How is Your Insurance Rating Calculated?

By Catherine Powell

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If you’ve ever compared your auto insurance rate to that of a friend, you may come to find that even though you’re both the same age and use the same insurer, what you pay could be quite different from what your friend pays.  What most consumers don’t realize is that insurance rates aren’t the same for everyone.  That’s because insurance is based on risk.  Insurance companies calculate risk by using a number of factors, including how old you are, where you live, what you drive, how many tickets you’ve had and where you park your car for the night, just to name a few.  If you’ve ever wondered how insurance rates are calculated, today’s blog should help take the mystery out of the process.

Have you got a CLUE?

To begin with, the insurance industry relies on something called a CLUE report to determine your personal insurance rating.  The acronym stands for Comprehensive Loss Underwriting Exchange.  In it is a record of every insurance claim you’ve filed in the past seven years.  This includes information for both auto and personal property claims.    Insurers use the report to determine how likely it is that you will submit a claim.  Based on your rating, an insurance company will not only assess how much to charge you for a policy, they can also use the information to approve or deny coverage. 

Data mining is nothing new to the insurance industry. LexisNexis reports that 96% of insurance companies submit property claim information about their customers to CLUE and 99% of companies that provide auto insurance submit customer information to the database.  While CLUE doesn’t reveal everything about you to insurers, it does provide them with enough information to determine how big of a risk you pose and how likely it is they will have to pay a future claim.

How can consumers get a copy of their CLUE report?

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Since CLUE reports determine how much you pay to insure your car and home, wouldn’t it be nice if you could obtain a copy for yourself?  You can obtain a free copy of your report once every year by simply going to the LexisNexis website, or by calling 866-897-8126.  If you’re considering either buying or selling a home or vehicle, having a copy of your CLUE report could be beneficial. From a buyer’s perspective, if you’re looking to make a big investment, wouldn’t it be nice to be able to see the previous owner’s claim history?  Wild weather and wildfires can cause water and smoke damage to vehicles and homes.  Even after the damage has been repaired, insurers still view these properties as a risky proposition.  On the other hand, if you’re looking to sell a vehicle or a property, handing a potential buyer your CLUE report might be just the thing to seal the deal, provided the report has few if any claims.  

CLUE reports can affect your insurance premiums in either a positive or negative way.  Obviously, the more claims you have, the riskier you are to insurers. Your insurance rating as well as the price you pay for home and auto insurance is based in part on what insurers learn about your past claim history.  Whenever you file a claim and an insurance company reimburses you, their bottom line takes a hit.  Depending on the size of the reimbursement, not to mention how often you filed claims in the past, this provides any insurance company with the data they need to determine how great of a risk you are.  Other factors include where you live, how old you are, your driving record and even your credit rating.

Who’s watching the watchers?

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Since the data that’s used to determine how much you pay for auto and homeowner’s insurance is entered into the system by human beings, there’s always a risk of erroneous information.  That’s another reason why it’s a good idea to take a look at your report every year.  Should a clerk or an insurance adjuster submit incorrect information to the database, it’s up to you to point it out.  The best way to report an error is to contact LexisNexis directly either on the phone or via mail to explain the problem in great detail.  Any time you file a claim, a notation is made in your CLUE report.  Even if the claim was never settled or you decided to pay out of pocket rather than seek reimbursement from your insurance company, this fact may or may not be recorded. Once you report any errors to LexisNexis, it’s up to them to report the error to your insurer.  Still, it wouldn’t be a bad idea to touch base with your agent to let them know about the situation, especially if you’re getting ready to buy or renew a policy.

What can you do to improve your insurance rating?

While you can’t erase insurance claims from your record, there are other things you can do to improve your insurance rating in order to lower the costs.  Unless your credit score is above 800, doing whatever it takes to raise your credit score is one thing that nearly all consumers can do to improve their insurance rating.  Reducing the amount of debt you carry and paying creditors promptly could bump your credit rating to a higher level which could lower your risk to insurers.  Another way to reduce risk is to park your car in a garage as opposed to on the street.  Speaking of streets, moving to a more upscale neighborhood is another way to lower your auto and homeowner’s premiums, since geography is one of the most prevalent means for insurers to assess risk.  That doesn’t mean you need to move into a McMansion to see your auto and homeowner’s premiums drop.  But if you live in a high crime area, this will definitely affect your insurance rate.  The best way to assess crime in your area is to go to sites like SpotCrime.com, CrimeReports.com or NeighborhoodScout.com

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more ways to save on flood insurance, check out her website at http://aplusallfloridainsuranceinc.com/