Factors That Affect Your Eligibility for Insurance and Its Cost
Insurance companies are in the “risk transfer” business. When you buy any type of insurance you are contracting with the insurance company to transfer the types and limits of financial risk spelled out in your policy to the insurance company. For this service you pay a premium determined by the company.
Insurance companies are also in business, of course, to make money — to make a profit. A stock insurance company wants to make money for its shareholders (who own the company) and a mutual insurance company for its insurance policyholders (who own the company). Even a not-for-profit health insurance company must make enough money to meet its obligations to its policyholders and stay financially robust. In order to be successful, therefore, an insurance company must carefully manage the risks they contractually agree to take on. As a result, insurance companies have developed a number of sophisticated statistical tools and techniques for each type of insurance that help them use a wide range of data to evaluate the risk of loss represented by an individual insurance applicant or by a group.
The process of evaluating insurance risk and accepting or rejecting it is called underwriting. Because a wide range of risk may be acceptable, underwriting also involves classifying or “rating” the risk into various tiers. Three typical rating tiers for life insurance, for example, are “preferred plus,” “preferred” and “standard.” Such tiers can have subclassifications. Different policy conditions and terms typically apply to different rating tiers. For example, applicants who are rated at higher risk of making a claim on the insurance pay higher premiums.
What criteria do insurance companies use to evaluate an insurance applicant?
Underwriting criteria are the factors that can be shown to correlate to particular risks for loss that insurance companies use in evaluating applicants. These criteria not only differ for each type of insurance but they also vary from one company to another. In efforts to promote fairness and prevent discrimination, individual state regulations may also permit, qualify or prohibit the use of certain underwriting criteria and require that denial of insurance must be “risk based.” These variants are one reason that comparison shopping for insurance is important.
With these points in mind, we can take a very brief look at some of the traditional criteria that play a role in underwriting for several common types of individual insurance. Keep in mind that different companies weight criteria differently, “crunch the numbers” in different sophisticated computer models, and otherwise engage in complex (usually computer-driven model) decision-making. Also insurers consider their underwriting criteria proprietary company information and generally don't share the details with the public.
- Auto insurance.
- Age and genders of driver(s)
- Driving history/record
- Previous claims history (loss history database report such as CLUE or A-PLUS)
- Driver education of drivers
- Model of vehicle
- Age and mileage of vehicle
- Location of vehicle
- How vehicle is driven (work, commute, pleasure)/miles driven on commute
- Vehicle garaged or not
- Deductibles, coverages and benefit limits selected
- Insurance score
- Homeowner's Insurance
- Construction type of dwelling (frame, brick, masonry, EIFS, etc.) and size
- Age of dwelling and condition; age or renovation date of systems within structure such as plumbing, electrical, furnace, roof
- Location of dwelling/property
- Proximity to local fire protection
- Presence of safety features (smoke detectors/fire alarm system, security system, sprinklers, etc.)
- Previous claims history on the property and owner (loss history database report such as CLUE or A-PLUS)
- Probability of certain types of peril (hurricanes, tornadoes, hail, windstorms, for example)
- Full-time residence or seasonal; occupied or vacant
- Deductibles, coverages and benefit limits selected
- Homeowner's credit history/insurance score
- Life Insurance
- Age and gender of policy holder
- Medical history/pre-existing conditions (you fill in form, but many companies also use database of Medical Information Bureau)
- Family medical history (For instance, did your parents have a history of heart disease or cancer?)
- Results of medical exam (various tests usually required for higher amounts of insurance; the higher the value the more stringent the criteria). Typical tests include:
- Cholesterol level
- Blood sugar level
- Blood pressure
- Weight
- Urine tests
- Other blood tests
- EKG
- Stress test
- X-rays
- Smoker or not
- Mental health record
- Occupation
- Lifestyle issues, such as leisure activities that the insurance company considers risky (For example, not just bungee jumping or race car driving but mountain climbing and scuba diving may concern an insurer.)
- Driving record
- Where you travel regularly
- Features, coverages and limits selected
- Credit history
- Individual Health Insurance
- Age and gender of policy holder
- Medical history/pre-existing conditions (you fill in form, but many companies also use database of Medical Information Bureau)
- Family medical history (For instance, did your parents have a history of heart disease or cancer?)
- Smoker or not
- Mental health records, including history of use of anti-depressants and counseling
- Occupation
- Deductibles and coverages selected; benefit limits or exclusions
- Previous health insurance application history
What is “insurance scoring”? How is your insurance score related to your credit history and your ability to obtain insurance?
Insurance scoring is a method of rating an individual's risk for making claims for certain types of insurance based on selected aspects of their credit history. The insurance industry cites statistical evidence showing a strong correlation between good credit and fewer claims and poor credit and more frequent/more costly claims. Based on this correlation, an insurance score may be used both as a screening factor for an insurance applicant's acceptability and as a rating factor for placing a consumer in a particular risk classification, which has a bearing on the cost of premiums and insurance benefits.
The vast majority of insurers use insurance credit scoring in underwriting and rating auto insurance. Many insurers also use insurance scoring related to homeowner's property-casualty insurance.
The use of insurance scoring has generated considerable controversy. The insurance industry argues that the practice is objective and unbiased and provides assistance in adjusting premiums fairly so that those who pose greater risk of claims pay higher premiums and those less likely to engage in risky behavior pay lower premiums. Many consumer groups and advocates, on the other hand, question the inherent fairness of insurance scores and the ways in which they may be used potentially to discriminate. Many state legislatures and insurance regulatory agencies have enacted or are considering various regulations related to insurance scores and how they may be used in insurance underwriting and rating. Although these issues are certainly of interest to insurance consumers, they are beyond the scope of this guide.
What's important to know about insurance scores as you shop for insurance is that they are in wide use. That's one more reason to use credit wisely and to regularly review your credit report for accuracy. You may order your free reports online at the official website (www.annualcreditreport.com) or make your request by toll-free phone call to 877-322-8228. In addition, because insurance scores use credit data from “consumer reports,” the use of insurance scores is covered in part by provisions of the Fair Credit Reporting Act. For example, if you are denied insurance or experience other “adverse actions” (such as denied auto insurance at standard rates) based in part or whole on your insurance score then the insurer by law is supposed to give you a written “adverse action notice.” You have the right to dispute the information and to receive a free credit report.
What are “loss history databases” and how are they used in insurance elegibility decisions?
Insurance companies have long used the claims history of an individual or on a property as one factor in deciding whether to accept an insurance contract and to determine what premium to charge. Insurance companies call this claims history a “loss history” because money has been paid out to cover a claim.
Today, large, national computerized “loss history databases” make it possible for insurers to access with the click of a mouse the claims history for an individual or a property. The largest database is the Comprehensive Loss Underwriting Exchange, known as CLUE and provided by the ChoicePoint company. Because of CLUE's dominance in the market, most loss history reports are referred to as CLUE reports. The second largest database is called A-PLUS (Automated Property Loss Underwriting System) and provided by Insurance Services Office (ISO).
Most companies that sell homeowner's property insurance and auto insurance report claims and other claims-related information to these databases. The databases typically include:
- Personal information — your name, address, date of birth, Social Security number.
- Record of any property loss claims for auto or property (home) you have submitted or that previous property owners have submitted. The data includes the date of the loss, the type of loss claimed, what (if anything) the insurance company paid on the claim.
- Notes about any “damage” to the property — even if the company paid no money. For instance, water damage (even possible water damage) is currently of great interest to insurance companies because of rising claims for mold damage.
- Records from all policies you have held.
- Records from all policies on a particularly piece of property.
In recent years, the use of CLUE reports has raised concerns particularly among homeowners and the real estate industry. A number of buyers have reported that they were not able to get insurance on the home they wish to purchase or had to pay much higher rates to insure the home if the property had a history of problems and insurance claims. Other homeowners reported having their rates raised after they made a small claim or in some cases simply called to ask about coverage but made no claim. Although many consumer advocates find this trend alarming, it may be a while before any changes take place in these underwriting practices and you should protect yourself.
Like insurance scores, the use of CLUE reports is also covered by the Fair Credit Reporting Act because they use consumer information. You have a right (for a fee) to have a copy of your personal CLUE report (about your personal claims history) and on property you own. If you are thinking of purchasing a home, only the homeowner or insurer can request the CLUE report, but you may wish to request one from the seller. You also have right to receive an “adverse notice” notification if an adverse decision is based on the information in the report. You have the right to correct inaccurate or incomplete information.
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