Your Financial Responsibility and Insurance Risk- The Relationship

According to the Insurance Information Institute (I.I.I.), insurance companies have been looking at their customer’s credit score ratings for decades. Now, with the modern computerization of data, insurance companies are able to calculate what is called an “insurance score” based on an applicant’s credit rating. An insurance score is a numerical ranking that takes into consideration a customer’s credit score, credit history and other metrics. (Note: income, race, etc. are never used to calculate an insurance score).

The reason your insurance company will look at your insurance score is because studies have for a long time found a definite correlation between a homeowners negative credit rating and their likelihood of filing an insurance claim. Customers more likely to file an insurance claim are more of a risk to insurance companies- and therefore may pay slightly higher premiums. Not only this- but customers with a better credit score are more likely to pay their premiums on time.

This works similar to mortgage qualification. The worse your credit score- the higher interest rate you are going to have to pay on a loan. This is because a lender also associates credit history with financial risk. A poor credit history shows that you may be more likely not to pay your mortgage payments on time or in the worst case scenario- to default on your loan.

The good news is, for those customers who have maintained good credit history, you will benefit from this process. This is because since home insurance companies are able to accurately asses risk- they are also able to set rates at appropriate levels for each customer. If they were not able to rate customer’s risk level- insurance premiums would be subsidized- and all customers would pay an average rate. For customers with poor credit history this scenario would be beneficial- but for homeowners with a good credit rating- this would likely mean higher rates.

For homeowners who may not have the best credit rating- don’t fret. You can lower your premiums many different ways. For example, if you maintain a safe home you may be less likely to file an insurance claim. For example, maintaining your roof might prevent wind damage; fixing a broken step might help avoid an injury and lawsuit; clearing dead tree branches might prevent damage to your home from a fallen tree limb. In this case, your home insurance company may offer you a “No Claims” discount if you maintain a claims free record for a specific period of time. (Of course, some claims cannot be avoided and we are in no way suggesting that you should not file a home insurance claim if you need to.)

Also, additional discounts for safety features like deadbolts, smoke alarms and burglar alarms should help reduce your rate.

Lastly, work on improving your credit score. Get your credit report and try to resolve any negative items. Make an effort to always pay your bills on time- especially loans like a mortgage or auto loan. This can go a long way in saving you money in the future- not just on your insurance.

Last Updated: July 15, 2009

Have other questions about home insurance or how to get started? Want to speak with one of our licensed agents? Give us a call at 1-833-231-3644 and let us get started on your quote today!