Insurance Scores and How They Affect Your Rates

The Insurance Version of Credit Scores – Insurance Scores and How They Affect Your Rates

Have you ever had a friend tell you what they pay for insurance with a company, and you called for a quote, only to discover that your premium was drastically different? You may have even said to the insurance agent, “But my friend has insurance with you and she only pays X amount for her auto insurance!”

This happens ALL of the time. The reason you have a drastically different score? It’s because insurers don’t have standard premium amounts that they charge every 25 year old driver that lives in Tennessee – in fact, there’s not a set premium for ANYONE of ANY age. There’s a lot more that goes into calculating premiums, and no two policies are alike because no two people are alike. When you think about it, would you expect insurers NOT to use so many complicated premium calculations when insurance can be so confusing to begin with? It’s only appropriate. In fact, you wouldn’t want your insurance premiums figured this way – imagine how unfair it would be for you to pay the exact same premium as someone driving a Lamborghini with five speeding tickets while you drive  a Honda Accord and don’t have any tickets.

Insurance Scores: Not the Same As a Credit Score

When insurers calculate insurance premiums, the primary thing they’re basing your premiums on is what they call your ‘insurance score’. Insurance scores are made up from several things – essentially factors that say how much your risk is worth charging for. Basically they consider, “5 speeding tickets + brand new $50K car + congested traffic in the area you live in + poor credit = whatever would accurately let them at least break even since you’d be likely to have a lot of accidents or tickets based on that kind of past. These scores include things like your past driving record, how many accidents you’ve had, whether they were at-fault or not at fault accidents, if you’ve had any lapse in coverage, and lastly, your personal credit score is factored in.

Why do they do that?

This isn’t without reason and is quite logical if you really look at it from their perspective. They use insurance scores because the factors those scores include support statistics that have revealed that not only do people with factors like bad credit history for example have more of a chance of failing to pay their premiums, therefore becoming a high risk for cancellation due to non-payment, but statistics have also shown people with poor credit scores have historically received more violations, make more claims (whether comprehensive or collision claims on their vehicle) but overall tend to be involved in more accidents in general.

Also, statistics have proven that people with low credit scores also have a tendency to jump around from to different insurance companies and not stick with one insurer for the long term. Thus, this is another  benefit to having a high credit score to improve your rate: insurers won’t increase your rate if they see a potential long term customer that will likely be remaining with them for the long haul. The other bonus is that usually insurance companies will offer a loyal customer discounts after you’ve stayed with that company for awhile.

Improving your credit score will undoubtedly help lower your insurance premium. Many times insurance companies will not write a policy for those with low insurance scores because they don’t want to risk paying out on a claim and be running the risk of not receiving that money back if the policy holder does not pay their premium. .

The Importance of Good Insurance Scores

In the most severe cases, some insurers are actually starting to greatly and strictly restrict what type of policies that you can buy as a policyholder according to varying credit scores. Some of the larger names in insurance that are operating will especially deny writing any sort of property policy for those with poor credit and/or unfortunately even people who have had to file bankruptcy in the past. Some even refuse to write auto policies based on credit. So not only does having a better credit score help lower the price of your insurance, it also increases your options of insurance companies, thus providing you more opportunities to find a better rate. Additionally, if you are able to obtain auto insurance with a company and not a property policy, you’ll miss out on discounts like multiple policy discounts for having more than one policy placed with one insurer.

Insurance companies consider low credit scores into their insurance scores because they’ve had the evidence to consider what a low credit score can result in. History is generally a good indicator of what the future.

Working on your credit score may take some time, but once you do achieve a higher credit score, you’ll see insurance rates begin to drop as a result.

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