Ten years ago my answer would have been, "there is no correlation". Today there is a different insurance rating environment in which personal and some commercial insurance policies factor in an applicant's credit information. With additional data and more accurate risk rating technology, insurance companies have determined that an individual's credit history correlates to the probability of making an insurance claim. We are seeing differences with most, if not all, of our insurance carriers on home and auto insurance. Clients with good credit history are seeing lower rates and the opposite is true for those with below average credit history.
A good question to ask is, "What does my credit score have to do with my driving?" When speaking about just one person, very little. When we look at a large group of people there is a correlation. For example, out of 25 drivers with good credit history, only 2 drivers may be involved in a claim. For 25 drivers with lower credit scores, 3 may have claims. Although still a small percentage, it could result in a substantially higher premiums for those with below average credit. Home insurance is affected as more and more companies are factoring credit into the rate. Although some insurance carriers are now utilizing the credit rating technology when rating commercial insurance policies, the practice is not wide spread.
How much does my credit affect my insurance premium? It could be SUBSTANTIAL. A client with poor credit history can be paying 25% or more than what another client with strong credit history could pay.
Things to know:
· When insurance companies check your credit, it is not a “hard hit” on your credit. As per Experian, Insurance companies credit searches do not have an impact on your credit score.
· Insurance companies do not use your actual credit score; more likely they use information in your credit report and factor that into their specific algorithm to determine what “tier” to place you in. Although the correlation will likely be very close, understand that they could weigh one piece of credit information heavier than others.
· Most insurance companies only run credit through one credit agency. If an entry with one credit agency score is incorrect, that could result in you paying higher premiums.
· Check with your state to see how insurance companies are allowed to use your credit. A few states ban the practice, others just require disclosure information. For instance, in New York State an insurance company can factor credit in your insurance premium and they can re-run your credit on policy renewal, but they can only lower the renewal premium if your credit improves, not increase it if your credit gets worse.
What you can do to make sure you are being rated properly.
If you have a personal insurance broker:
· Ask them to watch your policy. Credit is a sensitive topic and your broker will likely not bring it up more than what is required by law to avoid a tough conversation for something they can not control. If you are concerned, initiate the conversation. They will work with you to monitor the policy for better credit options or place you with a carrier that factors credit less where possible.
· Depending on the insurance company you are with, your broker might have some insight as to how much credit is impacting the rate. Ask them if the carrier indicates what the best premium available is if credit was optimal. Some carriers provide the information, others can not.
· Does my premium seem right? How do you compare to other clients? No two premiums are the same, but if your premium is way higher than average, try to find out what factor is causing it. If your broker is local, he/she should be able to look at the policy and tell if something is off. Give them time to research alternatives.
· If you purchased the policy after buying a home, leasing a car, or after just getting out of collections, ask your broker to automatically requote the policy next year. I am not recommending requoting every year, but just around those times when credit score changes are likely occurring.
If you only work with an insurance company service center:
· Without the personal relationship, the representative will only be able to tell you so much information about how credit affects your premium; mostly what is in the official disclosure documents. I would recommend asking them to re-rate your policy every year or two in case your credit improves. You should be able to decline the quote if the premium is higher.
Rino G Pietanza, CPCU, CIC is an Independent Insurance Broker with Summit Coverages, Ltd based in Brooklyn, NY. For the last 11 years, he has helped families and small businesses in placing their insurance needs. For any questions, please email him at Rino@SumCov.com or call 718-INSURED (718-467-8733).