What Is An Insurance Score And What Are The Factors That Affect This Score?
Many people believe that their credit score is the same as their insurance score – however, that is not the case. Based on the credit information that is provided by credit rating agencies, insurance providers come up with their own scores, which are known as insurance scores.
This score helps insurance companies determine the level of risk that you pose, as a holder of their policy. The higher the score, the lower the probability that you will file an insurance claim, while a lower score presents a higher probability of a claim. Since the level of risk is used to determine the amount of insurance premium, your credit score could have a direct impact on the overall insurance cost.
Factors that Affect the Insurance Score:
There are several factors that insurance providers use to calculate a customer’s insurance score. A range of things, ranging from credit mix to outstanding debt, are weighed in this calculation. All of the variables can be accessed through the credit report.
According to the NAIC (National Association of Insurance Commissioners, the below factors are the most critical with regard to the insurance score calculation. The percentage mentioned with each score represents the degree to which each variable contributes to your overall score:
1. History of payments (40%):
Your entire payment history, ranging from all punctual payments to any missed or late payments, is the most important factor in determining your credit score, accounting for almost half of the total constitution. Payment history is important as it helps insurers determine the probability that you will pay your premiums on time and in full.
2. Outstanding debts (30%):
The amount of money that you owe is another vital factor for an insurer, as, just like payment history, it helps the company determine the regularity with which you will make your premium payments. In addition, the outstanding debt can also help predict your claim-filing likelihood.
3. Length of credit history (15%):
The period for which you have possessed lines of credit (such as mortgages, loans, or credit cards) also plays a role in the insurance score calculation.
4. New credit pursuit (10%):
If you have applied for any new credit lines, this might represent increased risk from the insurer’s perspective. Even though you might be handling the current debt and credit limits well, an additional credit line might change this situation.
5. Credit mix (5%):
Even though the credit mix makes the smallest contribution to the insurance score, the number and variety of credit lines that you own is not something that you should ignore.
To sum up, your insurance score determines the premium that you will pay on your policy coverage, which is why you need to improve this score before applying for an insurance policy. To learn more about how insurance scores work and how you can improve yours, feel free to reach out to us.