What every policyholder
should know about
insurers’
use of
credit scores for for establishing an
Insurance score and with tips on what you can do to
improve your
credit score.
There's been some attention recently paid to the issue of
insurance companies' use of credit information in the underwriting process.
While not all insurance companies use this sort of information, it
is important for you to understand the process and how it could affect you
in the future, This information will provide you with an
overview on how and why credit information is used, and what you can do to
improve your credit score.
What is a Credit Scoring?
Credit scoring is the process by which a credit bureau analyzes your
credit history and assigns an objective 'credit score' based on a number of
factors to help determine your credit 'risk.' While lenders use this
information to determine your likelihood of repaying a loan, insurers use
similar information to to determine your
likelihood of filing an insurance claim.
What is Underwriting?
Underwriting is the process used by insurance companies to examine,
classify, and accept or reject insurance risks (i.e., whether or not to provide you with coverage).
The information that is gathered in the underwriting process is then used to determine the appropriate
premium for the level of risk you represent.
The basic premise is that the
higher the chance you will file a claim, the higher the premium you will
be charged. It stands to reason that people who file more claims
over time will be charged higher premiums.
Why Do Insurers Use Credit
Scores in the Underwriting Process?
Quite simply, it's statistical. Credit history has been found to have a
direct correlation to the tendency for a policyholder to file a claim.
One study found that credit history was a better predictor of
auto losses than driving history. While it may be difficult for some people
to explain, experts generally agree that people who take good care
of their credit take fewer risks in other areas in their lives, and, quite honestly, it's
fair. Insurance companies need to use every resource available to accurately predict losses and adequately price their products. Credit scores are
an important tool to help predict losses and fairly price premiums for policyholders. One insurer found that when
ranking its policyholders by credit score, those with scores in the bottom 20% filed 100% more claims than those with scores in the top 20%.
And. since most people have
good credit, the news is good! Credit scoring in underwriting saves most people money on their insurance premiums. One insurer found that
75% of its policyholders got lower rates because of the use of credit scores in the underwriting
process. Another reported more than two-thirds of its policyholders saved money by using credit
scores.
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