Tuesday, September 14, 2010

How insurance companies decide if you’re a good person Cover Art

How insurance companies decide if you’re a good person

Source: Insure.com
Summary: Insurers use your credit history to set your premiums. You may not be aware of the vast array of scores that already exist for you, developed for insurers.

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If you pay your bills on time, drive responsibly and keep your house in good shape, your actions will save you money on insurance quotes.

To insurers, assessing risk is good business. Making the distinction between a good and bad customer one is not always easy. Home and car insurance companies use a variety of databases and software programs to determine how risky you are to insure. Receive a good assessment and you’ll be offered lower insurance rates. If your insurer determines you are too risky to insure, you’ll pay more - or possibly have your application declined.

You already know about credit scores and the importance of maintaining a good credit history in order to secure favorable car loan rates, credit cards and other financial advantages. You may not be aware of the vast array of other scores that already exist for you, developed for insurers.

Are you 'good'?

Here are some of the ways insurance companies decide if you’re a "good" person who deserves better home and car insurance rates.

Your insurance score: Not quite a credit score but similar, your insurance score from FICO uses historic data from consumer credit reports issued by the three credit reporting giants: Equifax, Experian and TransUnion. You cannot obtain your own insurance score.

To determine your rates, insurance companies may also combine your insurance score with your driving record, loss reports (meaning claims you’ve made) and information that you provided on your insurance application.

"Insurers use scoring to predict if you present a risk they can offer coverage for and at what rate," says Lamont Boyd, director of insurance scoring solutions at FICO. "There is a strong correlation between how customers manage their credit obligations and how likely they are to submit an insurance claim."

Boyd says insurance companies want to know if you have opened multiple lines of credit in recent months and if you are managing all credit obligations effectively (maxing out your credit cards and failing to pay on time will hurt you). Insurance companies have found that people using 30 percent or less of their available credit will generally submit fewer claims.

Insurance 'credit' score

Your insurance score uses some of the same factors as your credit score but weights them differently. Insurers say this gives them a score that better evaluates you as possible claims maker.

"Each [insurance company] decides how they are going to use the information in their underwriting and pricing processes," says Boyd. "While one insurer may think an insurance score of 720 or above is top tier, another insurer may think a score of 650 or above is adequate." Here’s more information on how your credit history affects your home and car insurance premiums.

If you plan to apply for insurance in the future, Boyd recommends you first check your credit reports at AnnualCreditReport.com to make sure nothing inaccurate scuttles your chances at a good rate.

"Mistakes on credit reports are few but certainly possible, and if you are not aware of the information being reported in your credit history, you could be paying insurance rates that are not justified," he says.

Your home's risk

Insurance judgments about your property: A risk score called PropertyPredict® from FICO and Millennium Information Services, Inc. gives insurers a score on your property and your potential for making home insurance claims. Put simply, it takes home insurance-inspection details and runs them through analytics that calculate a score on your property.

"Underwriters would compare things on the inspection report such as a brick veneer home versus a brick home, or one with aluminum siding, and rate the property applying for insurance accordingly," says Boyd.

Other factors include the location of your house, its replacement costs, square footage, condition of roof tiles and even cracks in the sidewalk or driveway. In some states, the type of dog you own may also affect your insurance rates.

In other words, you may consider yourself a prudent homeowner, but if you have a pile of debris in your backyard or missing roof shingles, those exposures to future loss will be reflected in your insurance bill.

Flood zones and crime rates won’t affect your PropertyPredict® Insurance Score.

Credit history plus insurance claims: Here’s a score that combines your credit history (including bankruptcies, liens, garnishments and judgments) with your claims history: Your ChoicePoint Attract Auto & Home Insurance Score tries to predict your potential for filing future claims so that insurers can accurately price your policy. You can buy your score by going to ChoicePoint.

Neighborhood factors

Neighborhood crime impacts your insurance rates: Do you know if someone is coming to rob your house? Your insurer knows the probability. The Insurance Services Office’s Location Crime Service has crime-risk data for every address in the United States. When you apply for home insurance, your insurer can buy this report that details past, present and projected crime-risk scores. This plays a role in your home insurance rate.

"These data are quite precise and timely in capturing both upward and downward changes in a neighborhood's demographics," according to ISO. "It can also look at the status of neighborhoods in your surrounding area."

Crime statistics, property values, neighborhood turnover and the average neighborhood income all factor into your score.

Even if you live in a nice location, nearby neighborhoods inhabited by criminals can drag down your score and raise your insurance rates. The system recognizes that criminals often travel to perpetrate their crimes — sometimes just a few streets over. "Research has demonstrated that the scoring methodology we employ most closely approximates the way that perpetrators target their locations," according to ISO.

Mileage to work

When you bought your car insurance policy, your insurance company no doubt asked how far you commute to work every day. But know this: They may already have the answer. The Location HomeWork Service offered by the Insurance Services Office instantly provides insurers with the minimum driving distance between your house and your workplace. Insurers then use this information to help set your rate.

Related articles from Insure.com:

How your credit history affects your home and car insurance rates

How life insurance companies view you: Underwriting categories

12 ways to save money on car insurance


For More Information

This article as well as additional insurance articles can be found on Insure.com.



Consumer Action has partnered with Insure.com so that we can share its comprehensive consumer educational articles with our readers. Copyright held by Insure.com



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