Most insurance companies use a credit-based insurance score in their evaluation of your insurance risk, in addition to several other factors such as your driving record and claims history. Your insurance score is not a measure of your creditworthiness, but rather an estimate of your current insurance risk. Numerous studies and statistical analyses have shown a high correlation between the factors included in your score and the likely frequency with which you will file insurance claims.
What it ultimately means is each person is charged a rate that more closely corresponds to the risk of loss they represent. Insurance companies use insurance scores to make premiums fairer so you don’t end up paying for someone else’s claims. If you are less likely to make a claim, then you will pay less for coverage. Conversely, if you are deemed to pose a high risk of costly claims, you will end up paying a higher premium.
Insurance scores also speed up the underwriting process, allowing more automated underwriting, saving costs and allowing consumers to obtain "instant" quotes without approval delays.
Insurance scores are completely non-discriminatory and are not based on gender, nationality, ethnicity, religion, income, address, or marital status. Like credit scores, the use of insurance scores is governed by The Fair Credit Reporting Act.
Insurance scores and credit scores are similar in that they are both based on information in your current credit report. Similar to your credit score, your insurance score is a number and the higher your score, the less risk you represent.
Credit scores are designed to predict the likelihood a consumer will be delinquent in repaying their credit lines, but insurance scores try and predict if a consumer will have higher or lower insurance losses than the average person.
The scoring models are proprietary and closely guarded by the companies that develop them, however the basic composition of your insurance score is shown in the pie chart below1:
If you are able to achieve a high credit score then a high insurance score will naturally follow. That is, if you can demonstrate over a period of time that you can handle credit responsibly and on standard commercial terms, then a good score will be yours. That means paying your bills on time, especially your credit card bills, and making your loan repayments on time.
A further key factor is your utilization of credit. Try not to use more than 50% of the available credit limit on your credit cards, but don’t open more credit card accounts in an attempt to achieve this ratio, as that will in all likelihood detrimentally affect your insurance score. Also, aim for stability in your account portfolio, and don’t go opening and closing accounts as that will adversely impact on your score.
Finally, avoid using alternative forms of financing, such as high-rate finance companies. Stick to conventional means and to conventional lenders to finance your home and other assets.