Individualizing climate risk: Credit score penalties in the home insurance market

• In Event: 30410 - Environmental Inequalities

Abstract

The climate crisis represents an unprecedented challenge for societal risk management, and the American home insurance market has come under intense scrutiny as the consequences of climate change have worsened. While other insurance markets heavily rely on proxies of individual risk (e.g., age) to set prices, it is assumed that proxies of asset risk (e.g., construction quality) and environmental risk (e.g., hurricanes) dominate the risk-based pricing of home insurers. But as risk estimation has become increasingly individualized across the insurance industry broadly, home insurers routinely collect vast amounts of individual-level data from prospective buyers and use these variables in setting prices, despite their tenuous connection to the underlying risk of insured events. In this study, I use standardized industry data on home insurance quotes from 2021-2024 generated using 157 inputs about prospective buyers, including policy details and home characteristics, where all inputs are held constant except credit score and zip code. Across all zip codes, medium credit homeowners pay on average $785 more than high credit homeowners, and low credit homeowners pay $2,107 more for an identical policy. The effects of credit are substantively large compared to the effects of zip code, which should proxy environmental risk. Low credit homeowners living in the 25th most expensive zip code pay the same price as high credit homeowners living in the 80th most expensive zip code. These findings have important equity implications, as the most marginalized Americans have been filtered to the frontline of climate-related disasters in many regions of the country and now also bear a disproportionate financial burden in the distribution of anticipated losses through private home insurance.

Author

• Nick Graetz, University of Minnesota