BY: Phil Hayden
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When applying for home, auto, or any personal insurance coverage, insurance companies review the information submitted to determine the level of risk they may be facing. The higher the risk, the higher the pricing, so insurance companies also rely on outside information sources such as credit reports, claims history, and many others to determine an appropriate cost. For example, to quote a homeowners insurance policy, a typical insurance company may reference:
- Financial history (credit report)
- Claim history (CLUE report)
- Construction age and building method: wood frame, masonry, metal, etc.
- Type of siding: wood, vinyl, brick
- Roof age and the type of roof: asphalt shingle, metal, tile
- Protection class: distance to fire company and the capabilities of that fire company
- Location: zip code, distance to bodies of water, distance to flood areas
- Electrical wiring type and when it was last updated
- Plumbing type and when it was last updated
- Total amount of insurance being requested
- Tree score: how many and how close trees are to the home
- Usage: whether the home is primary, secondary, seasonal, vacant, or rented out
- Protection: presence of a central station alarm, deadbolts, backup generator, and similar
- Special hazards: trampolines, swimming pools without fences, wood or coal stoves, fireplaces, pet types, dog breeds, dog bite history
- Extra coverages added to the policy: service line protection, personal umbrella, water and sewer backup
- Payment plan: such as a paid in full discount
- Age of applicant
Some insurance companies do not use credit reports, and certain states even prohibit the practice. Nonetheless, most insurance companies use some or all of the factors above to determine the level of risk. In fact, any data points which are statistically significant and allowed by law are game. That said, credit reports and claims history can be large factors, so let’s consider how they are used.
Insurance companies use consumer reports such as credit reports, credit scores, and CLUE reports to determine coverage eligibility and pricing, both before issuing a policy as well as at renewal. The Fair Credit Reporting Act allows insurance companies to use these reports if they comply with state laws as well.
Statistics show that clients with bankruptcies, collection activity, foreclosures, and liens have more insurance claims than a client with financial stability. Late payments on revolving credit may indicate a lack of financial responsibility, therefore represent a higher risk for non-payment of an insurance policy and the administrative burden that comes with it. In addition, certain insurance companies interpret a poor payment history as a higher likelihood of poor upkeep and maintenance of the home or auto.
Credit scores are a present-day snapshot of creditworthiness. Like the credit report, credit scores can determine whether a client receives standard pricing or a discount. Credit scores fluctuate depending on credit activity, so being consistent with financial responsibilities is helpful in receiving preferential insurance pricing.
Common factors used in a credit score are:
- Negative events such as bankruptcies or collections
- Payment history and frequency of late payments
- Credit history length of time
- Home ownership
- Frequency of applying for credit
- Amount of open credit
- Type of credit
- Amount of outstanding debt
CLUE stands for Comprehensive Loss Underwriting Exchange, which is a service that tracks home and auto claims on individuals. A CLUE report provides a history of any claim’s activity pertaining to the client, showing claims submitted, paid, or denied. All claims are displayed on a CLUE report, even those zero-paid.
Knowing how insurance companies use these reports to determine coverage availability and pricing can help clients take appropriate action to reduce their future cost of insurance. We recommend each client obtain a copy of their credit report once per year from the three credit reporting agencies and review it for accuracy. Clients can receive this information free of cost by going to opens in a new windowwww.annualcreditreport.com or by calling (877) 322-8228. The good news is one mustn’t be affluent to have good credit. Keeping debt low, especially credit card debt, and paying bills in a timely manner goes a long way.
To score well on the CLUE report, we recommend clients understand when to file a claim. If ever in doubt, talk to your insurance agent before submitting. Just like my colleague Stewart Fleming recently wrote, I am not suggesting clients shouldn’t file legitimate claims – that is the reason we purchase insurance. But should questions exist regarding whether a claim is covered or whether it is worth filing, have a conversation with your insurance agent prior to doing so.
Ultimately, information contained in these consumer reports affects insurance premiums. Reviewing credit reports for accuracy and keeping claims low not only helps reduce insurance prices, but is a positive factor in many other services. Questions on home insurance or car insurance? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each of our clients is assigned a personal insurance agent and provided their email address as well as a phone number that rings right on their desk.
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I really appreciate the tips Bankers Insurance sends out.
I am in the middle of an auto claim right now. Chuck Gibson reached out .. I feel quite relieved that someone locally has taken the time …in helps during this distressing time.
Gail, we are sorry to hear about your claim. Claims can be distressing for certain. But Chuck is a great agent, as are the other folks assigned to your account and handling the claim. Please don’t hesitate to reach out to Chuck or others when questions arise. Thank you for your business. All the best!