 What is it?
Credit-based Insurance Score models were developed to predict future insurance losses by comparing actual policyholder performance data from insurance companies with the corresponding credit bureau data of those same policyholders. These models assign an insurance score, generally ranging from 100 to 900. A high insurance score indicates that an individual is a member of a group that is historically less likely to have a high loss ratio in the future. A low insurance score indicates that an individual is a member of a group that is historically more likely to have a high loss ratio in the future.
Why are insurance companies using credit-based insurance scores?
The insurance score models are built to predict the likely "loss ratio relativity" of a particular individual. Loss ratio is the amount paid out by the insurance company in claims divided by the amount they collected in premiums. Loss ratio relativity measures whether you will result in more or fewer losses than average.
The Process
Where do insurance scores come from?
Scores are based on information from consumer credit reports that insurers or statistical modelers obtained from the three major credit bureaus: Equifax, Experian and TransUnion. Another company, Fair Isaac, provides the majority of the statistical models used to calculate insurance scores. ChoicePoint, a LexisNexis company, also provides statistical modeling, as well as driving records (MVRs) and claims history information to assist insurance companies in assessing insurability.
How are insurance scores computed?
Insurance score models are developed by actuarial analyses. The model assigns values to certain attributes or situations that reduce or increase the score. Negative attributes are assigned for situations such as bills which are paid late or go unpaid, high balances maintained on credit cards, collection agency entries, increases in available credit, etc. The more negative attributes, the lower the score.
Are Insurance Scores the same as Credit Scores?
There are obvious similarities between your credit score and your insurance score since they are both based on your current credit report data and are calculated using models built by Fair Isaac.
There are, however, important distinctions. The credit score models are built to predict the likelihood of delinquency or non-payment of a credit obligation. The insurance score models, by contrast, are built to predict the likely "loss ratio relativity" of any particular individual. Insurance scores are also used in different ways than a credit grantor would use a credit risk score. For example, an insurance score is most often one factor of many in an insurer’s evaluation. For example, most insurers use an insurance score along with a motor vehicle report, claims history report, home condition and other kinds of information in their decision-making process. Scores are not used in isolation to set pricing, nor to deny insurance to an individual.
Implementation
Why does the same score receive different treatment from different insurance companies?
Many companies use the same model or models that produce very similar results. However, each company assigns thresholds for tiering results based upon their historical experience. Therefore, a score that is considered "the best" for one company might not be considered so by another company. A company’s appetite for risk can change over time, resulting in different evaluations of returned scores.
When does Indiana Farmers Mutual use credit scoring
Insurance scores are ordered on all Personal Lines new business and renewals.
How does Indiana Farmers Mutual use the scores?
The scores are assigned to a tier. We have 10 tiers for both Personal Auto and Homeowners. For Farmowners, we are using insurance scores to determine if using discounts is warranted. By using the scores this way, an account is priced, based in part upon the credit score.
Multiple Scores
If a husband and wife have different scores, which one is utilized?
Over time, a husband and wife will find their scores to be similar. However, if the scores are different, Indiana Farmers Mutual will utilize the highest (most favorable) of the two.
Low Insurance Scores
Do a large number of credit inquiries affect a credit score?
Inquiries or "hits" are tallied whenever a consumer’s credit report is accessed for the purpose of determining the consumer’s credit performance. For example, whenever an individual applies for a credit card or a home equity loan, the credit check performed is considered an inquiry. As with virtually all credit checks, applications for additional credit have an impact on insurance scores. However, it is important for insurance customers to know that insurance scores consider patterns of credit management practices and single incidents generally have minimal impact.
Do unsolicited invitations for credit cards affect the score?
No. These solicitations are not considered as “hits.” Only consumer-initiated applications for credit are considered “hits.”
What if an individual shops around for the best interest rates?
Some consumers will apply for credit at multiple locations, looking for the best interest rate. In those situations, the applications are lumped so that they do not create multiple “hits” if they are completed within a 2-week to 30-day time period.
What about those who shop around for the best insurance rates? Will those insurance company inquiries create multiple “hits”?
No. These inquiries are reflected on the credit report but are not used in developing a score.
What about those individuals for whom a score cannot be calculated?
If no score can be developed, Indiana Farmers Mutual ignores credit scoring. Indiana law requires that we price these risks as if insurance scoring was not being utilized. They will be placed in a tier 50, which represents a ‘neutral’ handling, or tiering without respect to insurance score.
Can a large open credit line create a bad score?
A large available credit limit may affect a credit score. Likewise, adding a new line of available credit will have an effect on a score, especially if it is an unsecured line of credit (credit card). Simply put, the whole concept of insurance scoring is about managing credit. Those who manage their credit well are less likely to require the use of asset protection. Insurance is asset protection. Groups of individuals who establish available amounts of credit which are extraordinarily high are statistically more apt to incur difficulties in managing their assets.
Improving Credit Scores
What can customers do to improve their insurance scores?
An insurance score is a snapshot of an individual’s chance-of-loss, based on the information in their credit report that reflects their management of credit (access to credit and credit payment patterns over time), with more emphasis on recent information. The following are a few tips they can give customers that can improve a credit score and/or insurance score: - Pay bills on time. Delinquent payments and collections can have a major negative impact on an insurance score.
- Keep balances low on unsecured revolving debt like credit cards. High outstanding debt can affect an insurance score.
- Apply for and open new credit accounts only as needed. Individuals should maintain the necessary minimum number of credit cards, as well as other credit accounts.
- Close “0-balance” credit cards. These should be closed in writing, and written confirmation should be received and retained.
- Annually request a copy of credit report. Review for accuracy and correct all errors in writing.
Over time, responsible use of credit can increase a customer’s insurance score.
Re-scoring an Account
What if the credit score significantly improves over time?
We are automatically re-scoring accounts at renewal. If a score changes, the risk will be appropriately tiered/priced at the next renewal.
Agent Access to Scores
Why can’t the agent receive the actual score?
This is a requirement of the credit bureaus and the scoring vendors. The value of a score is meaningless without a detailed knowledge of how the company plans to utilize that score.
Fair Credit Reporting Act (FCRA)
What are the Fair Credit Reporting Act Implications?
The Fair Credit Reporting Act requires that applicants be informed about the consumer reports that were used to make decisions on their insurability. If an “adverse decision” (rejection or higher price) is made based upon an unfavorable MVR (Motor Vehicle Report), CLUE report (Comprehensive Loss Underwriting Report) and/or Credit Score, the applicant must be given an opportunity to review the report for accuracy. All of our consumer reports are ordered through ChoicePoint, therefore our FCRA letters to consumers provide the following contact information:
ChoicePoint
P.O. Box 105108
Atlanta, GA 30348-5108
1-800-456-6004
www.consumerdisclosure.com
Discrimination Issues
Are credit scores unfair to minorities, women, or people who live in certain neighborhoods?
No. Quite possibly the best aspect of utilizing insurance scores is that they are objective. Consumers have the ability to control or improve their own rating based on their individual efforts. The following information is not used in any insurance credit scoring models – Ethnicity, Income, Religious Beliefs, Gender, Marital Status, Nationality, Age, or Address.
Summary
Classifying risks into groups with actuarially similar chance of loss characteristics is a common practice in personal lines underwriting and pricing. It permits those with a lower chance of loss to appropriately pay less for their insurance protection. Credit scoring classifies risks according to their ability to manage financial responsibility. Credit scores can be improved through active management of the factors that are used to develop a credit score. |