Are Credit Scores Fueling Hidden Insurance Costs for Consumers?

Across the South and the United States, homeowners’ insurance rates are rising, with some states seeing an increase of over 50%. Experts say that this issue is contributing to an ongoing housing crisis. While insurance companies have attempted to explain away this increase, critics have pointed to a major culprit creating this inequity: credit-based insurance pricing.

Credit-based insurance pricing is a method where an insurance company uses a consumer’s “credit-based insurance score” to assess their likelihood of filing a claim and then determines the cost of their premium using this information. However, it’s important to note that your credit-based insurance score differs from your regular credit score. Although they are determined by the same factors — payment history, outstanding debt, credit length, pursuit of new credit, and credit mix — your credit-based insurance score weighs these factors differently because it is evaluating you for a different risk.

Insurance companies argue that a consumer’s credit score is an indicator of their risk. Because of this, they should be able to use this information to set rates that accurately reflect that risk. They also argue that, were they not able to use credit-based pricing, “lower-risk” (i.e., higher-credit) consumers would have to pay higher premiums to offset the risk of “high-risk” consumers. Interestingly, the Federal Trade Commission also proposed that credit-based scoring made insurers more willing to offer coverage to individuals considered “higher-risk,” albeit at a higher premium.

You might wonder whether this practice of credit-based pricing is legal. The answer is, perhaps shockingly, mostly “yes.”

Ultimately, the laws for credit-based insurance pricing vary by state, with California, Hawaii, Maryland, Massachusetts, Michigan, Oregon, and Utah all having strict laws regarding how insurance companies can use credit-based insurance scores. For example, California prohibits insurance companies from using credit history when setting homeowners’ insurance rates. The Washington state Senate approved a bill this year that would have required a study of credit-based scores, but the bill died in the House.

However, most of the other 43 states in the US have no laws regarding credit-based pricing for insurance companies. One report by the Consumer Federation of America claimed that “a typical homeowner with a ‘low’ credit score will pay nearly $2,000 more each year — or almost double the price — for their insurance premiums than their otherwise identical neighbor with a ‘high’ credit score.” This stark statistic shows the drastic effect that credit-based pricing can have on consumers.

What makes this even more alarming is that credit-based insurance pricing is a phenomenon known to disproportionately affect low-income and minority families. A study from 2004 found that “race/ethnicity proved to be the most robust single predictor of credit scores,” and that “in most instances it had a significantly greater impact than education, marital status, income and housing values.” Over two decades later, the debate rages on about the inherent racial bias of the credit scoring system, considering its origins.

What Can Consumers Do About Credit-Based Insurance Pricing?

While consumers with low credit might think that they are simply stuck with paying more for their homeowner’s insurance, there are steps they can take if they are in this situation to soften the blow of an increased premium. One of the best ways to save money on insurance is by “bundling” policies.

Many insurance carriers offer discounts to customers who purchase not only their homeowner’s insurance with the company but also their auto insurance and other types of insurance, such as motorcycle or boat insurance.

Consumers may also want to consider reviewing the terms of their policies. Sometimes, it might be possible to lower your rate by purchasing a “cheaper” policy with different terms, such as a higher deductible or lower limit, though it is important to consider the requirements and risks of this decision. If you have a mortgage, your lender might have strict requirements for the insurance you must carry. Furthermore, if a major incident occurs, such as a natural disaster, a lower policy may not provide you with the protection you need.

Another recommendation is to keep shopping around for other insurance providers. Particularly when it comes time to renew the policy and the insurance provider changes the premium, policyholders can take the time to get new quotes from additional providers. While insurance companies will often try to get you to stay with them with “rewards” for loyalty (such as claims forgiveness), the truth is that an insured might save more money in both the short and long term by switching providers.

Some insurance companies with other specialties have also made it a policy not to use credit checks as part of the underwriting process to determine insurance premiums. For example, car insurance providers Cure Auto Insurance, Dillo Insurance, and Empower Insurance offer options for consumers that do not involve credit-based insurance scores. Although there are currently no homeowner’s insurance companies that have pledged not to use credit-based insurance scores while determining rates, these car insurance companies may set a powerful precedent that could extend to the rest of the insurance industry.

Nevertheless, insurance companies in most states are still able to use credit-based insurance scores to help determine customer premiums. Until a change occurs, homeowners can avoid breaking the bank with their insurance by being savvy consumers, taking steps like bundling policies and shopping around for the best rates.

Theodore (Ted) Patestos is co-founder and CEO of Tiger Adjusters, a public adjuster firm with offices in Atlanta, Orlando, Palm Beach, Houston, Philadelphia, Dayton, and in Trenton, Toms River and Westwood, New Jersey.