It’s not news that homeowners insurance is getting more expensive, but new research finds that there’s an underappreciated factor at play: credit scores.
Growing, climate change-fueled disaster risk. Increasing rebuilding and reinsurance costs. These are some of the commonly cited explanations for those growing premiums. But using a massive data set detailing some 70 million policies, researchers have found that “credit scores impact homeowners insurance premiums as much as disaster risk.”
“One of the implications of this is that two households side by side that have the same disaster risk homes built at the same time, you can have the homeowners paying dramatically different premiums and in some cases more than double,” said Benjamin Keys, a real estate and finance professor at the University of Pennsylvania’s Wharton School and co-author of a new working paper on the phenomenon published by the National Bureau of Economic Research.
Based on these and other findings, the New York Times recently reported on a Minnesota case where the lower-score neighbor was paying more than twice as much.
On average nationwide, customers with low credit pay 24% more than their high-credit neighbors for identical coverage. But according to the paper, those gaps are even wider in Mountain West and Pacific Northwest states.
“This turmoil in insurance markets and the increasing unaffordability of insurance is being disproportionately borne by the lowest credit score homeowners,” Keys said.
The significance of credit scores for premiums was further highlighted by a natural experiment documented by the researchers. In 2021, the state of Washington banned the use of credit scores for policy price setting, a measure that was in place for several months until legal challenges overturned it. That was enough time to see that low credit customers saw their premiums fall by $175 annually and high-credit customers saw theirs rise by $100.
“It's a light switch policy,” Keys said. “You see the distribution collapse where insurers are no longer allowed to use credit scores.”
But he and his co-authors also found that ZIP codes with lower average credit scores file claims more frequently, which supports “the hypothesis that individuals with lower credit scores” do the same.
Even so, Keys said that using credit scores as a “proxy for insurance risk is always going to be noisy.”
“We don't want to include things in the pricing equation that are only tangentially related to the true underlying risk…,” he added. “We don't want to overly penalize choices that might have been made many years prior in an entirely different context, like missing a credit card payment when you were 19 years old.”
He recommended that state lawmakers ask for better data from the insurance industry to inform potential policy responses.
This story was produced by the Mountain West News Bureau, a collaboration between Boise State Public Radio, Wyoming Public Media, Nevada Public Radio, KUNR in Nevada, KUNC in Northern Colorado, KANW in New Mexico, Colorado Public Radio and KJZZ in Arizona as well as NPR, with support from affiliate newsrooms across the region. Funding for the Mountain West News Bureau is provided in part by the Corporation for Public Broadcasting and Eric and Wendy Schmidt.
