Homeowners with low credit scores pay an average of $1,996 more per year for insurance than those with high credit scores, a penalty that often outweighs the premium costs associated with living in a high-disaster-risk area, according to a new report from the Consumer Federation of America (CFA) and the Climate and Community Institute (CCI).
The report, "Penalized: The Hidden Cost of Credit Score in Homeowners Insurance Premiums," found that this "credit penalty" amounts to a 99% surcharge for a typical homeowner with poor credit compared to an identical homeowner with excellent credit. The findings challenge the narrative that rising premiums are driven primarily by climate-related catastrophe risk.
The slideshow above illustrates the states where the most homeowners, on average, experience an insurance penalty for poor credit, according to CFA and CCI.
“Homeowners who have done everything right — kept up their homes, avoided claims — are still getting hit with higher premiums just because of their credit scores," Sharon Cornelissen, director of Housing at CFA and co-author of the report, said in a press release. "Combined with years of skyrocketing premiums, this pricing practice is pushing the dream of homeownership ever further out of reach for millions of Americans, especially younger buyers and families of color."
The report argues that using credit scores in pricing amounts to "proxy discrimination," as it disproportionately affects lower-income, younger, Black, Hispanic and Native American homeowners who statistically have lower credit scores. Because insurance is required for a mortgage, the practice can create a barrier to homeownership, the authors claim.
Regulatory push
Based on its findings, the CFA and CCI are calling for a nationwide prohibition on the use of credit scores in homeowners insurance pricing. The groups argue that unlike lending, insurance does not involve credit risk, as carriers can cancel policies for non-payment.
The report also recommends that states mandate greater transparency from insurers regarding their pricing models. It proposes a system modeled on the Home Mortgage Disclosure Act (HMDA), which would require carriers to annually disclose detailed, anonymized data on quotes, coverage, pricing and denials, including consumer and property characteristics.
The analysis was based on over 600,000 test quotes generated from insurance rate filings in every U.S. ZIP code by Quadrant Information Services, covering an estimated 57% of the homeowners insurance market. Disaster risk data was sourced from the Federal Emergency Management Agency (FEMA).
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