John A. Saracino Insurance Agency

By Tracy Becker

Professional Insurance Agents/May 2011

Credit Scores, used widely in banking, also are important in the insurance industry where they are used to predict future claims or accidents and to set premiums. Underwriters routinely pull reports and scores for risk-based decision-making that can seriously affect a policyholder’s cost. Professional independent agents who understand insurance credit scores can advise prospective policyholders, who may have been charged or quoted a high premium due to credit score issues, authoritatively. Agents can provide a great benefit to their customers and can facilitate the insurance acquisition process when they are able to answer all of their customers’ questions about insurance credit scores or are able to refer them to the right experts, if necessary. An insurance credit score is,a numerical value calculated from information on a customer’s credit report, such as credit and payment history, late payments and past due bills. Generally speaking, the higher the number, the better the score. Besides age, marital status, geographical location, driving history and even whether the automobile will be garaged, as factors that can make a difference in premiums. FICO (Fair Isaac & Co.) provides credit scores to the banking and insurance industries as,a tool for evaluating risk decisions. There are several different kinds of insurance credit score products available:

• FICO Insurance Risk Score (auto and property) from TransUnion;
• Experian/FICO Insurance Score (auto and property) at Experian (delivered by ChoicePoint); and
• InScore (auto and property) at Equifax.

FICO insurance and mortgage scores use similar factors with some variations in their breakdown. In insurance scores, payment history is 40 percent; length of credit history 15 percent; amount of debt 30 percent; new credit 10 percent; and types of credit used is 5 percent. There are some important differences between insurance scores used for rating one type of insurance versus another type of insurance. For instance, the weighting of credit attributes to develop an insurance score for private passenger automobile insurance may differ greatly from the weightings used for commercial automobile insurance or for homeowners insurance. While most agents are familiar with the importance credit scores play in setting insurance premiums and granting mortgages, many customers should understand that credit scores used in insurance are very different from those used for mortgages, car and student loans, credit cards, overdraft protection and business loans. The main difference lies in how the scores are interpreted and used. FICO mortgage scores are sensitive to new derogatory data. Just one late payment can reduce a mortgage credit score as much as 100 points and thus increase monthly mortgage payments by many dollars or result in a rejection of the mortgage application by the lender. By contrast, insurance companies, though they routinely check FICO insurance scores, will not deny a policy based on negative information. They will only increase the premium amount. Insurance customers who need to improve their goals if they understand what strategies will help them. An In-the-know independent insurance agent can be their best ally in understanding and using these strategies. When discussing credit scores with your customer, point out that favorable credit information results in lower premiums. Your customer should know that even with negative information they still have an opportunity to get a lower rate. Positive information includes long-established credit history, numerous open accounts in good standing, no late payments or past due accounts. Unfavorable or negative information could be account in collection, past-due payment, high use of available credit and numerous recent credit applications. Tell customer they can improve insurance scores by making payments on time, keeping accounts current and avoiding numerous credit application over a short time. You can help your customers by giving them good advice on how to do this. But, keep in mind in some cases you may need to seek help from credit score experts and firms that specialize in credit restoration. Agents can help their customers by explaining the impact of a credit score “pull,” or inquiry into a person’s credit information. In the lending industry, an inquiry made with a borrowers’s authorization is called a “hard” pull and has various degrees of negative effect on the credit score. Enough hard pulls can sometimes lower a credit score to the point where a loan is denied or is available at a much higher interest rate. Most of the time, “pulls” don’t work this way in the insurance industry. Ninety-five percent of the initial insurance score reviews are considered “soft inquiries” and do not hurt prospective insured’s score. If the insurer does a review of the score for renewal purposes, in virtually every case it is a “soft pull” and there is no consequence. In rare instances when applying with a new insurer, the insurer, the initial pull is a “hard inquiry” and will cause the customer’s credit score to drop. Agents should advise customers, who may be applying for a mortgage or other financing at the same time to first ask the insurer what type of inquiry will be made. Once the customer, has the answer on a particular company’s use or non-use of hard pulls, they can decide if they need to avoid having a 2-5 point decrease and use an insurance company that will not create this problem. The information processed into consumers’ insurance credit scores is voluminous and complex. While independent agents do not need to know and would be hard-pressed to know all of the intricacies of the system, they should have a good working knowledge to properly advise customers.