The insurance industry has been changing rapidly these last 10 years. One of the most notable changes for consumers was the introduction of credit scoring. When it was first introduced, it was viewed by the public as a huge invasion of privacy and irrelevant to insurance. So why was this introduced, what is done with it, and how much does it actually benefit insurance companies to use your credit for the purpose of insurance?
Credit scoring was introduced by most insurance companies between 2014 and 2016. It is used as a means of determining your likeliness of having a loss as well as how severe that loss might be. It might sound crazy to try to connect the two, but years of research and claims history have shown that the connection between good credit scores and lower likeliness of losses (and severity of losses) is quite strong. Think about it. What makes up a person’s strong credit score include diligently paying off debt, not borrowing more than they can afford, and ensuring they don’t miss payments, among other factors. These character traits would also apply to how someone views things like home maintenance or how likely someone is to be able to afford to maintain their home properly, both of which work to prevent claims from happening or reduce how bad claims might be.
If you feel it is important to pay off your credit card right away, you are quite likely to replace your roof when it’s time, rather than waiting for it to become leaky. It may also indicate you are likely able to afford to replace your roof as sometimes you know it needs replacing, but your finances don’t allow it.
A large portion of home insurance claims are avoidable issues. Things like overflowing bathtubs, aging hot water tanks bursting, an expensive purse stolen from a parked car—all of these incidents are preventable.
It is therefore reasonable to assume that financially responsible people are likely to be responsible in other areas of their life.
While this may not exactly be a popular explanation, from a business standpoint, we can understand why insurance companies would feel more inclined to use credit scoring to determine an individual’s risk exposure. As a result, one of the biggest discounts available from insurance companies today is a credit score discount, which can be up to 45% off your base premium! Especially with insurance companies needing to increase premiums to cover the spike in losses they are seeing, one of the first things you should do when you review your insurance renewal this year is ensure your broker has used your credit consent to get you the best rate possible.
How Credit Consent Could Help your Insurance Rates
Now that we understand why this helps insurance companies determine risk exposure and premium, what happens if you agree to having your credit run? Insurance companies will run your name, date of birth, and address history against a company that performs credit checks, and it brings back a discount for your policy. Brokers and underwriting companies can’t tell what your credit score is, only whether you are getting a discount and how big that discount is. On occasion, your credit score may be considered when a company is trying to make a decision about your policy so it uses your credit score for underwriting purposes. For example, if you got cancelled for nonpayment because you didn’t get your notification but you have no history of payment concerns and you are getting a large discount for your credit score, the underwriting company might allow you to reinstate the policy as your large credit discount would show that this nonpayment is not a usual occurrence for you.
Another thing that is worth understanding is how a credit check for insurance purposes affects you. It is a “soft” credit check, meaning it does not negatively affect your credit to have it checked for insurance purposes the way it would if you were applying for a loan. It shows the insurance company viewed it, and that’s it. In fact, most services these days use your credit—cell phone companies, landlords, car leasing companies, and even some employers!
Ultimately, credit scoring seems to be one of the main tools used by insurance companies, so it is important to understand how it works and why this could benefit you in the long run. If you ever have questions, feel free to ask your Waypoint insurance broker for more information and we will be happy to discuss it further! +
by Allison Gandy, Branch Manager, Waypoint Insurance