The short answer to the question is “No, not exactly.” Credit scoring is specifically related to the loan of money and paying bills. The objective in credit scoring is to discern the likelihood of an individual paying off borrowed funds on time and over a period of time. To determine the “creditworthiness” of an individual prior to making a loan, lenders will apply several money-borrowing factors such as the individual’s total amount of debt, type of credit utilized, length of credit history and payment history.

On the other hand, insurance scoring is a numerical ranking based on a calculation of various factors which statistically predicts a risk. Typically, insurance scores are only used with automobile and home insurance applications. Insurers in both areas need to be able to assess the risk of loss—the possibility a homeowner or auto driver will file a claim—before deciding whether to insure that individual and what rate to charge for coverage.1 The objective of insurance scoring, therefore, is to determine how likely the individual is to have a claim that would require the insurance company to pay out funds for a coverage claim. Simply stated, credit scores are used to evaluate creditworthiness and insurance scores are used to assess risk.

How Are Insurance Scores Determined? For homeowner’s insurance, the insurer combines the applicant’s credit score and the claims filing history and adds in other factors such as a home’s construction, location and proximity to water supplies for fighting fires, to capture an insurance score. Actuarial studies show that how a person manages his or her financial affairs—the credit score factors—when combined with an insurance score, presents a good predictor of insurance claims behavior.2 Historically, the person with a lower credit score is much more likely to file an insurance claim than a person with a higher credit score. A 2007 FTC study of automobile insurance found a correlation between the amount a customer costs an insurance company and that individual’s insurance credit score.3 The same results has been found with homeowner policies. These studies purport to show a direct correlation.

Why Do Insurance Companies Use Insurance Scores? It should not be surprising that the goal of every insurance company is to match rates for insurance policies as closely as possible with the actual cost of claims. Insurance companies are in business to make money. If they set a rate too low, they lose money and if they set a rate too high, they will lose their market share of customers.4 Like Goldilocks’ porridge, the premium rates must be “just right.” Whether the “premium porridge” is “just right” for the policyholder begs another question.

What is a Good/Bad Insurance Score? The combined credit score and claims filing history, plus other factors, gives a range of the insurance score from 200 to as high as 997. Insurance scores of 700 or higher are considered good scores while a number below 500 is considered a poor insurance score, a poor risk, and generally, if insurance is sold, results in a higher premium for that individual.

Why Should Policyholders know Their Insurance Score? Policyholders should know their individual insurance score because an insurance score can have a significant impact on the premiums paid for insurance coverage.5 While the difference in premiums may appear insignificant, over time, the difference in dollar amounts can add up. For example, if you have a low insurance score which costs you an extra $20.00 a month for automobile insurance, over a year that would equal an additional $240.00 in higher premiums and over four years close to a $1,000.00. Three states, California, Massachusetts, and Hawaii, ban insurance companies from using credit-based insurance scores in determining insurance premium rates for auto insurance. Maryland and Hawaii ban insurance companies from using credit-based insurance scores in determining insurance premium for homeowner’s insurance.6 In Texas, credit/insurance scores affect the variation rate of premiums across the board by 91%.7 A fairly recent rate analysis by The Dallas Morning News, of 34 of the largest insurance companies, found that the gap for homeowner’s policy premiums between poor credit/insurance scores versus good credit/insurance scores was nearly fifty percent (50%).8 For auto insurance, the difference was less pronounced, averaging thirty-nine percent (39%).9

Are Texas Policyholders Protected From Abuse of Their Credit Information by Insurers? Fortunately, according to the Texas Department of Insurance, Texas rules, regarding the use of insurance credit scores are among the strongest in the country.10 Texas law allows insurers to use insurance credit scores, but mandates that the Texas Department of Insurance regulate their use. For example, an insurance company can use your credit/insurance score to decide whether to sell you a policy and what premium rate to charge, but it cannot refuse to sell a policy, cancel one, or not renew a policy based solely on a person’s credit/insurance score. In addition, there are exceptions to a poor credit/insurance score situation: a serious, prolonged medical condition, a divorce, temporary loss of employment, a victim of identity theft, or if an individual has experienced the death of a spouse, child or parent, or some other similar life event. If any of these circumstances are present, coupled with an unusually high premium, one should ask the insurance company for an exception.

The Take-Away: If you think your insurance premium is too high, ask your carrier for your insurance score number and the factors that were used to reach that number. If any of the factors used are incorrect or seem unreasonable or you think you might fall within an exception to the use of the credit score in determining your premium, ask for a review and a lower premium when the policy comes up for renewal or change companies. Insurance credit scores count.
_________________________________________
1 See Insurance Handbook, https://www.iiiorg/publications/insurance-handbook/regulatory-and-financial-environment/background-on-credit-scoring at 4.
2 Id. at 1.
3 See https://www.ftc.gov/sites/default/files/documents/reports/credit-based-insurance-scores-impacts-consumers-automobile-insurance-report-congress-federal-trade/p04484facta_report_credit-based_insurance_scores.pdf.
4 Id.
5 See https://www.chron.com/business/money/tips/article/Do-Low-Credit-Scores-Raise-Your-Insurance-13249146.php.
6 See https:/www.uphelp.org/pubs/credit-scoring-insurance=unfair-practice “Credit Scoring in Insurance: An Unfair Practice,” United Policyholders.
7 See “Do Low Credit Scores Raise Your Insurance Premiums?” at 1.
8 See https://www.dallasnews.com/news/texas/2015/08/02/bad-credit-score-can-double-insurance-premiums-in-texas at 1.
9 Id. at 2.
10 See hpps:www.tdi.texas.gov/credit/index.html.



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