What You Need to Know About Insurance Scoring

What is an insurance score?

Insurance scores are numerical ratings developed from certain attributes of a person’s credit history. For example, an insurance scoring considers primarily:

Insurance scores are not a measure of an individual’s financial assets, but instead, reflect how well individuals manage their financial affairs. Insurance scores take into consideration only those characteristics from a credit report that are relevant to predicting loss potential.

An insurance score does not take into account:

What is an insurance score? How does it differ from a financial credit score?

When evaluating a person’s credit information to determine an insurance score, an insurer only considers those items from credit reports that are relevant to insurance loss potential. Both an insurance score and a credit score are derived from the same thing – a credit report, but they are distinctly different.

The main difference between an insurance score and a credit score is that insurance scores do not take into account a consumer’s income. Unlike a mortgage company, an insurance company is not assessing a customer’s credit-worthiness and therefore doesn’t consider income. Instead, an insurance company only considers those items on a credit report that will indicate future loss potential.

Research has shown that someone who pays their bills on time is more likely to take care of their home or car and will reduce losses. We recognize that people sometimes face difficult circumstances in their lives such as job loss, medical bills or divorce. When we consider an applicant’s insurance score, an isolated instance of a late payment will not have a significant impact on your eligibility. We are looking at long-term patterns and overall responsible use of credit.

Similarly, applicants who use cash for purchases or who don’t have established credit will not be scored negatively. Unlike many insurers, ERIE will treat these applicants as if they had a positive insurance score.

Why do insurers use insurance scores?

Insurance scores provide an objective tool that insurers use along with other applicant information to better predict the likelihood of a consumer filing claims. Insurance scores also help to streamline the decision making process, so that policies can be issued more efficiently. By accurately predicting the likelihood of future claims, insurers can control their risk, enabling them to offer insurance coverage to more consumers at a fair cost.

Insurance companies use financial history, along with a host of other factors, to properly classify insureds according to their potential for future losses. Studies have shown a strong correlation between a consumer’s financial history and his or her future insurance loss potential. Thus, insurance companies believe the use of credit information helps them to underwrite and rate applicants at a cost that reflects their anticipated risk of loss.

Do all insurance companies use insurance scoring?