OII Backgrounder: Insurance scoring
9/03

Insurance scoring process

1. There’s a difference between a credit score and an insurance score. Both are based on credit report information, but they do not use identical factors or processes in score outcomes. A credit score predicts the likelihood of repaying a loan or other financial obligation, and takes income into consideration. An insurance score uses credit report information to predict the likelihood of filing a claim or the level of risk, and does not include income as a scoring factor. Insurance companies’ application of insurance scoring varies as do the models used in determining a score.

2. Insurance scoring benefits the majority of policyholders. The benefit is lower premiums. There is a proven correlation between the way you handle credit and how responsible you will be as an insurance risk. Research shows that some people with certain patterns of behavior in their credit history are more prone to losses from an insurance standpoint. Those who are responsible with their finances are usually more responsible drivers and homeowners, and typically take preventative measures instead of risks.

3. When you apply for auto and/or homeowners insurance, the insurer compiles an insurance score, based on information obtained from your credit report. In most cases, the insurance company representative or agent does not have access to your credit report. Only those factors used in determining an insurance score are accessed. These factors are compiled and run through a modeling system used by the company. Your insurer only sees the final insurance score, and not specific financial information gathered from your credit report.

4. Insurance models derive a score from credit report data that is predictive of future claim losses. According to the Insurance Information Institute, if you divide the population into five groups, the fifth with the worst insurance scores files 40 percent more auto insurance claims than the group with the best scores. Insurance scoring enables insurance companies to price insurance accordingly so people with a smaller chance of filing a claim aren’t subsidizing the premiums of those who are at a higher risk of filing claims.

5. Credit report information used in determining an insurance score includes: payment history, bankruptcies, collections, length of credit history, amount of outstanding debt, new applications for credit and types of credit in use. The value or “weight” that these factors carry varies depending on the insurance scoring model. The information not used in insurance scoring includes: income, ethnic group, religion, gender, marital status, nationality, disability, address or public assistance sources of income. Someone living in a city on a modest income and practicing reasonable money management may have a higher insurance score than a six-figure income-earner who lives in an affluent suburb and has high outstanding credit card debt.

6. When an insurer requests information from your credit report, the corresponding credit bureau makes a note in your report file. The number of inquiries on your record can also affect your insurance score. There are several types of inquiries, but under the models used by most insurance companies, the only inquiries that affect your insurance score are those you initiate. Every time you apply for credit such as a department store charge card, a new car loan or a financing offer, an inquiry is noted in your report. A general rule of thumb is that it’s better to have a few credit cards with higher balances and credit lines than it is to have several cards with total balances and credit lines that are substantially higher.

7. Nationally, over 90% of auto insurance writers are using insurance scoring to some degree according to a Conning study. Some companies also use insurance scoring to assess homeowners insurance risk. Insurance scoring in combination with other risk characteristics allows you to receive more objective, consistent and efficient insurance underwriting. From an auto insurance standpoint, other factors that weigh in significantly in determining premiums include the driving records of those listed on the policy, vehicle make and model, claims history, geographical location, how the vehicle is used, etc. Other factors used in determining homeowners insurance premiums include the type of structure, location as it pertains to catastrophes that the area is prone to such as earthquakes or hurricanes, limits and deductibles, proximity to a water source and fire department, previous loss history and the condition of the home.

Insurance scoring in Ohio

The Ohio Department of Insurance (ODI) monitors the use of insurance scoring. Companies that use insurance scoring provide actuarial justification for their use as part of the filing process. Specific scoring models employed by insurance companies are considered proprietary information and are not filed with the ODI. The department does not permit insurers to cancel insurance solely on a policyholder’s insurance score. Scoring can be applied as part of an insurance company’s underwriting criteria and/or in rate structuring.

According to the Ohio Department of Insurance, of the 9,929 consumer complaints received in 2001, only 18 were credit report-related. This is extremely minimal, especially with over 7.5 million vehicles insured in Ohio and over 3.2 million homeowners and renters insurance policies in effect.

Consumer information

Consumers can improve credit and insurance scores over time. Recommendations include:

• Pay bills on time. Delinquent payments and collections negatively impact a score.
• Keep balances low on unsecured revolving debt like credit cards. High outstanding debt can affect a score.
• Apply for new credit accounts only as needed. Close accounts on credit cards no longer in use. A credit bureau can assist you in closing such accounts and will notify the other credit bureaus.
• Periodically obtain a copy of your credit reports from the three major credit bureaus to check for inaccuracies. You’ll likely pay under $15 for a report. Not all inaccuracies affect score outcomes, but it’s still a good idea to keep reports as error-free as possible. Contact information for the three credit bureaus follows:
  
  Equifax www.equifax.com
  For a copy of your report, call 1-800-685-1111
  To dispute information in your report write to: PO Box 740241, Atlanta GA 30374
  
  Experian (formerly TRW) www.experian.com
  For a copy of your report, call 1-888-397-3742
  
  Trans Union www.tuc.com
  For a copy of your report, call 1-800-888-1213.
  To discuss a copy of a report you’ve received, call 1-800-916-8800
  To dispute information in your report write to: PO Box 2000, Chester PA 19022

• Obtain a copy of your homeowners and auto insurance score reports. ChoicePoint offers these online. These reports can provide consumers with information regarding what factors affected their insurance scores and how to improve them over time. These are available for $12.95.
  Homeowners insurance score link
  Auto insurance score link