Insurance Scores

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As I come from the world of health insurance and not auto insurance, I was simply amazed to see how important credit scores were to auto insurance companies.  But as surprising as that was, nothing could prepare me for the news that there was no proven relationship between credit scores and claim history!

Sure the logic makes sense, but before a company starts poking around my personal financial data they should be able to at least show a simple cause and effect relationship.  As in people with low credit scores have more auto insurance claims.  Sadly, there is no such relationship.

First off the auto insurance companies use a different scoring system than auto financing companies who tend to use FICO scores.  Auto insurance companies use whats called Insurance Scores.  Of course insurance scores, like credit scores, are top-secret.  So we can’t even know what aspects are weighed at what level.  Whats really amazing is that no one knows what factors predict accidents and claim issues but still auto insurance companies pay for these scores which have no relationship to actual performance.

We do know that insurance scores have a wealth of information that comes from your standard credit reports. This information is sliced and diced, and a software program spits out an insurance score.  Another reason for the lack of information is that not all insurance scores use the same modeling.  Many insurance company have their own score system that might use credit related information along with other data – such as details you provide on your insurance application.

Also the databases for health insurance claims are also definitely utilized so if you are using your health insurance for every nick and scratch your auto insurance company is also going to take this as proof of your tendency to use your insurance which is not a good thing.


So How Accurate Are Insurance Scores?


According to some insurers there is a definite relationship between insurance rates and credit scores. They report that they make good business decisions by incorporating scored generated from your credit reports. A number of studies have tried to make a final judgment, but of course the results differ depending on who you ask.

The craziest part again is that insurers may not understand completely how insurance scores work. Just like lenders, they don’t need to know about the nuts and bolts behind the scores. Lenders have some understanding of how credit scores work, but they mostly just use them because they like the results they get. The same thing goes for insurance scores. As long as there appears to be a correlation, they don’t seem to care what the actual cause and effect relationship is.