Section 604 of the Fair Credit Reporting Act says that the credit reporting agencies, Equifax (EFX), Experian (EXPN) and TransUnion, may furnish reports to any company that intends to use that information for the purpose of underwriting insurance. So, at the Federal level, the use of credit reports for underwriting insurance is perfectly legal and many of them do so. The real question is, why do they do it?
Insurance companies have the same issues lenders have: understanding the risk of doing business with certain consumers. It’s not necessarily the risk of being paid or not being paid for their services (premiums). It’s more so the risk of providing a policy for someone who is more likely to file claims and thus be a less profitable customer. It’s all about the money.
The primary difference between banking and insurance is that insurance policies are all secured, essentially. If you don’t pay your premiums they’ll cut you off, which could lead to you losing your home (it’s called a non-monetary default) or you getting arrested for driving without insurance. Determining whether or not you’ll pay your premiums is not the primary reason some of them pull your credit reports and credit scores.
The primary reason is to determine if they even want to do business with you and/or under what terms. Despite what many believe, how you manage your credit is very predictive of what kind of insurance customer you’ll be. It’s predictive not only of your likelihood of filing claims but also predictive of how profitable you’ll be. If it weren’t, insurance companies wouldn’t spend the money buying millions of credit reports and scores each year.
They’re Not The Same Credit Scores
Much like the financial services environment, the insurance environment relies heavily on credit scores. This isn’t anything new. However, the type of score they’re using is not the same type of score banks and other financial services companies use. In fact, they’re very different.
The scores used by insurance companies are called Insurance Credit Bureau Scores or Insurance Risk Credit Scores. They are developed by a variety of companies, including FICO (FICO) and LexisNexis. LexisNexis develops the LexisNexis Attract Score, which is very commonly used by insurance companies.
Insurance scores consider credit information and/or previous insurance claim information. So, if you filed an auto claim or a homeowner’s claim it can be considered in your insurance score and it can result in a lower score. And if you’re assuming the presence of claims means that you’re a less profitable insurance customer, well, you’d be right. Yes, it’s all about the money.
But They’re The Same Credit Reports
While the scores used by insurance companies are different, the reports they use are the same as the reports used by financial services companies. The reason: all credit reports originate from the same three places; Equifax, Experian and TransUnion. Point being, there are no secret credit reports that insurance companies use to set your premiums.
Insurance Inquiries Don’t Hurt Your Credit Scores
Enough bad news. When you apply for insurance, the insurance company may or may not access your credit reports and scores. There is no guarantee that they will, in fact, pull your credit reports. But, it’s a safe bet.
If the insurance company does choose to access your credit report and score, there will an inquiry posted to the credit file. It will clearly be identified as being from your insurance company. And, more importantly, it will systemically be coded as coming from an insurance company. This is good news because insurance related inquiries are not counted in your credit scores.
You will be able to see them, but no other entity will be able to see them. And, credit-scoring systems don’t not consider insurance-related inquiries so they’ll never lower your credit scores.
I’ll end on that high note.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.