First, what is an insurance score? According to the Insurance Information Institute (III), an insurance score is “confidential rankings based on credit information.” Like a credit score, an insurance score provides whether the consumer has made payments on time, the number of open credit cards, and whether a bankruptcy filing has been made. However, it is not looked at the same way that creditors look at it. An insurance score is a measure of how well consumers manage their financial affairs, not of their financial assets. It doesn’t tell certain information, such as, income or race.
According to the III, studies have shown that individuals who manage their money well also tend to manage their most important assets well, such as, their home. Also, individuals who manage their money responsibly also tend to handle driving a car more cautiously. Insurance companies would use insurance scores as another factor in underwriting and rating. It is mainly used in personal lines of insurance, such as, home and auto.
This topic on the use of credit information in insurance is often heavily disputed. Many state insurance departments and regulators disapprove the use of insurance scores; however, it is legal in nearly all states. A number of states have made several attempts to ban or restrict this practice, but have failed.