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Can my credit score affect my home insurance premiums?

Posted : July 11, 2006

Your credit will affect your homeowners insurance, which makes comparing home insurance quotes very important. It pays to have a good credit history. Case in point: Homeowner insurance companies tend to give their better rates and terms to consumers who pay their bills and loans, in full, on time. A number of homeowner insurers weigh your credit history in making underwriting decisions, confirms Selective Insurance spokeswoman Cynthia B. Heismeyer who explains why.

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"Insurance scores, based partially or wholly on your credit information, help insurers assess risk and charge the appropriate rate based upon that level of risk," observes Heismeyer, Selective Insurance`s assistant vice president of corporate communications.

"Statistically, it has been proven that people with poor insurance scores are more likely to file a claim," notes Heismeyer. "Historically, homeowners rates had been based on the characteristics of the structure itself. The insurance industry is now shifting the focus to include characteristics of the occupants, and insurance scores are one of those factors."

Heismeyer says that a credit-based "insurance score" from a consumer`s credit report is used to predict how often he or she is likely to file claims, and/or how expensive those claims will be. Heismeyer indicates that studies by insurance regulators, universities, independent auditors and insurance companies all have shown that an individual's credit history is a proven, strong indicator of how likely that person is to file a future claim.

Here are some basic facts about credit-based insurance scores, according to the Insurance Information Institute, of New York:

  • They allow insurers to charge lower premiums to customers who are better risks.
  • These types of scores are totally objective and "blind" - insurance scores never factor in a consumer's income, race, address, marital status, age or nationality.
  • They promote competition, which means more choice for consumers.

Chubb doesn`t use credit-based scores in homeowners insurance underwriting decisions, but Chubb spokesman Mark Schussel points out that his company has "other ways to determine the acceptability of a risk." Chubb goes "beyond what`s contained in the insurance application," said Schussel who then gave an example.

For instance, Schussel says, the application doesn`t provide enough detailed information about the type of materials and craftsmanship used in a home as well as specific exposures a home faces and what steps a customer has taken to mitigate those exposures. That`s why we visit many of the homes that we insure."

Credit-based insurance scores are "blind" and objective, points out Lynn Knauf, director of personal lines for the Property Casualty Insurers Association of America, in Des Plaines, Ill. She stressed that credit-based insurance scores don`t consider a consumer`s race, nationality, income, marital status or location.

American Insurance Association`s Dave Snyder focused on what he described as one of the benefits of credit scores in the homeowners insurance equation. "They enable insurers to offer many more pricing levels than before," Snyder says. Citing example, Snyder noted that those with "good credit-based insurance scores can get lower premiums on their homeowners insurance than they could have, say, 10 years ago before credit scoring came to the forefront."

"The addition of credit scoring gives the homeowners insurance company a clearer idea on how to price a particular risk and in the process gives consumers assurance that they`re not paying more than they should for coverage," says Snyder, assistant general counsel for AIA in Washington, D.C.

Snyder believes that experience has shown that fiscally responsible consumers who have solid credit histories have fewer losses than those with spotty or poor financial track records. "From the insurer`s standpoint," observes Snyder, "credit information serves as an indicator as to how well a person manages financial risk. A person who keeps his finances in order tends to keep his or her home in good shape, and probably drive more safely as well. In addition, homeowners insurance losses for people with the worst credit tend to run much higher than that of consumers with the best insurance credit scores."

A final thought on credit scores comes from Safeco Insurance spokesman Paul Hollie. "Personal credit reports are available from several organizations, including Experian, Equifax and TransUnion. Reviewing your credit and cleaning up inaccuracies should be an annual ritual, no different than checking on your personal retirement accounts or checking your fire alarm batteries," says Hollie.

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