How to Reduce Your Insurance Premium

Does having bad credit make you a worse driver or a riskier homeowner? More than 90% of property-casualty insurance companies use a risk-scoring formula for writing policies and setting premiums. This article explains how the system works and how you can lower insurance premium costs.

Instructions

Difficulty: Moderate

1. Does having bad credit make you a worse driver or a riskier homeowner?
   More than 90% of property-casualty insurance companies use a risk-scoring formula for writing policies and setting premiums. It is based on the FICO (Fair Isaac and Company) credit rating model. The insurance companies’ formula weighs, in order of importance, past credit card payment history, amount of credit owed, length of time credit has been established, newly-opened lines of credit, and the number and types of outstanding credit. This includes installment loans and mortgages.
2. The primary difference between the insurance industry model and the FICO model is that the insurance industry is more concerned about how likely you are to pay your bills, not how many bills that you have to pay or how much you owe. It equates paying bills on time with good judgment and simple common sense. And the more common sense that an individual is likely to demonstrate in handling money, the more common sense practices he or she will likely use in his or her home or place of business. This is likely to reduce or altogether eliminate the filing of insurance claims. This same reasoning also applies to determining automobile insurance premiums.
3. Each insurance company starts with the basic FICO report model but modifies it to fit its own specifications. That’s why a customer can receive an “excellent” rating from one company and only a “good”, “fair” or even “poor” rating from another company, even though every insurance company is dealing with the same credit history information!
4. The choices of available insurance products can be further limited if the would-be insured seeks coverage from one of the major companies that use their own dedicated sales force. For the individual who has been classified as high-risk, perhaps on account of a string of bad luck or bad choices, putting himself or herself in the “hands” of one underwriter or staying too close to the “farm,” further limits their options.
5. The use of credit information can also work to the advantage of the individual unlucky in insurance matters. A high credit rating history could very well minimize or cancel out a high-risk insurance history that may have already resulted in policy termination or a higher premium.
6. Limiting insurance coverage options to the exclusive products of a single insurance company is akin to shopping for shoes in a manufacturer’s exclusive retail outlet. You may think you got a great deal on a perfect fitting pair of lizard skin shoes -- until you get invited to an animal rights fundraiser. Wearing your new bargain slippers to the ball would clearly not fit this or every other occasion! Independent Insurance Agents, representing a multiple of insurance companies and products, can provide customers for insurance with a choice of products that are most appropriate for all different times and aspects of their lives.
7. About the author: William Cooper Colwell is president of H.E. Colwell & Sons, Inc., an independent insurance agency based in New Rochelle founded in 1893. He can be reached at 914-632-6154.