Auto Insurance Scoring

Insurance Scoring Can Cost You a Lot of Money

It has been common knowledge for some time that some auto insurance companies were using credit scoring to determine rates.

However, no one outside the industry seemed to know exactly what the companies were doing. However, Consumer Reports Magazine, with some difficulty, was able to get this information and reported on it extensively in the August 2006 issue.

It seems that insurance scoring is quite a bit different than credit scoring. Innocuous things like carrying more than two credit cards or applying for a new card within the last year can seriously decrease your insurance score and result in a major increase in premiums.

The insurance companies and the insurance scoring companies claim there is a statistical relationship between the “aggressive” use of credit and bad driving habits. What the insurers are trying to do is reduce their claims exposure.

Each auto insurance company – and it appears this might apply to some homeowners insurance companies as well – use different systems that give different weights to various things. It seems the companies are not really interested in your debt repayment habits, but rather the age of your credit relationships, the percentage of credit you use and in some cases if you just carry a balance on your accounts.

Other things that cause your insurance score and rates to rise are carrying the wrong types of credit cards, such as credit cards issued by department stores or finance companies – as some major retailers’ cards are. Even getting an auto loan from an auto manufacturer’s credit arm, like GMAC, can hurt your score.

Consumers Reports was also able to do some limited comparisons of how insurance scores can help or hurt you.

Those with the best scores can obtain discounts of 0 to 30% - as compared to rates charged by companies that don’t use insurance scoring – but those with bad scores can see their rates increase from 30 to over 140%. In dollar terms and depending on the company, this can mean a premium increase of from $300 to $3000 per year. About 50% qualify for discounts, while the other 50% pay more.

Consumer advocates argue that there is no real correlation between insurance scores and claims experience. They also argue that these scores discriminate against low income and minority insurance buyers. Some state insurance regulators have agreed.

So far California, Hawaii and Massachusetts ban insurance scoring for all insurance, while some other states have weaker protection.

When you are turned down for credit, the lender has to notify you of the name and address of the credit bureau it relied on to make that decision. Insurers are not required to do so, or even let you know if they used insurance scoring or which method they used.

As I indicated before, the companies use different methods of scoring. What one company considers objectionable, another might find okay or even ignore.

So it pays to shop carefully for insurance, especially if you are younger and have been using a lot of credit. A good way to do that is to use online brokers like Netquote which will allow you to compare policies and premiums online.

[Most online brokers and direct sellers of auto insurance like Progressive and GEICO will not write insurance in certain states which they consider to be over-regulating the auto insurance market – New Jersey being the most notorious example.]

For more information, read the August 2006 issue of Consumer Reports.

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