An insurance score-also called an auto insurance score, insurance risk score, or credit-based insurance score-is a score based on items in a driver's credit history that helps insurers estimate his or her likelihood of filing a claim. These scores are used to predict risk and help determine how much to charge an individual for coverage.

How Insurance Scores are Calculated

Like traditional credit scores, insurance scores are meant to give a summary of a person's track record with meeting their financial obligations, and the two are calculated in similar ways.

Credit scores, though, are meant to give an indication of a person's creditworthiness, while credit-based insurance scores are meant to predict claims activity. As a result, the two scores almost always differ, since one aspect that's important in determining creditworthiness may not be so reliable in predicting claims activity, and vice versa. 

There is no single system or scoring model that is used by every carrier to develop these scores. 

They sometimes are developed by individual insurers, or insurers can rely on third-party scoring models created by companies like Lexis Nexis and TransUnion. Depending on the source, the scores will include different types of credit information and assign weights to each category. Still, the scores are typically developed based on the same information.

For example, TransUnion, one of the three major credit reporting bureaus and a third-party score provider, uses the following predictive characteristics to develop an insurance risk score:

  • Length of credit history
  • Payment history
  • Number and types of credit accounts
  • Debt to credit-availability ratio
  • Credit inquiries
  • Number of derogatory items (late payments, collections, bankruptcies, etc.)
  • Outstanding debt

As with credit scores, derogatory items on in a person's financial history will lower a person's TransUnion auto insurance score. Higher scores mean less risk to insurers.

If drivers have worse-than-average scores, insurers may charge them more or even deny them coverage. However, credit scoring laws in most states make it so that insurers can't deny coverage to drivers based solely on their insurance score, and pricing formulas must take factors beyond credit into account when determining what rate to charge.

Some insurers go a different route than TransUnion, with higher scores actually indicating a worse credit history and higher risk of filing a claim. 

Progressive, for instance, first compares its past policyholders' accidents and credit history to see which factors can help them predict risk. 

For example, if a high percentage of policyholders who file claims have a bankruptcy in their credit history, bankruptcies may indicate a higher risk of a future loss. Therefore, a bankruptcy would be considered a "predictive credit factor." Some other examples would be late payments, collections, etc.

Then a value is assigned to each predictive credit factor. When looking at prospective clients, Progressive looks at the number of predictive factors in their history and adds the values up for each; so the more factors a driver has, the higher his or her score. With Progressive, lower scores are better.

Exceptions for 'Extraordinary Life Events'

In recent years, many states have passed tighter regulations for insurers' use of credit information. One of the most common measures has been requiring insurers to disregard negative items in a person's credit history if it was tied to an "extraordinary life event."

In Illinois, for example, these extraordinary life events include:

  • Catastrophic illness or injury to the policyholder or immediate family member
  • Death of a spouse, child, or parent
  • Involuntary loss of employment for three months or more
  • Identity theft
  • Dissolution of marriage

If you have had one of these events occur to you and you want to keep it from affecting your insurance premiums, you'll likely have to provide documents verifying one of these events helped contribute to your negative credit situation. 

Insurance scores can be complicated, but they do impact drivers' coverage eligibility and premiums. A recent analysis from, for example, showed that Nevada policyholders' premiums could increase by an average of 129 percent if they went from having the best possible insurance score to having the worst possible score.

When applying for policies with insurers, motorists should ask if their credit is affecting them and how. That way, drivers can take steps to make sure their credit isn't working against them when looking to get insured.