insurance scoreGrading is an inescapable part of life. Long after our days of cramming for exams, we still find ourselves looking at grades, albeit different from the sort we got in school. In the real world we’re usually only graded on one thing – our ability to pay back borrowed money in a timely fashion. This grade, your credit scores, touches many aspects of your life, from being able to borrow money, to applying for a job and renting out an apartment. But did you know credit scores affect your insurance premiums through a metric called an insurance score? Continue reading to get an in-depth look at what an insurance score is, how it affects you and how you can improve your current insurance score.

What is an insurance score?

Simply put, an insurance score is a numerical value, not unlike a credit score, that alongside your CLUE report determines how much of a risk you are to an insurer. Insurance scores or credit-based insurance evaluations are mostly carried out by home and auto insurance providers. Like credit scores, there are different variations of insurance scores available for insurers to view, but typically higher credit scores result in higher insurance scores, which almost always result with lower premiums. It’s important to note that lower credit or lower insurance scores don’t necessarily prohibit individuals from being insured altogether, but they can raise the cost of insurance significantly. On the other hand, insurance companies like to emphasize that individuals with excellent credit are rewarded with significant deductions toward their premiums.

If the idea of using credit scores to evaluate insurability seems strange to you, don’t worry, you’re in good company. The concept is fairly new, and even experts familiar with the insurance industry are just now understanding it. Over the last 20 years, various studies have determined that individuals with poor finances appear to be a greater risk to insure. This association isn’t because credit poor individuals don’t pay their premiums, but apparently because, statistically speaking, individuals with poorer finances tend to file more insurance claims. Oddly enough, while insurance scores are a very popular evaluation metric, no one can articulate why they work.

Despite insurance companies’ reliance on insurance scores, the legitimacy of credit-based insurance scoring is still fiercely debated to this day. A number of consumer advocacy groups are against the usage of insurance scores due to both their privacy implications as well as their seemingly unfair discriminatory effects toward low credit individuals. These individuals can end up paying more for insurance than someone with a bad driving record simply because of a difference in credit. Since the reliability and accuracy of credit reports has been called into question many times before, many consumers may not even be aware of the errors on their reports. As a result, certain states like California, Hawaii and Massachusetts have outright banned the practice of using credit-based insurance scoring, while others have created rules that insurance companies must abide by when scoring customers with credit. Aside from these handful of exceptions, for the majority of Americans, insurance scores remain an important (although hidden) part of their financial lives.

How can I improve my insurance score?

While improving your insurance score is a great goal, one of the biggest issues is that formulas for insurance scores are proprietary, making it difficult to know what specific factors affect them. Although some insurance scores rely on nearly the same three-digit scoring system credit scores use, insurance scores and credit scores are not the same. Still, the positive correlation between credit scores and insurance scores guarantees that the best way to lower your premiums is to improve your credit scores.

Where can I view my insurance score?

It’s actually very difficult to obtain copies of your insurance scores, which is why many experts suggest simply looking at your credit reports often and improving those. A handful of credit monitoring services may allow you to see insurance scores if they provide multiple Equifax, Transunion, Experian or FICO reports, but it’s not extremely common. Even so, these scores likely aren’t related to the ones your insurer used, as each insurance company might have its own method for deriving insurance scores. Rather than hunting down your insurance scores, you should ask your insurance company if they utilize credit-based insurance scoring, as not all companies do. Some companies might be willing to share their scoring systems with you, but they have absolutely no obligation, legal or otherwise, to respond to your questions or requests regarding insurance scores.

While consumers have very little say in the insurance scoring process, there is legislation designed to assist them in navigating certain aspects of insurance scoring. For example, whenever a credit report has a negative or adverse effect on your premiums, the Fair Credit Reporting Act (FCRA) might entitle you to have access to your credit reports or request your insurance company to provide you more information regarding their usage of your credit report. Outside of the FCRA, some states and insurance companies allow consumers to request what is known as a notification of extraordinary life circumstances (note that the laws for these circumstances may vary from state to state). This request comes from previsions enacted after the 2008 recession that allow consumers to attribute negative changes in their credit scores to major life circumstances, such as unemployment or illness. Using this request will prevent insurance companies from adversely impacting the premium of someone whose credit changed as a result of circumstances out of their control. Should you need either of these requests, you can talk to your insurance company about them and do some research for yourself.

If you want more auto insurance tips, have a look at our auto insurance blog. And for more information regarding managing your credit scores, keep reading our personal finance blog, which is filled with information about building and improving credit.