Top5 Insurance Industry Secrets You Need to Know

By Stacey L. Bradford,
Associate Editor, SmartMoney.com

INSURANCE IS many things, but straightforward isn't exactly one of them.

A person's age, claim history and credit score are just some of the factors used in the complicated formula that determines their premiums. And while some of these factors are controllable -- a credit score can be improved or impaired -- others are completely out of your hands -- no one's getting any younger, for example. Learning what matters most to insurers can help policyholders pinpoint ways to lower their premiums or get more claims covered.

To get the most out of your policy, here are five insurance industry secrets worth knowing:

1. We Track Every Claim You Make

The insurance industry keeps an almost Big Brother-like eye on the claims policyholders make on their homeowners and auto insurance policies. They do so with the help of two major property claim databases, the Comprehensive Loss Underwriting Exchange (CLUE) and Automated-Property Loss Underwriting System (A-PLUS).

The insurer's vigilant eye on a policyholder's every move means there's little room for missteps. If a policyholder files two claims for water damage in five years, for example, he could see his premium double or even triple when he goes to renew his policy, says Bob Hunter, the director of insurance for the advocacy group Consumer Federation of America. Even worse, the insurer could decide to drop his coverage altogether, according to the Insurance Information Institute. And since other insurers have access to claim histories, that same person could have a tough time finding new coverage, says Noreen Perotta, money editor for Consumer Reports.

To prevent the claims from piling up and your premiums from getting boosted, refrain from filing a claim if the damage is small, says Perotta. If the repairs cost just a few hundred dollars above the deductible, it's not worth having the claim show up on a CLUE report, she says.

2. Your Credit Score Matters -- a Lot

Lenders and landlords aren't the only ones making decisions based on your credit score. The insurance industry also wants to know how well consumers manage their finances since actuaries believe it's a good predictor of risk and whether someone is likely to file a large number of claims. Fair Isaac, the company that calculates FICO credit scores, also created an "insurance score" (which measures a set of 15 to 30 credit characteristics to calculate a score of between 100 and 999). The lower the number, the higher the perceived risk -- and the more a consumer will have to pay for auto or homeowners premiums, says Amy Danise, editor of Insure.com. (Some states have put restrictions on how credit information can be used.) A driver with the lowest insurance score could get charged at least 30% more for auto insurance, according to Consumer Reports.

Read our story for more on the factors that can weigh down a credit score.

3. We Don't Want to Pay Your Claim

Insurers will look for just about any excuse not to pay a claim, says Kevin Flynn, president of Health Care Advocates, a Philadelphia-based patient advocacy firm. When a patient files a large claim, for example, some health insurers will review their initial application and look for any errors that could allow them to cancel the policy. Typically, this happens to holders of individual health plans who are stricken by a major ailment that racks up at least $25,000 in claims, says Flynn. Following a two-year investigation, five major health plans in California, including Health Net, Kaiser and PacifiCare, recently reached settlements with the California Department of Managed Health Care for rescinding coverage after folks gets sick, according to reports from the Department of Managed Health Care.

Homeowners are also feeling the pinch. After Hurricane Katrina, insurers started adding wind deductibles of 1% to 5% (of a policy's total value) for policyholders living in hurricane-prone areas, says Perotta. Some insurers also put limits on how much they will pay for mold damage to as little as $10,000, she says. The only way to avoid a windstorm deductible and a mold coverage limit is to shop around and see if another insurer in the area doesn't include them in its policies.

Read our story for tips on how to save on homeowners insurance.

4. You Can Fight Our Decisions -- and Often Win

Don't take no for an answer. Just because a health-insurance company rejects a claim doesn't mean a patient can't fight the denial and win, says Health Care Advocates' Flynn. In fact, sometimes a simple call to a customer service rep can remedy a clerical error and get the claim paid. If that doesn't work, consumers can request in writing for a formal review by the insurer.

When all other efforts fail, more than 40 states offer consumers the right to pursue an independent and external review through their state's insurance department. Going through the hassle to formally file a complaint is worth the effort. In New York, for example, patients tend to win about half the time. Click here for more advice on how to fight a denied claim.

5. We Sell Products You Don't Need

There are some insurance products, like a health plan, that no one should go without. But there are also plenty of other policies that are nothing more than a waste of money, warns Hunter of the Consumer Federation of America. When contemplating any type of coverage, make sure the policy protects against catastrophic loss, such as a bread winner's income, and that the coverage is comprehensive. There's no reason, for example, to buy air travel and accidental death policies. If someone wants to provide for his loved ones, he's better off with traditional life insurance since it pays a benefit no matter how a person dies.

Read our story for more on insurance plans consumers don't need. Also, click here for more information on policies worth owning.

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