Did you know that many insurance companies use an insurance scoring model to determine your insurance rates in a similar way that a mortgage company uses your credit score to determine your interest rate? You see insurance rates are mostly data driven and there are really two areas of concern for the insurance company -the object being insured, such as a car or house, and the customer.
The object being insured is the easy part. The insurance company knows, with a high degree of certainty, how much it will cost to repair a $50,000 car involved in a front-end collision. They know how much it will cost to put a new roof on a 2000 square foot home damaged by a hail-storm. That’s the easy part – the customer, however, is not as easy to assess as a static object. Insurance companies have limited information about their customers from the insurance application such as name, date of birth, past insurance history, past claim history, and past lapse/cancellation/non-renewal history etc.
Enter the insurance score……
Insurance companies’ contract with third party vendors who have access to consumer reports from Experian, Equifax and Transunion. The information contained in these reports such as account history, payment history, outstanding debt, types of accounts in use, derogatory credit information etc are used to generate a risk profile of the customer. The risk profile is essentially a statistical analysis of a customer’s likelihood of filing an insurance claim based largely upon financial history and it’s called an insurance score. The crazy thing about insurance scores is that they’re really accurate. Actuarial studies have found that insurance scores are one of the most accurate predictors of future insurance claims.
It’s important to note that accessing insurance scores is not a credit pull and does not show up as a hard credit inquiry – in fact, insurance companies are generally unaware of your credit score and most times they don’t require a social security number to access your insurance score. But the bottom line is this – a higher insurance score will result in lower insurance rates whereas a lower insurance score will result in higher insurance rates.
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