Credit history hitting home insurance costs harder than climate
Homeowners with lower credit scores can pay more for insurance than those who live in a disaster-prone area but have higher scores, a new CFA report found.
Key points:
- Consumers with low credit scores in Pennsylvania, Arizona and Oregon face the largest penalties, the Consumer Federation of America found.
- The insurance industry pushed back on the report’s findings, arguing that credit score checks ultimately save consumers money.
- The consumer and climate groups behind the report are calling on legislators to block credit scores from factoring into premiums — a ban already in place in three states.
In some parts of the country, homeowners who have low credit scores and live in areas that are less impacted by climate change are paying more for insurance than those with high credit scores who live in disaster-prone areas.
This is the conclusion drawn in a new report that assessed data from nearly every U.S. ZIP code. The Consumer Federation of America (CFA) released the report this week in collaboration with the Climate and Community Institute.
Both organizations are calling on legislators to prohibit using credit scores and credit history in pricing homeowners insurance, and to require more transparency on pricing models.
"Charging more for having a low credit score than living in a high-risk community shows what the insurance companies truly value," said Douglas Heller, CFA's director of insurance. "The insurance industry says that increasing climate risk is driving premiums — but actually, they slice and dice the market to make folks with low credit scores living in lower-risk communities subsidize the price of the higher credit score customers the insurance companies prefer."
But the report has some detractors, with the American Property Casualty Insurance Association (APCIA) arguing that using credit scores to determine home insurance premiums actually "saves most consumers money."
High penalties for low scores
In three states — California, Maryland and Massachusetts — it is illegal for companies to use credit scores in home insurance pricing. But in other parts of the country, the low credit score "penalty" can vary widely.
Homeowners who live in Pennsylvania, Arizona and Oregon and have low credit scores (which the study pegs at around 630) face the largest penalties, paying well over 100% more compared to those who have high credit scores (around 820). That can equate to around $2,000 more per year in some parts of the country, according to the report.
'Most consumers' benefit, insurance industry says
The APCIA pushed back on the CFA's report, arguing that it repeats misconceptions that have been rebutted by numerous other government and private sector studies.
"Most significantly, the CFA consistently fails to acknowledge that insurers' use of credit-based insurance scores results in substantial consumer benefits. Studies have shown that the use of credit-based insurance scores saves most consumers money," said Bob Passmore, department vice president of personal lines at APCIA.
Looking at specific aspects of credit scores enables insurance companies to evaluate risk of loss with greater accuracy, which enhances competition and results in savings for homeowners, Passmore added.
The APCIA also noted that many states heavily regulate the use of credit scores by building in consumer protections, such as allowing appropriate consideration for extraordinary circumstances and not treating a lack of history as a negative.
"Eliminating the use of credit-based insurance scores will result in the loss of savings for many consumers and result in rates which are less fair and accurate for all," Passmore said.
Consumer group counters insurance claims
But that's not the way Heller sees it. In an email, Heller alleged that insurance companies artificially inflate their base rates for the purpose of presenting the credit penalty as a discount.
"Fundamentally, if insurers are going to give some homeowners a special break for their credit score, they have to charge others with lower credit scores more to make up the difference," he told Real Estate News.
According to Heller, credit-based insurance scores typically look a lot like traditional credit scores — and many homeowners don't know that their credit history impacts their insurance, let alone that they can do anything about it amid extraordinary circumstances.
"Most Americans — in survey after survey — say insurance companies should not use credit scoring to price insurance, and telling consumers that they have a right to run through an insurance company's bureaucratic maze and maybe they can get it fixed is not a solution to this problem," Heller said.