How insurance companies decide if you’re a good person

If you pay your bills on time, drive responsibly and keep your house in good shape, your actions will save you money on insurance premiums. In the world of insurance, these things make you a good egg.

To insurers, assessing risk is good business. Making the distinction between a good egg from a bad one is not easy. Home and car insurance companies use a variety of databases and software programs to boil you down to numbers. Receive a good number and you’ll be offered lower insurance rates. Score a higher number and you’ll pay more, or possibly have your application declined.

You already know about credit scores and the importance of maintaining a good credit history in order to secure favorable car loan rates, credit cards and other financial advantages. You’re probably not aware of the vast array of other scores that already exist for you, developed for insurers.

Here are some of the ways insurance companies decide if you’re a "good" person who deserves better rates:

Your insurance score

Not quite a credit score but similar, your insurance score from FICO uses historic data from consumer credit reports issued by the three credit reporting giants: Equifax, Experian and TransUnion. It can also be combined with your driving record, loss reports (meaning claims you’ve made) and information that you provided on your insurance application.

"Insurers use scoring to predict if you’re too much of a risk for an insurer to take on as a customer," says Lamont Boyd, Director of Product Management at FICO. "There is a correlation between how a customer handles their credit and how likely they are to submit an insurance claim."

Boyd says insurance companies want to know if you have opened multiple lines of credit and if you are maxed out. If you are using 30 percent or less of your available credit, you're in good shape in their eyes.

Your insurance score uses the same factors as your credit score but weights them differently. Insurers say this gives them a score that better evaluates you as possible claims maker.

"Each [insurance company] decides how they are going to use the information in their pricing schemes," says Boyd. "While one insurer may think an insurance score of 720 or above is top tier, another insurer may think a score of 650 or above is adequate." Here’s more information on how your credit history affects your home and car insurance premiums.

If you plan to apply for insurance in the future, Boyd recommends you first check your credit reports at AnnualCreditReport.com to make sure nothing inaccurate scuttles your chances at a good rate.

"Sometimes the bureaus make mistakes, and if you are not aware of the information being reported in your credit history, you could be getting hit with high insurance rates that are not justified," he says.

Judgments about your property

A new risk score called PropertyPredictR from FICO gives insurers a score on your property and your potential for making home insurance claims. Put simply, it takes home-inspection details and runs them through analytics that calculate your score.

"Underwriters would compare things on the inspection report such as a brick veneer home versus a brick home, or one with aluminum siding, and rate the person applying for insurance accordingly," says Boyd.

Other factors include the age of your house, its location, square footage, condition of roof tiles, and even cracks in the sidewalk or driveway. In some states, the type of dog you own may also affect your insurance rates.

In other words, you may consider yourself a prudent homeowner, but if you have a pile of debris in your backyard or missing roof shingles, you’ll likely pay the price when your insurance bill comes.

Flood zones and crime rates won’t affect your PropertyPredictR score.

Credit history plus your claims

Here’s a score that combines your credit history (including bankruptcies, liens, garnishments and judgments) with your claims history: Your ChoicePoint Attract Auto & Home Insurance Score tries to predict your potential for filing future claims so that insurers can accurately price your policy. You can buy your score by going to ChoicePoint.

Crime around you

Do you know if someone is coming to rob your house? Your insurer knows the probability. The Insurance Services Office’s Location Crime Service has crime-risk data for every address in the United States. When you apply for home insurance, your insurer can buy this report that details past, present and projected crime-risk scores. This plays a role in your home insurance rate.

"These data are quite precise and timely in capturing both upward and downward changes in a neighborhood's demographics," according to ISO. "It can also look at the status of neighborhoods in your surrounding area."

Crime statistics, property values, neighborhood turnover and the average neighborhood income all factor into your score.

Even if you live in a nice location, nearby neighborhoods inhabited by criminals can drag down your score and raise your insurance rates. The system recognizes that criminals often travel to perpetrate their crimes — sometimes just a few streets over. "Research has demonstrated that the scoring methodology we employ most closely approximates the way that perpetrators target their locations," according to ISO.