The important points
- Insurance scores are a numerical score representing an individual’s financial health at a certain point in time.
- Insurers use insurance scores or credit scores as part of their rating models that calculate applicants’ insurance premiums, and to determine their eligibility for different payment plans.
- With an applicant’s consent (and where permitted), Square One uses credit information to calculate premiums.
What is an insurance score?
An insurance score is a simple numerical grade that represents certain aspects of a person’s financial situation.
If that sounds like a credit score, it’s for a good reason — they’re very similar. However, insurance scores use different math under the hood. The purpose of a credit score is to predict the likelihood of an individual defaulting on a loan, whereas an insurance score predicts the likelihood that they’ll make an insurance claim or what the theoretical cost of those claims might be.
Insurance scores in Canada are developed by the major credit reporting bureaus like Equifax and TransUnion, who license the information to insurance providers.
How are insurance scores calculated?
Insurance scores are calculated primarily with credit-related factors such as:
- Debt payment history
- Current outstanding debt
- Types of credit used
- Length of credit history
- History of bankruptcies or foreclosures
Some factors are snapshots in time, while others look at trends over a given period. These factors are processed through various statistical models and combined into a three-digit score.
Insurance scores don’t consider an individual’s income. Nor do they include personal characteristics like race, gender, marital status, or medical history.
Why do insurance providers use insurance scores?
Insurance providers have long used credit information to calculate insurance premiums. That’s because studies have shown that there is a strong correlation between a person’s credit score and the probability they make insurance claims. Higher credit scores correlate with a lower lifetime cost of insurance claims.1
It’s not that having a low credit score means you’re a bad driver or you don’t take proper care of your house; it’s just a statistical correlation. The reasons for this correlation are still under debate, but credit information is nonetheless a useful tool for insurers to price their products accurately and fairly.2
It’s important to note that insurers can’t deny someone insurance based on their credit information. Instead, strong insurance scores usually result in discounts.
A few provinces forbid the use of credit information for insurance pricing, particularly for car insurance. In most provinces that allow it, insurers must get express consent from an applicant before accessing their credit information — including insurance scores.
Almost every province allows insurers to use credit information for home insurance underwriting. If an applicant doesn’t give their consent for this, the insurer isn’t obligated to give them a quote or sell them a policy.
Insurance scores are also just one piece of the puzzle. Most insurance providers consider dozens or even hundreds of factors to determine eligibility and pricing.
Aside from pricing, providers often use credit information to determine a customer’s eligibility for various payment options, such as monthly installments or the ability to pay by bank withdrawal.
