It is now common knowledge that insurers look at credit history while determining premiums charged in nearly all states, except California, Hawaii and Massachusetts. Insurance score takes it a little further than just looking at financial activities and includes claim, accident and driving history into account as well to come up with a figure that indicates an applicant’s risk level.
The way they are calculated can be slightly different depending on which personal lines product it is used for. For example, different information may be used when calculating automobile quotes than home. All these grading is done in the background and there is very little information as to what guidelines each underwriter uses.
Anyway, the way insurers use credit reports a bit different than how banks and agencies use. Underwriters try to predict the risk of getting a claim from you and banks try to predict possibility of a default on a loan or mortgage. Having a good payment past helps you to get both cheap auto insurance and low mortgage rates.
Lately, companies have been looking into many factors that can help them predict future claims. If there is a correlation between a data and claims they like to use it. When they determine their scoring tables they look at the demographics. For example, they look at how many people with one claim made another claim shortly after. They look at the driving experience and age too and see how it correlates with claims. That is why it is often referred to as insurance risk score.
There are independent firms who calculate these. However, most carriers would rely on their own formulas to assess the risks after checking your financials, claims and driving history through various sources.
Mostly, the higher the score is the better for you. Oddly enough, it may be the opposite for some carriers. In any case, you wouldn’t know what number a particular one has given you. But it isn’t hard to guess by looking at the quote they offer. If they offer a good price that means they think you are a low risk, after taking everything into account.
Most companies allocate different weights on information they gather. While one heavily relies on past accidents a few carriers are known to place more weight of financial position of their applicants. That is why you may still be able to get good car insurance rates even if you have a recent claim providing you have good monetary standing, own your home and live in a safer zip code. They may even take each component of the report into account differently. That is why it is smart to get several quotes before choosing a provider.
As you know, having good driving record and no recent claims help you a lot to get low rates. In addition, long established money trail, no missed payments, having several accounts in good standing and low use of available cards can help you too. On the other hand, any action taken against you by debt collection agencies, late bill payments, maxing out cards are bad and things like bankruptcy can ruin chances of finding affordable coverage.
Your background may have something to do with it if you are wondering why your premium is high. There are things you could do now if you are facing higher rates due to bad credit. For example, you could start looking at non-standard companies who are more tolerant than the mainstream ones. Shopping around for the best deals is another one. In the long run, you could try to improve credit score and reduce premiums in the process.