What Credit Score Do Insurance Companies Use?

Many consumers are unaware that financial behavior, typically associated with borrowing, also plays a role in determining insurance policies and premiums. Insurance companies utilize various pieces of financial data, including credit-related information, to assess risk. This practice influences the cost of coverage for auto and home insurance.

Insurance Companies and Credit Information

Insurance companies commonly use credit-based information as part of their risk assessment process for various types of personal insurance, such as auto and home policies. This practice stems from statistical correlations observed between credit behavior and the likelihood of future claims. Insurers believe that individuals who manage their finances responsibly may also exhibit more responsible behavior in other areas, leading to fewer insurance claims. This information is typically used for underwriting decisions and to help determine premiums.

It is important to understand that insurance companies use credit information, not necessarily a direct FICO score, to develop their own risk assessments. This credit information is gathered with permissible purpose under federal law, specifically the Fair Credit Reporting Act (FCRA). Insurers integrate this data with other factors, such as driving records and claims history, to create a comprehensive risk profile for each applicant.

Understanding Insurance Scores

An insurance score is a numerical rating derived from select characteristics found in a consumer’s credit report. Unlike traditional credit scores, which primarily measure creditworthiness for lending decisions, insurance scores are specifically designed to predict the likelihood of a policyholder filing an insurance claim. These scores are not intended to assess an individual’s ability to repay debt.

Insurance scoring models are proprietary, developed by credit bureaus or other scoring companies specifically for the insurance industry. These models use different algorithms and weightings than standard credit scores, even though they draw from the same underlying credit data. Examples of such models include the FICO Insurance Score and LexisNexis Attune. Insurance scores generally range, for instance, from 200 to 997 or 300 to 900, with a higher score typically indicating a lower risk of filing claims.

Key Factors in Your Insurance Score

Several credit-related factors influence an individual’s insurance score:
Payment history, reflecting consistency of on-time payments.
Amount of outstanding debt and credit utilization (credit used relative to available limits).
Length of credit history (how long accounts have been open).
Recent applications for new credit (new credit inquiries).
Diversity of credit accounts (mix of credit used).
Public records such as bankruptcies or foreclosures, where permissible.

An insurance score does not incorporate personal information such as income, occupation, race, gender, or marital status.

Impact on Insurance Premiums

A higher insurance score generally leads to lower insurance premiums, as it signals a reduced likelihood of filing claims. Conversely, a lower insurance score can result in higher premiums, reflecting a greater perceived risk to the insurer. This score is one of many factors insurers use to determine rates, alongside elements like driving record, claims history, geographic location, and vehicle type.

While the insurance score is not the sole determinant, it can be a significant one in the overall calculation of premiums. Insurers utilize these scores to segment customers, enabling them to offer more competitive rates to those identified as lower risk. Actuarial studies indicate a correlation between lower credit scores and a higher frequency and cost of insurance claims.

Consumer Rights and State Regulations

Consumers have specific rights regarding the use of insurance scores. In most states, individuals can request their insurance score and are entitled to receive an adverse action notice if their score negatively impacts their premium or policy. This notice explains the reasons for the adverse action and provides information about the credit bureau that supplied the data. Consumers also have the right to dispute any inaccuracies found on their credit report, which could indirectly influence their insurance score.

Regulations concerning the use of credit information in insurance vary considerably by state. Some states have implemented regulations that limit or prohibit the use of credit information in insurance underwriting and rating. For instance, certain states may prohibit the use of a lack of credit history as a factor in setting premiums. Consumers should consult their state’s specific laws to understand the exact regulations governing how credit information can be used by insurers.