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How Your Credit Effects Your Homeowners Insurance
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Insurers look at your credit report, just as your mortgage lenders do, but their weigh each piece of information differently and come up with a separate Insurance Bureau Score (or "Insurance Risk Score") to determine your risk to them. Insurance scores are designed to identify stability, while lender credit scores identify a pattern of reliability.

"The credit risk models are built to predict the likelihood of delinquency or non-payment of a loan. The insurance risk models, by contrast, are built to predict the likely loss ratio relativity on any particular individual. A loss ratio is the ratio of losses to premiums of an applicant or book of business and is generally expressed in terms of percentages ... Insurance risk scores range from the 100’s to the 900’s: the higher the score, the lower the likely loss ratio relativity and the better the risk." (Boyd, TIP, Fall 2001)

[UPDATE: Click here for information about the new standardized VantageScore that the three major credit reporting companies have jointly developed and are marketing to compete against the FICO score.]

According to Fair, Isaac & Co (FICO), they generally weigh the different types of credit history information to compute the Insurance Bureau Score as follows:

QUESTIONS AND ANSWERES BY FICO:

[1] WHAT IS AN INSURANCE BUREAU SCORE?
An Insurance Bureau Score is a snapshot of a consumer’s insurance risk picture at a particular point in time based on credit report information. Insurers use Insurance Bureau Scores along with motor vehicle records, loss reports or application information to evaluate new and renewal auto and homeowner insurance policies. It helps them decide, “If we accept this applicant or renew this policy, will we likely be exposed to more losses than our collected premiums will allow us to handle? ”Insurance Bureau Scores are based solely on information in consumer credit reports. The scores are dynamic, changing as new information is added to a consumer’s credit report. Insurers will typically ask for a current score when they receive a new application for insurance so they have the most recent information available.


[2] WHERE DO INSURANCE BUREAU SCORES COME FROM?
Insurance Bureau Scores are based on information from consumer credit reports that insurers get from the three major credit reporting agencies: Equifax, Experian (formerly known as TRW) and TransUnion.

Information used in scoring includes:
Outstanding debt
New applications for credit
Length of credit history
Types of credit in use
Late payments, collections, bankruptcies

[3] WHAT’S NOT INCLUDED IN AN INSURANCE BUREAU SCORE?

Insurance Bureau Scores do not use the following information:

Ethnic group
Nationality
Religion
Age
Gender
Marital Status
Familial Status
Income
Handicap
Address.

[4] WHY DO INSURANCE COMPANIES USE INSURANCE BUREAU SCORES?
Insurance companies use scores to help them issue new and renewal insurance policies. Insurance Bureau Scores provide an objective, accurate and consistent tool that insurers use with other applicant information to better anticipate claims, while streamlining the decision process so they can issue policies more efficiently. By better anticipating claims, insurers can better control risk, enabling them to offer insurance coverage to more consumers at a fairer cost.


[5] HOW DO YOU KNOW IT WORKS?
Independent tests by insurance companies and a major consulting firm compared Insurance Bureau Scores against the claims history of policyholders. The tests demonstrated that the scores do predict the likelihood of claims.


[6] HOW CAN I FIND OUT MY SCORE?
While you can get copies of your credit reports from credit reporting agencies, only insurance companies can get Insurance Bureau Scores. However, your insurance company or its agent can tell you the main reasons behind your score. Keep in mind that your score is one of many pieces of information an underwriter uses to review a policy. Factors like motor vehicle reports and application information also impact an insurer’s decision. Also, remember that the score changes as new information is added to your credit report.


NOTE: Your score will improve over time through a pattern of responsible credit use. An Insurance Bureau Score is a snapshot of your insurance risk picture at a particular point in time based on credit report information. Review your credit reports once a year and report any errors to the credit reporting agencies. Insurance Bureau Scores provide underwriters an objective, accurate and consistent tool that, used with other underwriting information, helps them issue new and renewal insurance policies.


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