Study Finds Credit Scores Heavily Influence Homeowners Insurance Premiums

A recent study by the Consumer Federation of America (CFA) and the Climate and Community Institute (CCI) reveals that credit scores have a significant impact on homeowners insurance premiums, often exceeding the cost differences associated with living in areas prone to natural disasters. The report found that homeowners with low credit scores pay nearly double, about $2,000 more annually, compared to neighbors with high credit scores, even when other risk factors are similar. This discrepancy highlights a major cost burden on homeowners who maintain safe properties but have suboptimal credit histories.

The analysis utilized insurance premium data across nearly every U.S. ZIP code and discovered that the "credit penalty" could result in low-score homeowners in low-risk areas paying as much as high-score homeowners in high-risk zones. Additionally, homeowners with medium credit scores (around a 740 FICO) face notably higher premiums, approximately $800 more annually, compared to those with top-tier credit.

Insurance companies justify the use of credit data by arguing it signals climate risk and encourages risk mitigation. However, the study challenges this rationale, suggesting that incorporating credit score data potentially obscures true climate risk signals and may introduce discriminatory elements into pricing models. Consumer advocates argue for eliminating credit scores from underwriting criteria and recommend increased transparency by requiring insurers to disclose their pricing methodologies.

States such as California, Maryland, and Massachusetts already prohibit the use of credit scores in setting homeowners insurance premiums. The study highlights significant regional variation, with Pennsylvania, Arizona, Oregon, and West Virginia exhibiting the largest penalties for low credit scores. In 23 states, premiums for individuals with lower credit scores (around a 630 FICO) are at least double those for high credit score homeowners.

The findings emphasize the need for regulatory consideration regarding the use of credit information in insurance pricing, balancing actuarial soundness with fairness and equity in the homeowners insurance market. Insurers, regulators, and policymakers must evaluate the implications of credit-based pricing and its alignment with broader risk assessment frameworks, especially in the context of increasing climate-related risks.