Understanding the Benefits of Insurance Scoring

Most people realize their credit affects their ability to get mortgages, car loans, and other types of debt. However, businesses use personal credit histories in many other ways. Employers use it when considering job applicants. Landlords use it to evaluate prospective tenants. Increasingly, insurance companies are using it to develop an “insurance score,” a number that reflects the quality of a customer’s credit history. The companies’ research has shown  that people with good insurance scores tend to submit fewer insurance claims than people with poor credit histories. Because of the predictive value of credit history, many insurers now obtain an applicant’s insurance score during the underwriting process.

Some consumers are concerned about insurers using their credit information in this way. However, the use of scoring actually has many benefits for insurance consumers.

Insurance scoring speeds up the underwriting process. Before insurers began using scoring, underwriting decisions could sometimes take days. Internet technology allows an insurance company to obtain your score within seconds, which cuts the decision time down to just a few minutes. Many insurance agents are able to obtain a company’s approval almost instantly.

Scoring uses the facts about a person’s credit history to enable underwriters to make objective decisions. Scoring does not take into account a person’s race, nationality, gender, marital status, or other factors that the person cannot control. It focuses only on how that person has used credit in the past. The insurance application still asks about factors such as gender and marital status, but the insurer uses those answers only to correctly classify the person and ensure that it charges the proper rate. Scoring looks only at numbers, resulting in decisions that are much fairer. People of widely differing incomes and backgrounds who have similar insurance scores are treated the same way.

Scoring recognizes that a person can make up for past mistakes. Just as he can improve his driving record by becoming a more careful driver, a person can improve his insurance score by reducing debt and making payments on time. Old mistakes lose importance as time passes; scoring gives more weight to recent actions than it does to older ones. As the score improves, the person can benefit from lower rates and more companies interested in insuring him.

Scoring also increases the availability of insurance. Many companies use different pricing “tiers,” built around specific policyholder criteria. Scoring makes the use of tiers easier because it is an objective factor. If a company has five pricing tiers, and an applicant’s score is too low to qualify for the best one, the company might be able offer insurance to that person in one of the other tiers. It gives companies alternatives to simply rejecting the application.

Because scoring is an automated process, it makes the underwriting process more efficient for insurers. This lowers their costs and allows them to charge lower rates. Also, because it allows insurers to more accurately predict losses, they can control their losses and keep their rates lower.

Studies have shown that most people have good credit scores. Because of this, most people benefit from insurance scoring. They pay lower rates for home and auto insurance then they would otherwise. People who want to earn better rates can more easily fix their credit history than they can fix their driving records, which generally keep traffic violations for at least three years. Scoring gives insurance companies another tool to ensure their rates are fair, so that customers more likely to file claims pay more for their insurance.