How an Insurance Score Is Calculated and Why It Matters
Learn how insurance scores are calculated from your personal data and why they impact your coverage. Understand this key financial metric.
An insurance score is a numerical representation insurers use to evaluate risk. This score helps insurers predict the likelihood of a policyholder filing a future claim. It is derived from various data points, assessing risk for underwriting and pricing. Understanding how these scores are calculated provides insight into a significant factor influencing insurance premiums.
Information Used in Insurance Score Calculations
Insurance scores are derived from consumer data, drawing from several sources. A significant portion comes from an individual’s credit report, analyzing specific data points about financial behaviors and obligations, not the credit score itself.
Insurers also consider an individual’s prior claims history. This data is often obtained from industry databases, such as the Comprehensive Loss Underwriting Exchange (CLUE) report. The CLUE report provides a record of past property and auto insurance claims, including the type of claim, the amount paid, and the date of loss. This history helps assess the frequency and severity of past claims.
Motor vehicle records play a role, particularly for auto insurance scores. These records provide details about driving history, including accidents, traffic violations, and license suspensions. Such information indicates an individual’s past driving behavior and adherence to traffic laws. The presence of infractions can suggest a higher risk of future incidents.
Prior insurance history is also considered. This includes information such as gaps in coverage, policy lapses, and the length of time an individual has been continuously insured. Consistent coverage generally reflects responsible management. Public records, like bankruptcies or judgments, can also be factored into the assessment, often overlapping with information found in credit reports.
Categories of Data Impacting Your Score
Information collected from various sources is categorized and weighted within models to produce an insurance score. Payment history holds substantial influence. Timely payments on financial obligations, such as loans and credit cards, contribute positively, while late payments, collection accounts, or bankruptcies can negatively affect the score. This category often accounts for around 40% of the overall insurance score.
The amount of outstanding debt and credit utilization also carries considerable weight. This factor examines how much debt an individual owes across all accounts and the proportion of available credit being used. Keeping credit card balances low relative to credit limits is generally beneficial. High levels of debt or maxed-out credit lines may indicate increased financial strain and can negatively impact the score, often contributing about 30% to the calculation.
The length of credit history is another important component. A longer, established credit history with a consistent record of responsible financial management tends to result in a more favorable score. The age of the oldest account and the average age of all accounts are considered. This factor typically makes up around 15% of the score.
New credit applications and recently opened accounts can also influence the score, albeit to a lesser extent. While seeking new credit is a normal financial activity, a sudden surge in applications or newly opened accounts within a short period may be viewed as an increased risk. This element usually accounts for about 10% of the score.
The types of credit an individual uses, known as credit mix, also plays a minor role, typically around 5% of the score.
Beyond credit-related factors, the frequency and severity of past insurance claims directly impact the score. A history of multiple claims, especially high-cost ones, suggests a higher likelihood of future claims, leading to a less favorable insurance score.
Distinctions from Credit Scores
While both insurance scores and traditional credit scores use information from an individual’s credit report, their purposes and methodologies differ. A credit score primarily predicts the likelihood of an individual repaying borrowed money on time. It assesses creditworthiness for lending decisions, influencing interest rates and credit availability.
In contrast, an insurance score is designed to predict the likelihood of an individual filing future insurance claims. Actuarial studies suggest a relationship between financial management and the propensity to file claims. Therefore, insurers use these scores as a tool to assess the potential risk of financial loss from claims.
The data used also varies between the two scoring models. While both draw from credit report data, insurance scores incorporate additional information such as claims history and motor vehicle records, which are not typically part of a standard credit score calculation. Conversely, credit scores may consider income, which insurance scores generally do not.
The impact on an individual’s financial life also differs. A credit score directly affects access to loans, credit cards, and mortgage rates. A higher credit score typically leads to more favorable lending terms. An insurance score, however, primarily influences insurance premiums and coverage availability, with a better score often leading to lower rates.
Regulatory frameworks also highlight their distinctions. Credit scores are subject to federal laws like the Fair Credit Reporting Act, which govern their use and consumer rights. Insurance scoring, while also influenced by federal guidelines, is additionally regulated at the state level, with some jurisdictions imposing specific limitations or prohibitions on their use in setting insurance rates. It is important to note that inquiries made by insurance companies for scoring purposes are typically “soft pulls” and do not negatively affect an individual’s credit score.