Are you aware that your financial credit score can affect your insurability and your premium cost? Why do insurance companies use this factor in their underwriting and how does it correlate with your premium rates?
How it Works
For years, insurance companies have been experts at figuring out ways to determine the likelihood that an accident or “loss” will occur, and the level of risk in a situation. By making an assessment that considers many complex factors, insurance companies determine premiums.
Insurance companies use different methods that may incorporate aspects of an individual’s credit rating, zip or postal code rating, prior claims history, physical characteristics of property, and many other features that consider both the individual applying for the insurance, and the property to be insured. The calculations are very complex, so as a foundation, understanding how an insurance premium is determined, provides insight into your insurability or how you’re rated as a potential client or risk.
Most people consider their prior claims experience to be a major factor when they think about insurance rates. Insurance claims are not the only characteristics that come into play when assessing your insurability and the appropriate pricing for insuring you. Factors that may impact your cost of insurance:
- Insurance History
- General Financial History and Behavior
- Claims History
- History of Late Premium Payments
- Use of Property or Vehicle
- Personal Information
- Valuation of Property or Vehicle
Having high credit scores are indicators of financial stability, and financial stability has been shown to be a good indicator of how likely a person is to make a claim.
Actuarial studies have shown a compelling correlation between losses and financial credit score which applies to both automobile and homeowners insurance.
It is helpful to become familiar with your credit score. It is determined through:
- Payment History
- Outstanding Debt
- Credit History Length
- New Credit Applications
- Credit Mix (type of loans, credit cards, revolving credit, etc.)
Those factors may fluctuate quickly, so when shopping for insurance or making insurance coverage changes, it’s best to have your credit in order. It may be advantageous to shop for new insurance, or to ask your current insurer to re-evaluate your rates based on your improved credit score.