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Credit records impact insurance premiums

Many people do not realise that most insurance companies use credit-based insurance scores to help determine risk, and that this score is one of the leading factors used to calculate the premium consumers will pay for their insurance. This is why is it important for people to understand how their credit-based insurance score works to ensure they receive the best premium.

Insurance companies use credit-based insurance scores, along with the insured’s driving history, claims history and many other factors, to establish whether an insurance policy is likely to lapse prematurely and to help determine appropriate insurance rates.

In order to make sure that one’s credit-based insurance score does not negatively impact on one’s premiums, it is important to understand the difference between credit-based insurance scores and actual credit scores.

Credit scores are based on information from the consumer’s credit report and include data such as financial history, detailed information on borrowing and spending habits, payment trends and contact details. The credit score is used by lending institutions like banks to determine how likely it is that an individual will repay a loan on time. Credit scores are also used to determine interest rates and loan qualifications.

On the other hand, credit-based insurance scores do not factor in the person’s job, income history, gender or any other personal information, she says. Insurance companies use these scores to help determine the likelihood of an insurance claim in the future.

As a consumer, it is important to know what factors influence one’s credit-based insurance score to make sure it is most favourable when it comes to determining insurance premiums. Favourable factors might include: a long-established credit history, no late payments or past-due accounts and open accounts in good standing. On the other hand, unfavourable factors might include: past-due payments, accounts in collection, a high amount of debt, a short credit history and a high number of credit inquiries.

If the insured has a high credit-based insurance score, an excellent driving history and zero claims on record, they’ll typically qualify for the best possible insurance rates. Of course, the score is only one of many factors used to calculate the premium. If the insured has an excellent insurance score but a less-than-stellar driving history, for example, they might be considered riskier to insure and as a result pay a higher insurance premium.

The reason the insurance industry uses credit-based insurance scores is simple. The personal lines insurance industry is an extremely competitive market space and insurers want to make sure the best possible premium is charged at the outset, which is vital for taking on new business. They also want to ensure clients are not overpaying on their insurance.

Research shows that credit-based insurance scores can accurately predict accident potential. Statistical analysis shows that those with better credit-based insurance scores tend to incur fewer claims and cost insurance companies less than their lower-scoring counterparts. Extensive international studies also found that credit-based insurance scores are effective predictors of risk.

Given these findings, the use of credit-based insurance scores to determine risk and insurance premiums makes a lot of sense. It’s worth noting that since insurance companies started using credit-based insurance scores, rates have become more accurate and consumers with a better risk profile have greatly benefited as a result.

It is also important to be aware that credit-based insurance scores are returned to the insurance company’s rating engine in an encrypted form and it is therefore impossible for anyone to see the actual credit record of the individual concerned.

If consumers are looking to save on insurance premiums, tracking and proactively responding to problems in their credit report can be an effective technique. Credit-based insurance scores have proven to be an internationally effective means of calculating risk and getting consumers fair and accurate rates.

Christelle Fourie-Colman, CEO of MUA Insurance Acceptances

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