Like a credit score, it's important, but unlike a credit score, it's nearly impossible to find out what yours is.
This post comes from Ed Leefeldt at partner site Insure.com.
Your credit score is one of the most important factors in whether a bank will lend you money. And getting your hands on your own score is now a lot easier. Many lenders and websites provide it for free. Discover, for example, recently started providing customers’ FICO scores on their monthly statements.
Credit information is collected by three major companies — Equifax, Experian and TransUnion — which “score you” somewhere between a low of 300 and a high of 850. This information is then given to lenders whenever you apply for credit.
Insurance companies use similar three-digit scores in deciding how much to charge you for auto and home insurance policies (where it’s allowed by state law) – or if they want to insure you at all. But your insurance score differs from your credit score in two distinct ways. First, it is designed to measure different things about you. Second, it is more difficult – and sometimes impossible – to find out that score or how it is used.
The mysterious insurance scores
“It’s a black box,” says Atlanta-based credit expert John Ulzheimer.
Lenders use credit scores to see how you manage your finances. For example, do you carry a lot of credit card debt? Do you pay your monthly mortgage, rent or credit card payments on time?
In contrast, insurance companies aren’t really concerned about whether you’ll pay your monthly premiums on time because, if you don’t, they can simply cancel your home or auto insurance policy.
“What insurers really want to know is if you are under financial stress and likely to file claims,” says Ulzheimer. That’s because a claim can cost an insurer thousands, or even hundreds of thousands, of dollars, and a policyholder desperate for money could file multiple claims.
“Statistically, people who have a poor insurance score are more likely to file a claim,” says the Insurance Information Institute in its position paper on credit scoring. The III represents the property-casualty insurance industry.
Those scores are generated with the help of two “predictive analytics” firms, FICO and LexisNexis, which work in partnership with the three credit bureaus to develop the separate scores that insurers say are needed to predict whether a person will file claims.
“Our data can help underwriters better assess risk exposure prior to granting insurance coverage,” says Adam Pichon, vice president of insurance for LexisNexis Risk Solutions, one of the two major providers of insurance scores.
Your FICO insurance score is a closely guarded secret. However, LexisNexis will sell consumers both their auto and home insurance scores for $12.50 each.
The insurance score isn’t the only thing insurers look at when making their decisions, says Lamont Boyd, insurance market director for FICO. Other items on the insurance application come first, but the insurance score can often indicate if you’re telling the truth when applying for coverage. Studies have shown that credit correlates with claims.