What Is Your Insurance Score and How Does It Affect You?

What is an Insurance Score?

The short answer, insurance score is a numerical ranking based on a complex calculation of various factors that statistically predict risk. Financial institutions offering products, such as insurance, have to weigh the risk associated with their clients, and they all have uniquely complex and thorough methods of doing so through insurance scores.

Insurance companies use risk assessment to determine how much premium to charge each client based on the level of risk that the client will have to file a claim. The greater the risk, the higher the premium that client will have to pay.

The challenge is consumers have no clear way of knowing exactly how those assessments are made. For any customer of insurance products, it is important to understand what an insurance score is, how it is different than a credit score, and how it affects the process of obtaining insurance.

The following insights will give you a thorough understanding of how insurance scoring works so that you will have more knowledge of the factors to control that can positively influence your numerical ranking.

Difference Between Credit Score and Insurance Score

The first thing to note with certainty is a credit score is not exactly the same thing as an insurance score. However, sometimes insurance score is referred to as insurance credit score. The reason for that is because there are some common variables taken into consideration for both credit scoring and insurance scoring.

Credit scoring is specifically related to borrowing money and paying bills. The objective is to determine how likely a person is to pay off borrowed funds on-time and over a period of time. Lenders use several different money borrowing factors to determine the creditworthiness of a borrower before giving out a loan.

credit scoring factors

Insurance scoring is specifically related to the insurance underwriting process. It takes some of the same variables as credit scoring into account.

The objective is to determine how likely a person is to have a claim that would require the insurance company to pay out funds to cover the claim. Ultimately, insurance scores can have a significant impact on the amount of premium that you pay for your coverage.

Typically, insurance scoring only affects auto insurance and homeowners insurance, as well as renters insurance. Other less common types of policies affected by insurance scoring are motorcycle insurance, boat insurance, and RV insurance.

What is an Auto Insurance Score?

An auto insurance score is really just another term for insurance score that is used in the specific context of automobile insurance. Like other insurance scoring, auto insurance scoring takes into account all of the information that is found in your credit score, plus your past auto insurance history.

For auto insurance scores, some of the factors that are taken into are tickets, accidents, and any insurance claims that you may have filed within a certain time period. These factors are obvious indicators of how risky or dangerous someone is when driving. Some companies are being creative with how they look at risk factors. For example, Metromile rates are based on the amount of driving (for more information, see our Metromile review).

Your auto insurance score will have a bearing on determining how much you will be required to pay in premium for your auto insurance policy. In some cases, a poor auto insurance score might cause an insurance company to decline coverage.

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How is Your Insurance Score Determined?

Your insurance score is based in large part on your overall credit rating. This is because historical data reveals that there is a distinct correlation between one’s credit rating and the amount of insurance claims that they file. The insurance score that you are ultimately given is based on a combination of your credit score and your past insurance claim filing history.

Companies such as the Fair Isaac Corporation have large databases of information about consumer finance and consumer credit. Insurance companies have access to two property claim databases – the Automated Property Loss Underwriting System, or A-PLUS, and the Comprehensive Loss Underwriting Exchange, or CLUE. The combination of those sources of data is how insurance scores are determined.

Statistically, a person who carries a lower credit score is much more likely to file insurance claims than an individual who possesses a higher credit score figure. Likewise, an individual who possesses what is considered a “perfect” insurance score is considered to have the lowest possible risk to the insurance company of filing a claim.

There are very few individuals who possess a perfect insurance score – although this figure is not impossible to obtain. However, it is very possible to reach a good insurance score, which leads to paying a lower amount of premium for your coverage.

What is a Good Insurance Score Range? What is a Bad Insurance Score?

A lot of people wonder, what is a good insurance score? The answer is, once your claims filing history and your credit score are obtained by an insurer, they are combined to generate your total insurance score. This number will range between a low of 200 and a high of 997.

Insurance scores that fall into the range of 770 or higher are typically considered to be good. Conversely, a poor insurance score is considered to be any number below 500.

How to Improve Your Insurance Score

If you currently possess a low insurance score, there is good news. There are several ways that you can improve your score – ultimately resulting in your insurance premium amounts being reduced.

One way of improving your insurance score involves increasing your credit score and history. Here, you can concentrate on paying all bills in a timely manner, and reducing your overall amount of debt. In addition, by filing fewer – or no – insurance claims over a certain period of time, you will also be taking steps to improving your overall insurance score figure.

Does Income Affect Credit Score?

Another common question on this topic is, does income affect credit score? The short answer is yes, but probably not to a significant degree. The more a person makes the more likely they will have the ability to pay back debt and the better their credit score will be.

It is important to understand how income affects credit scoring and the ability to borrow funds, and although insurance scores are not supposed to be affected by income, it is hard to believe the impact of income on credit score does not at least have some indirect impact on insurance score as well.

What Information Is Off-Limits For Credit Based Insurance Scoring?

There are other pieces of information that are considered off-limits for the purpose of insurance scoring. Some of those factors include race, religion, gender, marital status, occupation, and location of residence.

What is an Insurance Financial Stability Score?

Some insurance companies offer discounts based on financial stability, sometimes referred to as insurability discounts. When a client meets the financial stability factors standards of the insurance company, a discount is made available to the client.

The companies that offer these discounts all have their own unique scoring systems – and, while these systems do not directly correlate to one’s exact credit score, they are primarily based on it. One insurance company might require a credit score of 700 to qualify for the discount, while another insurance company might require a credit score of 750.

Why Your Insurance Score Matters

Your insurance score matters a great deal when it comes to the premium that you will be charged for insurance coverage. While a small premium difference may not seem substantial, over time, the difference in dollars can really add up.

For example, suppose that your insurance score costs you an additional $20 per month for auto insurance coverage. Over the course of just one year, you will have paid $240 in higher premiums. In just four years, your premium difference would be inching close to a total of $1,000. And, over a ten year time frame, your lower insurance credit score would have cost you close to $2,500.

Although insurance scoring typically only applies to home and auto insurance, it would not be unrealistic for some insurance companies to use insurance scoring for health insurance or life insurance. For a company to offer cheap life insurance they could use insurance scoring methods to more accurately predict the risks associated with particular insurance score ranges in order to set appropriate premium levels.