How Do You Know If A Company Is Stable And Reliable?


This is a very important question. Knowing if the company you are buying a “promise” from, is going to be around to fulfill that promise is critical. Fortunately, there are a couple organizations – A.M. Best and Standard & Poor’s – who annually review the financial strength of insurance companies and assign a rating. A rating is a letter grade, which is an indication of the company’s financial security or vulnerability.

Let’s suppose, you want to purchase insurance from who is in a Secure and Strong range. Rating which are higher in the range (A’s), indicates greater financial security. Companies who are rated secure or strong are more likely to be around to fulfill their promise.

To find the A.M Best or Standard & Poor’s rating for your insurance company – ask your agent, or go to the company website. While the rating should not vary much on a year-to-year basis, it is a good thing to check this information periodically.

Why is Your Credit Score Important?

This may be one of the biggest surprises for you. It may not make intuitive sense at first, but you will understand why credit not only makes sense but that it can benefit you. The use of credit actually gives many people a lower price.

First, you are not the only one who questions the use of credit in pricing insurance. In fact, several states have banned the use of credit in pricing. The primary concern of regulators and consumer advocates is that the use of credit creates a disparate impact on some groups of people. This means that they believe some people are treated unfairly. If credit were to unfairly treat people based on their race, income, religion or economic station in life, then credit should not be used. The fact is that companies run insurance (or credit) scores on people and none of these factors are considered. The NAIC (National Association of Insurance Commissioners) – the people who are elected or appointed by the governor in each state and run the State Insurance Departments – have examined the issue closely and developed rules for the use of credit in setting prices. NCOIL is the formal name of the rules and every state that allows the use of credit generally follows these recommendations. Therefore, insurance companies follow the rules developed by the NAIC.

From a regulatory and legal standpoint, the use of credit has been approved and justified. While a few states have decided that the use of credit is not allowed, the majority has ruled that insurance companies can use credit in rating because it is meaningful in helping to determine the premium level.

Why and how does credit impact the price for insurance? 

It always goes back to stability. Historical data has shown that the better (higher) a person’s credit score, the more stable that person is, and the fewer accidents that person will have. Therefore, since they have fewer accidents, people with better credit scores deserve a lower price.

There are hundreds of credits characteristics that are examined to establish a credit score. Payment history, number of credit lines, available credit amounts, and length of time credit lines have been open are a few of the factors considered. When these items are looked at in aggregate, they provide a picture of a person’s stability. Here’s a hypothetical example showing how a person’s credit, their driving behaviors and —ultimately — the number of accidents they may have are related.

A poor credit history may adversely affect your driving abilities

The poor credit rating does not make Trudy a bad person, but it can certainly cause unwanted stress that can impact other facets of her life. Another way to look at this is that Trudy is more of a free-spirit in her lifestyle and that may flow through into her driving habits. Again, this tracks with the stability focus that insurance companies are looking for when setting the price.

People with poor credit could pay as much as twice what a person with excellent credit might pay. The good news is that typically 50-70% of people have credit histories in the good or excellent range. So, a majority of people are getting a discount or paying a lower price because those people who typically have more accidents are paying more.

But what happens if the state you live in doesn’t allow the use of credit in insurance price setting or the legislatures want to do away with the use of credit? Believe me; this is a discussion a battle – that is regularly held in legislative sessions. Many consumer advocacy groups want the use of credit banned from insurance pricing because some people are adversely impacted (they are paying more).

So, people who have excellent or good credit pay more, and those with marginal credit pay less. For example, let’s say that Goodtogoinsurance company is no in the business of losing money. In effect, Good to go insurance needs a certain number of dollars of premium or revenue to cover the costs of the accidents. If they can’t vary the rate and charge people who cause more accidents at a higher price, then everyone will pay the same.

Some consumers are concerned about the impact that insurance shopping will have on their credit rating. In other words, if all these companies order a credit history report on you, won’t your credit score be adversely affected? The short answer is no. There is a difference between credit inquiries and insurance inquiries. Technically, insurance companies will order “insurance scores” using credit models built specifically for the insurance industry. While these reports access similar data, files used by the financial and banking industries, the insights and answers provided in the output may be slightly different. In short, you do not need to worry that the ordering of several insurance scores will impact your credit score. The models and processes are separate.

The use of credit in insurance pricing can be a troubling and difficult to grasp

It may even appear to be an irrational concept. But it is also one of the few ways you can proactively do something to lower the price you pay for insurance. Other than driving safely, most other factors used to develop the rate are outside of your control. For example, you cannot control your gender, age, where you live, etc., but you can pay your bills on time, control your use of credit limits, and pay down your debt. While these activities may take time to impact your credit score and your rate, it is something you can do in the short term to save money in the long term.

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