Car Insurance and Your Insurance Score…Or Is It Your Credit Score?

Insurance companies are just like any other business in that they are out to make a profit. In any business, a company must correctly price its products in order to make a profit and many different methods are used to come up with a fair price.

The process of underwriting is simply the insurance company’s way of “evaluating” a risk so that it can set a reasonable price and make a profit from selling a policy. The days of using an applicant’s driving record, accident history, age and geographic location as the only underwriting tools are gone. They have been replaced by extremely complicated tiered rating plans that base your rate on a variety of factors that make up your insurance score.  This is a complicated algorithm that takes into account many factors but typically your credit rating closely parallels your insurance score. This means that if you have a good credit score, you are very likely to have good insurance score and therefore a lower insurance rate. The theory is that groups with good credit will have fewer claims than similar groups with bad credit. The good credit group is considered to act more responsible and that behavior should translate to their driving habits. The insurers have credible data to back this up and insurance departments across the country now generally accept insurance scoring as a viable rating tool. All of the factors that go into your insurance score are generally a closely held trade secret. It is difficult at best to get an insurer to tell you exactly how this score is calculated as even the company’s own insurance agents don’t typically have this knowledge.  Here is the formula that you need to know:  a good credit score = a good insurance score = a lower car insurance rate.

For example: two different risks that are next door neighbors of the exact same age, living on the same street, driving the exact same cars, and having the exact same driving records….would expect to pay a similar, if not the same, rate. However, this is highly unlikely with the new tiered rating plans, where often, a hundred or more rates could apply for what seems like the same risk. This is primarily because of their insurance score. If one of the neighbors has a bad credit score, they would likely to pay a significantly higher rate, possibly even double, as the credit score will often parallel the insurance score. Remember the formula shown above. In fact, today, to get an accurate car insurance quote, at some point you generally must give your social security number so an insurance score/credit check can be done. Then and only then do you get the true rate.

Using credit as a rating tool is a hot topic in the industry and many insurers are facing opposition from various groups across the country. These groups view this practice as unfair to the lower income populations because they typically have lower credit scores or no credit at all. Bad credit translates to a bad insurance score for this group, thus a higher rate for this population. Is this fair? The legality of using credit or an insurance score as a rating tool is currently being challenged in many states and the outcome will play out in courtrooms across the country. Stay tuned…..

For now and the near future, it looks like insurance scoring is here to stay. In order to get the best possible advice on these very complicated tiered rating schemes used by most of the major car insurance companies, I would recommend calling and insurance agent to get a rate quote. There are many things about these new rating plans that can be explained in simple language that you can understand. An agent has a vested interest in you, the client, and would like to get to know you by name.