What are Car Insurance Scores

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How do Car Insurance Scores work?

Basically, an insurance score is a number that your car insurance company uses to predict the likelihood that you will file a claim. These companies don't like it when you file a claim because it costs them money. It's as simple as that. 

All auto insurance companies use a proprietary formula for how they determine this score. One thing they all have in common is that they use your consumer credit history as one of the factors in determining your credit-based insurance score. The takeaway here is that the better your credit score, the better your insurance score, and the less you will pay for car insurance. Other factors in this scoring include where you live, how safe your neighborhood is, your age, your driving record, and how many times you have filed a claim in the past. 
According to the Insurance Information Institute (III), "Insurance companies often use insurance scores because actuarial studies suggest that how a person manages his or her financial affairs, which is what these scores indicate, is a good predictor of insurance claims. Statistically, people with a poor insurance score are more likely to file a claim. This allows carriers to better match insurance premiums with the risk that an individual insured might pose, helping prevent better risks from subsidizing bad risks." 

Are Insurance Scores the same as Credit Scores?

The short answer is no. Insurance scores are designed to predict insurance losses while credit scores try to predict credit delinquency based on your credit history. To better understand the difference between the two scores, while both are based on your credit score, an insurance score is not interested in how much money you make, but rather, how well you manage your money. 

The insurance company is looking at: 
  • Outstanding debt
  • Late payments
  • Delinquent credit cards 
  • Length of your credit history 
  • New applications for credit 
  • Bankruptcy.
The History of Insurance Credit Scores 
Before Insurance Credit Scores, auto insurance companies had a more difficult time figuring out the likelihood that a driver might have an accident and file a claim. They needed a way to know if the person requesting insurance was a good risk in order to figure out how much to charge for coverage. Underwriters assigned to this task were basically using their judgment to determine risk. 

Under that system, it wasn't unusual to be charged too much or too little for car insurance. Then in the 1990s, insurance scores were created to help make underwriting more predictable and fairer. According to FICO, 95 percent of auto insurance companies currently use some form of scoring including consumer credit scores to rate drivers. FICO stands for the Fair Isaac Corporation, and it pioneered the development of a method for calculating credit scores based on information collected by credit reporting agencies. 



How Credit Relates to Insurance Losses

Insurance companies are prohibited from unfairly discriminating against any individual they are insuring. Yet the rating process used by underwriters hopes to distinguish between drivers who are good risks versus bad risks. FICO developed a set of credit characteristics and gave each an assigned value so that the lower the score, the greater the risk. 

According to the III, a number of studies have found that there is a strong relationship between insurance scores and losses. A study in 1996 showed a "highly statistically significant" correlation between insurance scores and loss ratio. It seems that people who have lower insurance scores, coincide with a higher loss amount for insurance companies. 
Another study published in 2003 in the Casualty Actuarial Society Forum concluded that "credit does bear a real relationship to insurance losses." Insurance regulators have also added their approval of the system. A 2004 study declared a strong relationship between credit scores and claims, suggesting that "the use of insurance scores significantly improves pricing accuracy in predicting risk when combined with other rating variables such as geographical area and the age of the driver." 

Many other reports have since touted the same relationship between insurance scores and claim experience. In 2007, a report by the U.S. Federal Trade Commission (FTC) found that insurance scores correlate with both the number of filed claims and the total cost of the filed claims. The conclusion by the FTC was that this scoring system allows for more accurate underwriting by insurance companies. 

What is suspected is that there is a behavioral correlation that suggests that people who manage their finances in a positive way are likely the type of people who manage other aspects of their lives with the same structure and determination. In other words, they may be more responsible drivers.
The Bottom Line for Drivers 
After over 25 years of utilizing insurance scores to help determine the risk of losses, insurance companies are doing a better job of assessing and pricing risk factors. For consumers, this has meant lower premiums for many drivers. Today's car insurance companies tell us that depending on the auto insurance company you use and the state you live in, around 50% of drivers with good credit pay lower premiums. The system bears out that people with poor insurance scores are indeed more likely to file a claim. 

Keep in mind that insurance scores are not allowed in California, Hawaii, Maryland, Massachusetts, and Michigan.Â