more accurate rates.
What is the purpose of an insurance score? ›
An insurance score is a credit rating used by insurance companies to assess a potential insured consumer's level of risk. The insurance score is one of the primary determinants in how much monthly insurance premium the consumer will be assessed. Scores range between 200 and 997, with low scores reflecting higher risks.
What is the purpose of insurance definition? ›
Purpose of insurance
Its aim is to reduce financial uncertainty and make accidental loss manageable. It does this substituting payment of a small, known fee—an insurance premium—to a professional insurer in exchange for the assumption of the risk a large loss, and a promise to pay in the event of such a loss.
What is the scoring model of insurance? ›
What are insurance scores? Insurance scores, which are also referred to as credit-based insurance scores, are ratings based fully or partially on a consumer's credit information. Insurers use credit information with other factors to help underwrite and price policies.
Do you want a higher or lower insurance score? ›
What's a good insurance score? Using the LexisNexis Risk Classifier, an insurance score of 770 or higher out of 997 is considered good and will get you a favorable premium. A score of 500 or below is considered poor and could result in higher premiums or being turned down for coverage.
What's the purpose of a personal insurance score quizlet? ›
An insurance score is comprised of an individual's credit score and his or her history of claims. The more claims an individual has filed the greater a risk that individual is viewed to be and the higher premiums will be on his or her insurance policy.
What are the benefits of score? ›
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What is a good definition of insurance? ›
Insurance is a contract between you (or a business) and an insurance company to help protect you and your loved ones from financial loss due to an unexpected event, like an accident, illness, natural disaster, or other unexpected circ*mstances.
What is the purpose of the definitions section of an insurance policy? ›
Most policies have a Definitions section, which defines specific terms used in the policy. It may be a stand-alone section or part of another section. In order to understand the terms used in the policy, it is important to read this section.
What is the principle purpose of insurance? ›
The basic principle of insurance is that an entity will choose to spend small periodic amounts of money against a possibility of a huge unexpected loss. Basically, all the policyholder pool their risks together.
What Is a Scoring Model in Project Management? A scoring model is a tool you use to assign a comparative value to one or more projects or tasks. Scoring models allow governance teams to rank potential projects based on criteria such as risk level, cost, and potential financial returns.
What is the score model used for? ›
Credit scoring models are statistical analyses used by credit bureaus that evaluate your worthiness to receive credit.
What's the model score? ›
To score a model means to apply it to some data or population in order to obtain a result or prediction that can be used as input to decisions.
How to improve your insurance score? ›
Here are some strategies that might help improve your credit-based insurance score:
- Pay bills on time: Avoid late payments and missed payments. ...
- Keep credit utilization low: Credit utilization refers to the amount of your available credit you use.
Because an insurance company's ratings are an indicator of its financial strength and ability to honor its contractual obligations to policyholders, it should always be considered prior to purchasing any annuity. There are four main rating agencies: A.M. Best, Standard & Poor's, Moody's and Fitch.
Can your insurance cost go higher if credit score is low? ›
Insurance companies often view a lower car insurance credit score as an indicator of increased risk, which may lead to higher premiums for those with less favorable credit histories. This approach reflects the insurance industry's use of credit-based scores to gauge potential claim risks.
Why are insurance ratings important? ›
The goal of rating insurance companies is to evaluate the insurer's financial strength. Can they stay strong during challenging economic conditions, increased claims, or other financial hardships? Ratings are based on different criteria relating to financial health.
Does insurance score affect credit score? ›
An insurance score only applies to discounts, not increases. The insurance score is never used as a reason to charge higher rates, and it only counts as a “soft hit” on your credit report. It doesn't impact your overall credit score.
Why do insurance companies need your credit score? ›
Why do insurance companies use credit information? Some insurance companies have shown that information in a credit report can predict which consumers are likely to file insurance claims. They believe that consumers who are more likely to file claims should pay more for their insurance.
What are the benefits to checking your score? ›
Checking your credit history and credit scores can help you better understand your current credit position. Regularly checking your credit reports can help you be more aware of what lenders may see. Checking your credit reports can also help you detect any inaccurate or incomplete information.
