How Is an Insurance Score Calculated? - SmartAsset

Auto and home insurance companies use your credit report to calculate an insurance score that, along with information including your claims history, decides how much you’ll pay for coverage. These credit-based insurance scores start with much of the same data as a credit score, including your credit history and debt level. However, the data is analyzed differently to yield a number that, instead of predicting how likely you are to pay your bills on time, predicts whether you are more or less likely than a typical consumer to make a claim that will cause the insurance company to lose money. For more information on insurance or other financial questions, consider working with a financial advisor.

Where Credit-Based Insurance Scores Come From

Some insurance companies calculate their own credit-based insurance scores. However, most use scores provided by LexisNexis Risk Solutions and FICO. Whether developed in-house or purchased from an outside supplier, insurance companies use these credit-based insurance scores to help them with rating, pricing and underwriting decisions.

As is the case with credit scores, companies keep secret the precise details of how these scores are calculated. However, the main ingredients of the scores are well known. For FICO’s InScore credit-based insurance scores, they consist of the following ranked by importance :

40% – Credit performance, including presence of past-due items, collections and bankruptcies
30% – Current debt level, including total owed and proportion of available credit used
15% – Length of credit history, including when oldest account was opened and number of accounts
10% – New credit inquiries and new account openings
5% – Types of credit used, such as credit cards, auto loans and mortgages

How Your Insurance Score Affects You

Credit-based insurance scores range from 200 to 997 for LexisNexis Attract scores and 100 to 900 at FICO. A higher score means lower policy premiums. However, the credit-based insurance score is not the only factor.

Insurance companies are generally prohibited from declining to offer coverage based only on a credit-based insurance score. In setting pricing and coverage terms, underwriters may also look at applicants’ age, gender, marital status, education, location, driving record, history of claims and type of vehicle.

An insurance score can still have more impact on the premium for an automobile policy than the applicant’s history of being involved in accidents. Even if an applicant is a good driver, having a poor credit-based insurance scores can mean having to pay higher premiums. In fact, a 2021 Consumer Federation of American study found safe drivers in Washington State paid 79 percent more for insurance if they had poor credit-based insurance scores.

In addition to being calculated differently and having different uses, insurance scores and credit scores have other differences. One is that, while credit scores can be checked online, drivers can’t usually find out their credit-based insurance scores.

Dealing With a Poor Insurance Score

Several states prohibit or tightly restrict using credit-based insurance scores to set insurance rates. These include California, Hawaii, Maryland, Massachusetts and Michigan. So one way to avoid being affected by credit-based insurance scoring is to live in one of these states. Consumer advocates have campaigned for similar bans in other states.

Consumers can also make sure their credit reports are accurate. They can request annual copies of their reports for free at AnnualCrediReport.com. If mistakes are found, they can write to request corrections to the credit reporting agencies, Equifax, Experian and TransUnion.

Another option is to use an insurance company that de-emphasizes credit-based insurance scores when underwriting coverages. For example, Root, which uses a smartphone app to determine drivers’ actual driving behavior.

Insurance applicants may be able to use discounts to overcome of the disadvantage of having a poor credit-based insurance score. Many insurers charge lower premiums to good students, members of affiliated organizations, people who sign up online and agree to automatic paperless billing, pay in full rather than using installments and have multiple policies,

Finally, if a problem with your credit report is costing you money because of a credit-based insurance score, you may be able to write a letter asking for an exception. Insurance companies are supposed to overlook issues caused by a documented divorce, temporary unemployment, identify theft or death of a close family member.

Bottom Line

Credit-based insurance scores can have a significant effect on how much you pay for home and auto insurances. Most states allow insurance companies to use data from applicants’ credit reports to decide how to price their coverage.

Insurance Planning Tips

A qualified and experienced financial advisor can help you make sure your decisions about insurance fit your overall financial plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You can improve your credit-based insurance score by doing the same things that will boost a credit score. The most important are to pay bills on time and maintain low balances on revolving accounts such as credit cards.