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FICO sharpens insurance oracle

By Janna Herron · Bankrate.com
Tuesday, April 24, 2012
Posted: 4 pm ET

FICO, the creator of the most popular credit score, now can better predict which insurance claim is a bad one.

The company Tuesday unveiled an improved predictive model that is designed to identify potential insurance fraud faster. The model is "based on neural networks, modeled after the human brain." That doesn't sound scary at all.

FICO aims to cut down on the $52 billion in insurance fraud losses every year worldwide, per Celent's estimates. Around 1 to 2 claims out every 10 are fraudulent in the U.S., according to FICO. (That number is higher in other parts of the world.)

This isn't the only weapon the company provides to combat insurance risk.

FICO -- among other providers such as TransUnion and LexisNexis -- supply insurance scores that predict the probability you'll file a claim. Based on information found in your credit report, this credit-based insurance score is used by auto and homeowners insurers and helps to set premium prices.

So, factors such as missed credit card payments or how much you owe to creditors plug into FICO's model to spit out your claims risk to insurers. Payment history makes up 40 percent of the credit-based insurance score; amount owed is 30 percent; length of credit history equals 15 percent; and the types of credit you have contributes 5 percent.

The formulas for other insurance scores differ.

Unfortunately, consumers don't have access to their FICO credit-based insurance scores like they do with their plain credit scores. And insurers don't regularly disclose insurance scores either.

(As for credit scores, FICO sells its scores on its website. Mortgage lenders disclose credit scores to applicants, and a new federal law enacted last year requires other creditors, such as credit card issuers and auto lenders, to provide credit scores to consumers after they are denied credit or given unfavorable terms.)

But here's a good rule of thumb: The better your credit history is, the better your insurance score and the lower your premiums. That boils down to making payments on time and keeping balances low.

Do you think insurers should consider credit history?

Follow me on Twitter: @JannaHerron.

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