Insurance companies are always trying to predict the future.  Though the carriers don't have a crystal ball, they do use the information available to them, which, in NH, includes your credit score.  This HPM blog dives into how and why this information is used and some tips on how to improve your insurance score. 

Why is my credit score impacting my premium?

The very nature of the insurance business is pooling enough premium of many, to pay for the claims of a few.  It would be a lot easier to charge an appropriate rate if the carriers knew exactly who would have a claim and who would not. 

Because insurance companies have yet to develop a crystal ball, their employees use the tools available in an attempt to predict behavior and hence the future.  The more obvious factors contributing to premium for a NH auto policy include age and driving history while NH homeowners insurance factor the replacement cost of a home and prior losses.  A less obvious factor insurance companies use is your insurance score which weighs your credit history. 

What is an insurance score?

An insurance score uses information from your credit report in an attempt to predict how often you are likely to file a claim.  Many insurance companies believe that the way one handles credit says a lot about responsibility.  That said, an insurance score is not the same as a credit score.  Both are derived from information within a credit report; however, they attempt to predict different behavior.

A credit report predicts how likely one is to repay a loan with a large factor being your income.  While lenders will look at income in making loan decisions, insurance companies do not.  For example, when you get a quote on a NH homeowners policy, the carrier will order credit information from one of the three major US credit bureaus.  This information is then entered into that carrier's specific program weighing payment history, collections, credit utilization and bankruptcies to come up with your insurance score.  

What does my credit history have to do with how I drive my car?

Having a good insurance score does not necessarily mean you are a good driver or responsible homeowner;  however, studies have shown that consumers with better insurance scores generally file fewer claims.  It is important to keep in mind that insurance relies heavily upon statistics.  It is not a surprise that young drivers statistically have more accidents, but that does not mean that every young driver has an accident. Insurance companies are applying the same logic with looking at credit scores.

Do all insurance companies use credit history as a factor in the rating?

No, but it is harder and harder to find a company that does not.  At HPM Insurance we represent more than ten insurance companies offering home and car insurance in NH.  Ten years ago just a few companies used credit as a factor; however this year the last two companies within our agency who were holding out changed their rating model to include an insurance score.

What kinds of things impact my insurance score?

Any time someone looks at your credit report, the credit bureaus record this information and refer to it as an "inquiry."  The number of inquiries on your record can impact your insurance score; however, under most models used by insurance companies, the only inquiries that affect your insurance score are those you initiate yourself.  Think about all the credit card offers you receive in the mail.  Those are all inquiries done by the credit card companies, so not looked at in the same way as if you applied for credit.  If you actually apply for credit, whether it is a mortgage, car loan or store credit an inquiry is noted on your record.  Applying for a lot of credit in a short time shows you may be taking on more than you can handle and could adversely impact your credit and hence insurance score.

How can the insurance company look at my credit without my permission?

Both the federal and state Fair Credit Reporting Acts (FCRA) say that insurance companies may look at your credit information without your permission for underwriting practices.  The federal law may be found at www.ftc.gov while the NH state law is RSA 359-B and may be found on the NH Statutes web site.

What are my rights if my premium increases due to my credit history?

Insurance companies are required to provide information on who to contact if you have questions regarding your insurance score.  This information is typically mailed when the entire policy is issued, and not upon renewal where just the declarations pages are sent.  It is suggested that you keep the entire package of information in a safe place in case you need to refer to it.  Your insurance agent does not have access to your credit score, nor is privy to the factors that make up the insurance score.  They can however point you in the right direction if you have any questions regarding your insurance score.

Can my insurance score help me save money on insurance?

Not all use of credit score is a bad thing.  If you have a good credit score combined with a good driving record, you will most likely be charged a lower rate.

Once you understand what factors impact what you pay for your insurance, you can make better decisions about your overall finances and save money in the end.