Background on: Insurance scoring

What are insurance scores? 

Insurance scores, which are also referred to as credit-based insurance scores, are ratings based fully or partially on a consumer's credit information. Insurers use credit information with other factors to help underwrite and price policies. These confidential ratings are typically used for personal lines such as homeowners and personal automobile insurance. 

Actuarial studies, or statistical analysis methods that insurers use, suggest that how a person manages their financial affairs can be a good predictor of their likelihood to file insurance claims. This practice allows carriers to better match insurance premiums with the amount of risk that an individual customer might pose. The goal is to minimize the possibility that customers with lower risks might subsidize rates for those with higher risks. Laws dictate that insurers are prohibited from setting rates that unfairly discriminate against any individual in every state.  

Do insurance scores help lower premiums? 

A 2017 report from the Arkansas insurance department shows the impact of insurance scoring on calculations of the final premium in 2016 for some 3.4 million personal lines policies. In nearly 55 percent of those policies, the use of credit information resulted in a decrease in the final premium. In 19.8 percent of cases, it resulted in an increase. Still, credit scoring was a neutral factor—meaning it did not affect the outcome—in the remaining 25.7 percent of policies. Policies for which credit information decreased the premium outnumbered policies for which it increased the premium by 2.76 to 1. 

When analyzed by type of insurance policy, the data showed that the use of credit scoring lowered premiums for homeowners policies (56.6 percent) and auto insurance policies (57.4 percent), roughly the same amount. More auto policies experienced premium increases (23.4 percent) than did homeowners policies (16.5 percent).

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED.