Insurance companies today use a new numerical point system called auto insurance score to determine if they will issue insurance coverage on your car. It also determines what premium rate they will charge you if they decide to undertake the risk. Don’t blink now but under this new scoring system, you may end up paying higher premiums for your auto insurance even if you have an unblemished driving record. Here’s why.
In the past, your car would be automatically slapped a higher premium if you have previously figured in a car accident where you are at fault, or if you have incurred speeding tickets or other traffic violations the previous year. On the other hand, a pristine driving record meant lower insurance premiums then. This is no longer the case with the new system.
The Evolution of Auto Insurance Score
In the past, your auto insurance premium was calculated based on age, driving history, your vehicle type, where you live, and the car’s safety rating with your driving history having a profound effect on the final premium. But since various studies have shown a Draconian relationship between the credit report information and the insurer’s risk of loss or profitability. Soon enough, insurance companies adopted a credit-based scoring system which is not only based on the previously mentioned factors but also on information appearing on your credit reports.
By 1990, the new credit-based scoring system started to be used throughout the auto insurance industry to develop a more accurately predictive picture of a client’s risk profile. Insurers found it especially useful in determining rates on policies where there are no records of any insurance claims or where the owner has a pristine driving record. Industry wide, it was widely used as the basis for determining whether an auto insurance policy should be issued or not and in many instances in setting the insurance premium rate.
Auto insurance Scores are different from Credit Scores
Do not confuse a credit score for the auto insurance score. They are totally different from each other despite the auto insurance scoring system taking into account certain information from an individual’s credit score. Credit score is meant to gauge the credit worthiness of an individual and is used mainly by banks and other lenders in deciding the fate of credit applications. The scoring system for auto insurance measures the profitability or probability of loss on every risk undertaking relative to each individual auto insurance application.
Auto insurance scoring models differ from company to company since each insurer has its own proprietary formula or algorithm. The details of are kept away from the consumers and are considered as well-guarded corporate secrets. That is why there is very little that is known about the auto insurance scoring system except the fact that it now includes certain credit report factors in combination with insurance claim statistics and profitability data to determine the likelihood of an applicant figuring in a car accident or making an insurance claim in the future..
Who uses Auto Insurance Score
A study conducted by the Federal Trade Commission released on July 24, 2007 acknowledged the fact that credit-based auto insurance scoring system can indeed accurately predict the total cost as well as the total number of claims consumers file. While this may be of help to insurance companies, the benefit it provides consumers is highly controversial and the subject of a continuing raging debate. In Hawaii, the use of credit based auto insurance scoring system has been banned. Other states have attempted to follow suit but have failed.
But whether or not its use can produce a better match between the insurance cost consumers pay and the entailing risk of loss insures have to undertake, the new auto insurance scoring system continues to be the standard based on which insurance policies are issued or denied.
The Auto Insurance Score is currently being used by all insurance companies, the credit bureaus, the Insurance Information Institute, and the American Academy of Actuaries.