Unless they are denied coverage, most people don’t consider how an insurance company decides who gets insurance and who doesn’t. Even people who that take care of their home, drive safely, and pay bills promptly are sometimes refused or see a sudden increase in their premiums (learn about the factors that affect your auto insurance, home insurance, and life insurance premiums).
Why? Well, it turns out that insurance companies rely on information that you may not be aware of or whose value you may underestimate. But it's important to understand how much weight this information carries. It can affect not only your premiums but also your eligibility for automobile and home insurance.
You’ve likely heard about a credit report, but probably not a FICO score. An independent company prepares this score based on the information from the three major credit reporting agencies: Equifax, Experian, and TransUnion.
Approximately 95 percent of auto insurers and 85 percent of homeowner insurers use these scores, but not all states permit this (check this site to find out whether yours does). Insurance companies that use a FICO score do so to determine which customers are least likely to file claims, not to determine credit worthiness. Studies suggest a strong correlation between your FICO score and the frequency and severity of claims. The data also suggests people who use less than 30 percent of their available credit usually submit fewer claims.
The idea is that the insurance company can offer superior rates and coverage to those with the lowest level of risk. Each insurance company is free to decide what score is suitable for their best rates, so it pays to shop around.
Sometimes, errors occur on credit reports and these are reflected in your FICO score, so it's a good idea to review yours often (check all three annual reports here at no cost). If you see an error, have it corrected immediately; otherwise, you might pay more than you should for insurance or be refused coverage.
If you are denied insurance coverage because of your credit, the insurance company will send you an "adverse action notice," which tells you which credit bureau they used and how you can contact them.
CLUE Report & A-Plus Report
Insurance companies exchange information on your insurance history through a national database maintained by a third-party. The CLUE (Comprehensive Loss Underwriting Exchange) database tracks both automobile and homeowner insurance information in two separate reports. A CLUE report comprises personal data for identification purposes as well as any property loss claims you made over the past seven years. Not all states require that insurance companies tell you they are collecting this data so there may be a report on you without your knowledge.
Few people know about CLUE reports unless they learn the hard way: by being refused insurance or seeing their premium skyrocket. They may be inaccurate or incomplete too, so you should find out what is on yours to avoid problems. Keep in mind your rights are the same as they are with your credit report. Review the data in your CLUE report carefully. Sometimes, another person’s information may be on your report or your calls regarding a possible claim may be reported, even if you did not make a claim. Not all states prohibit the use of inquiries on CLUE reports that do not result in a claim.
Furthermore, another company reports automobile information. Some insurers use the A-PLUS (Automated Property Loss Underwriting System) report instead (you can obtain a copy by following the information provided here).
Insurance companies set in-house insurance scores based on your FICO score, information from your CLUE report, your driving record, and your claims history. They are interested in estimating the risk of insuring you, and if your risk is lower, you qualify for lower premiums. Different companies have differing views of what constitutes a good insurance score. Your score might also vary depending on which report your insurer consults. Insurance scores range from 200 to 997, with a good score normally being over 770, while a score under 500 is typically considered to be poor.
The reports mentioned above can affect your homeowner, automobile, boat, and RV insurance. While your insurance score isn’t based on your credit alone, it certainly has a strong bearing on it. Many companies offer discounts if you show you are financially stable, so it's worth your while to get your credit up to snuff and correct any errors that may have slipped into your reports.
The levels set by insurance companies for the best rates vary, and you may qualify for a discount even with a less than ideal insurance score if the company is lenient. Some offer lower premiums at a score of 700, while others may want to see numbers closer to 800. So review your reports for accuracy; it could save you money now and for years to come.