What Is An Insurance Score And Why Does It Matter?

What is an insurance score

What is an insurance scoreHave you been looking for insurance, but the premiums you are being offered seem much higher than the market average?

There are many reasons why an insurance company might think you are a risk and therefore hiking your premium. The way premiums are calculated depends on the type of insurance and the individual company.

But, insurance score is one of the factors commonly used across the industry.

A good insurance score can mean you are offered the lowest and best premium rates, while a bad score can have you tagged as a high risk and see you paying well above the market average.

So, now you are probably asking, what is an insurance score based on, how does it affect my premium rates, and what can I do about it?

Read on to find out.

What Is An Insurance Score?

An insurance score is also known as an insurance credit score or an auto insurance risk score. But unlike a standard credit score, it is not linked to whether you are likely to pay your premiums. Insurance companies use standard credit scores to assess that risk.

An insurance credit score is a rating used by insurance companies that represents how likely they think you are to make a claim on their insurance.

These scores are used across the insurance market, including health, auto, property, and travel insurance, and everything in between. However, while all insurance companies use similar principles, they calculate scores individually, so you do not have a “universal insurance score.”

Naturally, insurance companies prefer to have clients that pay their premiums and never make a claim, as that is better for their bottom line. When they engage a new client who seems highly likely to make a claim, they will up their premiums to compensate for their likelihood of making a payout.

Most insurance companies use insurance score ratings that range between 200 and 997. Low scores suggest that the individual is highly likely to make a claim and therefore cause premiums to increase. High scores suggest that the individual is a low risk in terms of claims.

Generally speaking, scores of 770 and above are considered good, and 500 and below are considered poor.

Just like a credit score, insurance scores are not fixed, and an individual’s score will rise and fall over time.

Note: The states of California, Hawaii, and Massachusetts forbid insurance companies from using insurance scores for determining premiums.

How Are Insurance Scores Calculated?

Insurance scores are calculated using a number of factors, but the two main factors used in all fields of insurance are credit score and the number of insurance claims you have made in the past.

For those who don’t know, credit score is a number that indicates an individual’s creditworthiness. It ranges from 300 to 850, with a higher score representing better borrowing potential. A credit score is determined by a variety of factors, but the most important are the number of open accounts, total level of debt, length of credit history, and repayment history.

How do insurance companies know how many claims you have made in the past with other insurers? They use your CLUE report, which is your Comprehensive Loss Underwriting Exchange report.

This report, compiled by LexisNexis, includes information about all of your claims and losses from the last seven years, including dates, type of loss, and payments received.

Other factors that may influence your insurance score include lapses in insurance coverage and the number of new credit inquiries you have made recently.

How To Improve Your Insurance Score

Since insurance scores are calculated individually by insurance companies, it is not something you can check online like a credit score. However, you can assume that you have a low insurance score if (1) you have a low credit score, and (2) the quotes you are receiving for insurance premiums are well above the market average.

There are a number of things you can do to improve your insurance score and potentially lower your insurance premiums.

1. Pay bills on time

While credit score and insurance score are not the same thing, the former informs the latter, so improving your credit score by paying bills on time can lower your insurance score.

2. Pay off debts

Again, this relates to the relationship between credit score and insurance score. If you pay off debts, you will improve your credit score, which will in turn improve your insurance score.

3. Limit insurance claims filed

Limiting the number of insurance claims filed can help lower your score. This can be challenging, and it usually means limiting claims for small items in order to lower your insurance score for larger items.

4. Refrain from making credit inquiries

Limit the number of new credit inquiries you make so as not to appear that you are seeking credit from a number of different locations.

5. Check your CLUE report

Any mistakes on your CLUE report that make it appear as if you have made more claims than you actually have can have a detrimental impact on your insurance score. Request your CLUE report and challenge any errors.

Is Lowering Your Insurance Score Worth It?

But how much of a difference does insurance score actually make to your premiums?

This depends greatly on the type of insurance you are looking at.

For example, an insurance score makes almost no difference to life insurance premiums, as their main determiner is life expectancy. In contrast, an insurance score is very important for auto insurance.

There is no easy way to calculate exactly what impact your insurance score has on your premium, as it’s influenced by so many factors. But, according to some calculations, a person with a bad insurance score can pay roughly twice as much as someone with a good insurance score.

For example, it is estimated that with USAA, if the average car insurance for an individual was $2,200, someone with a good insurance score could expect to pay $1,800 per year, while someone with a poor insurance score could expect to pay $3,700.

Similarly, it is estimated that with Nationwide, if the average car insurance for an individual is $3,250, someone with a good insurance score could expect to pay $2,900 and someone with a poor insurance score $4,100.

But, improving your insurance score is also not the only way to lower your premiums.

When it comes to health insurance, other factors such as whether you smoke and your weight and activity level can have a much more significant impact on your premiums.

For car insurance, the type of car you drive and where you usually park it can make a big difference, and you might be able to lower premiums more effectively by doing something like taking an approved defensive driving course.

But if your insurance score is so bad that it is making insurance a practical impossibility, then there are also a few insurance companies that do not use credit to calculate premiums, or offer special insurance for people with bad credit. Among them are Dairyland, Direct Auto, Progressive, and Allstate.

The Verdict

Insurance score is a measure used by insurance companies to determine how likely you are to make a claim. It is based on a combination of your credit score and your claims history.

Depending on the type of insurance you are taking out, it can have a big impact on the size of your premiums. For example, with auto insurance, someone with a poor insurance score can expect to pay twice as much as someone with a good insurance score.

For this reason, lowering your insurance score can help lower your premiums. You can do this by improving your credit score by paying bills on time and paying down debts, and improving your insurance claims record by avoiding claims when not essential.

But your insurance score is only one of many factors affecting your premiums. Other factors can be even more important depending on the type of insurance you are looking for. So don’t just stop with insurance score—look at other things you can do to make yourself look less risky and more desirable in the eyes of insurers.