Credit-Based Insurance Scores

Most insurance companies nowadays are using insurance scores in those states that allow it, in addition to other factors, to determine the premiums to charge customers for auto and home insurance, or whether to insure them at all. For instance, according to the Consumer Data Industry Association (CDIA), which represents more than 400 consumer data companies, 92% of the largest auto insurers use credit data for evaluating new potential customers, and half started doing so after 1998.

A credit-based insurance score is a 3 digit number resulting from a statistical analysis of a consumer's credit record that is highly predictive of future claim costs. Several studies by actuarial groups, notably Tillinghast Towers-Perrin and the Casualty Actuarial Society, have found, with a statistical correlation greater than 99%, that the loss ratio, which is the ratio of losses and associated expenses to premiums, is significantly higher for people with lower scores. In fact, for those with the lowest credit scores, the loss ratio actually exceeds 1, where losses exceed the premiums collected. A recent study by the Texas Department of Insurance showed that the loss ratio for homeowners with the worst scores was triple that of those with the highest scores and drivers with the highest scores had 40% fewer accidents over those with the worst scores. The insurance industry also believes that credit reports are more accurate than motor vehicle registration records for predicting future auto accident claims.

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According to 1 study, the Consumer Federation of America found that Allstate charged 39% more for drivers with top insurance scores over others with poor scores; State Farm's prices varied even more – 127%.

There are different insurance scores available, but not all of them are available to the consumer. Probably the insurance score that is used most by insurers is by FICO, who also provides the most common credit scores for lenders. The main company providing insurance scores is Fair Isaac Corporation (now calling itself FICO), which sells the scores to the 3 main credit reporting agencies—Experian, TransUnion, Equifax. Fair Isaac also supplies the FICO credit score, which is the most popular credit score used by lenders. According to Fair Isaac, 90% of the top property and casualty insurers and 300 others use insurance scores for rating and underwriting.

Tips and Resources for Improving Your Credit Score or Insurance Score

Although the algorithm used to compute the scores is the mostly the same, insurance scores, like the FICO and other scores that are based on credit information, will probably differ to some extent from each of the credit reporting agencies, since the information that each agency has on each consumer differs to some extent. However, the algorithm for computing insurance scores does different to some extent to conform to state law.

Although insurance scores are calculated using the information in the consumer's credit file, only some of the information is used and it is weighted differently than the information used in calculating credit scores. There is a greater weight given to payment history and total debt and less for types of credit used or the number of inquiries made for loans and credit, for instance.

Many states have limited the use of insurance scores for rating and underwriting. Montana, New Mexico, and Washington have recently enacted legislation that restricts the use of insurance scores in rating and underwriting consumers. Washington state law forbids companies to deny insurance or base rates on the lack of credit history, available credit, number of credit inquiries, collection accounts for unpaid medical bills, and using a particular type of credit. Kansas has similar laws. Maryland banned the use of insurance scores for determining premiums for homeowner's insurance in 2002. Texas law prohibits the absence of credit information to be used in underwriting decisions, and insurers must account for extraordinary circumstances, such as hospitalization or identity theft, that could cause declines in one's insurance score if the insured requests special consideration in writing. Michigan requires insurance companies to recalculate the score annually, and also when consumers successfully correct information in their credit records. However, only 3 states — California, Hawaii and Massachusetts — prohibit the use of insurance scores altogether.

In response to criticism about using insurance scores for rating consumers, insurance companies have argued that:

Insurance companies have also argued, in opposing changes to regulations in Michigan, that eliminating the use of insurance scores will increase prices for most consumers:

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People opposing the use of insurance scores have argued that:

Legal Basis for Using Credit Information for Insurance Purposes — Excerpt from the Fair Credit Reporting Act

15 U.S.C. §1681b, 604. Permissible purposes of consumer reports