Your insurance score: Another judgy number

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Your credit score is one of the most important factors in whether a bank will lend you money. And getting your hands on your own score is now a lot easier. Many lenders and websites provide it for free. Discover, for example, recently started providing customers’ FICO scores on their monthly statements.

Credit information is collected by three major companies — Equifax, Experian and TransUnion — which “score you” somewhere between a low of 300 and a high of 850. This information is then given to lenders whenever you apply for credit.

Insurance companies use similar three-digit scores in deciding how much to charge you for auto and home insurance policies (where it’s allowed by state law) – or if they want to insure you at all. But your insurance score differs from your credit score in two distinct ways. First, it is designed to measure different things about you. Second, it is more difficult – and sometimes impossible – to find out that score or how it is used.

The mysterious insurance scores

“It’s a black box,” says Atlanta-based credit expert John Ulzheimer.

Lenders use credit scores to see how you manage your finances. For example, do you carry a lot of credit card debt? Do you pay your monthly mortgage, rent or credit card payments on time?

In contrast, insurance companies aren’t really concerned about whether you’ll pay your monthly premiums on time because, if you don’t, they can simply cancel your home or auto insurance policy.

“What insurers really want to know is if you are under financial stress and likely to file claims,” says Ulzheimer. That’s because a claim can cost an insurer thousands, or even hundreds of thousands, of dollars, and a policyholder desperate for money could file multiple claims.

“Statistically, people who have a poor insurance score are more likely to file a claim,” says the Insurance Information Institute (III) in its position paper on credit scoring. The III represents the property-casualty insurance industry.

Those scores are generated with the help of two “predictive analytics” firms, FICO and LexisNexis, which work in partnership with the three credit bureaus to develop the separate scores that insurers say are needed to predict whether a person will file claims.

“Our data can help underwriters better assess risk exposure prior to granting insurance coverage,” says Adam Pichon, vice president of insurance for LexisNexis Risk Solutions, one of the two major providers of insurance scores.

Your FICO insurance score is a closely guarded secret. However, LexisNexis will sell consumers both their auto and home insurance scores for $12.50 each.

The insurance score isn’t the only thing insurers look at when making their decisions, says Lamont Boyd, insurance market director for FICO. Other items on the insurance application come first, but the insurance score can often indicate if you’re telling the truth when applying for coverage. Studies have shown that credit correlates with claims.

Predicting your own insurance score

Learning the ups and downs of your regular credit score will likely help you predict the ups and downs of your insurance score, since both have similar yardsticks.

But similar is not identical. While standard credit scores range between 300 and 850, LexisNexis scores can reach 997, with 776 and above indicating a “good” score and a score below 500 being less desirable.

“A score of 800 may be great in one model, but average in another model,” warns Pichon. Also, LexisNexis’s auto insurance score may not be the same as the homeowners insurance score.

Nevertheless, “insurance scores do have a great deal of synergy with credit scores,” says Boyd. If your credit score has gone up, your insurance score may have gone up, too. Then “you can bargain better for a lower rate on auto and home insurance,” he says.

And if you don’t get better car insurance rates from your current carrier, “look for alternatives,” he says. FICO’s website contains detailed information on credit and lending.

Aiming high on your insurance score

LexisNexis says that many of the variables it uses to calculate an insurance score are the same as a standard credit score, such as outstanding debt, length of credit history, new credit applications and type of credit used.

But some variables are more important than others. Ulzheimer suggests a three-pronged approach to improving both your credit and insurance score:

• Avoid having debt that is in default.
• Carry modest balances on your credit cards and pay them in full monthly.
• Shun “the world of public records.” Never have a tax lien, court judgment, your salary garnished or a bankruptcy.

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Shop around

While a bank credit inquiry, such as applying for a new credit card, creates a red flag on your credit report, a request for insurance quotes has no effect on your credit or insurance score. Insurance quotes are regarded as “soft postings,” says LexisNexis on its website. In other words, you can comparison shop without any impact on your credit scores.

Auto and home insurance are a very competitive market, says FICO’s Boyd, and one insurer may give a lower weight to an insurance score when calculating rates.