Jeanette A. Tucker | 4/21/2005 9:40:56 PM
What is an insurance score? How does it differ from a credit score? "Although very closely related, they are not the same," says LSU AgCenter family economics professor Dr. Jeanette Tucker.
An insurance score is a credit-based statistical analysis of a consumer’s likelihood of filing an insurance claim within a given period of time in the future, Tucker explains, noting that studies have shown a correlation between financial history of a person and future insurance loss potential.
"As a result, insurance companies incorporated the use of insurance scores in their pricing and underwriting to enable them to assess risk exposure better before granting insurance coverage," the family economist says, adding, "This allows insurers to offer coverage to more consumers at a fair cost." By knowing your score, you can learn how to reduce your insurance premiums over time.
In contrast, a credit score is a credit-based statistical analysis of a consumer’s likelihood of paying an installment loan (mortgage, auto loan, etc.) or revolving debt (credit card, etc.) when due. Creditors use the score to help determine whether to grant credit.
"Insurance scores provide an objective and consistent tool that insurers use along with other applicant information to predict better the likelihood of a consumer filing future claims," Tucker says. Scores also help streamline the decision process, so policies can be issued more efficiently. By predicting the likelihood of future claims, insurers can control risk, thereby enabling them to offer insurance coverage to more consumers at a fair cost.
"Using statistical programs, a consumer’s credit information is compared to the performance of a consumer to a subject consumer with similar profiles," Tucker explains. Scores incorporate credit data, but some models also consider other data, such as claims history, motor vehicle records, etc.
Insurance scoring firms have determined that characteristics from a consumer’s credit profile can predict future claims activity. These predictions vary by the type of insurance (auto and homeowners). As a result, homeowner and auto insurance scores will differ.
"The score predicts the likelihood of certain events occurring," Tucker says, adding, "Most scoring systems generate ‘reason codes’ in addition to a numeric score." The reason codes will identify up to four principal factors that influence the score. Different insurance score models may/will calculate a different numeric score and different reason codes.
Information gleaned from one’s insurance score and the accompanying reason codes can suggest ways for consumers to lower their insurance costs. Copies of both homeowners and auto insurance scores may be purchased for $12.95 each by contacting http://www.choicepoint.com.
Tucker offers these tips to help improve your insurance score:
• Pay your bills on time.
• Maintain account balances at least 75 percent below your available credit.
• Avoid excessive inquiries to your credit reports.
• Limit the number of credit accounts.
• Review your credit report regularly.
• Avoid "quick" credit fixes.
• Pay down your debt without generating more credit activity.
• Limit the amount of new debt you take on.
• Establish credit if you do not have a long credit history.
• Work with creditors to resolve credit problems.
For local information and educational programs in related areas of family and consumer sciences, contact an extension agent in your parish LSU AgCenter office. Also, log on to the Family and Consumer Sciences section under the Louisiana Cooperative Extension Service at the LSU AgCenter Web site: http://www.lsuagcenter.com/.
On the Internet: LSU AgCenter: http://www.lsuagcenter.com/
Source: Jeanette Tucker (225) 578-1425, or Jtucker@agcenter.lsu.edu.