In that they aim to make profits, insurance companies are no different from any other business. A company must accurately price its products to make profits. There are many methods to do this.
Underwriting is the insurance company’s method of “evaluating” a risk to determine a price and profit. No longer are driving records, accident history and geographical location the only tools for underwriting. These are now replaced by highly complex tiered rating plans, which base your rate on a number of factors that make up your overall insurance score. Although this complicated algorithm takes into consideration many factors, your credit rating is usually closely related to your insurance score. If you have a high credit score, it is more likely that you will have a higher insurance score and a lower rate of insurance. Groups with good credit are more likely to have fewer claims than those with poor credit. Good credit groups are more responsible, and this should be reflected in their driving habits. Insurance companies have reliable data backing this up, and insurance departments across the nation now accept insurance scoring as an acceptable rating tool. The factors that affect your insurance score are usually kept secret. As the company’s insurance agents are not usually privy to this information, it is often difficult to get an insurer’s explanation of how your score is calculated. This is how it works: A good credit score = good insurance = lower car insurance rates
Two different risk groups, for example, who are neighbors and live on the same street, drive the exact same cars and have the exact exact same driving records …., would expect to be charged a similar rate, if any. This is unlikely because of the new tiered rating systems, which often apply hundreds or more rates for the same risk. Their insurance score is the main reason. A neighbor with a poor credit score would be likely to pay more, perhaps even twice, because their credit score often matches the insurance score. Keep in mind the above formula. To get a car insurance quote that is accurate, you will need to give your social security number. This allows for credit checks and insurance scores. Only then will you be able to get the actual rate.
The use of credit as a rating instrument is a hot topic within the industry. Many insurers face opposition from different groups throughout the country. This practice is considered unfair by these groups because the low-income population has lower credit scores, or none at all. This group has a lower credit score which translates into lower insurance rates. This is fair? Many states are currently challenging the legality of credit or insurance scores as a rating tool. The outcome will be decided in courts across the country. Keep watching …..
It seems that insurance scoring will be around for the foreseeable future. To get the best advice about these complicated tiered rating systems used by major car insurance companies, I recommend that you call an insurance agent for a rate quote. These new rating schemes can be explained in simple language you understand. Agents have a vested in you, the client and would love to get to know your name.