As an escalating homeowners insurance crisis continues to hurt housing markets across the U.S., new research published by Matic, a digital insurance agency, reveals homeowners with lower credit scores pay substantially more for homeowners insurance than those with higher scores.
In states without credit restriction laws, which is the majority of states, the economics for lower-credit-score homeowners worsen still. Homeowners with FICO scores below 580 pay 42% more for homeowners insurance than people with the same scores in credit-restricted states, the study found.
Even in states with credit use restrictions, homeowners with FICO credit scores below 580 paid approximately 15% or $174 more than homeowners with scores of 740-799. In states without restrictions, the disparity between lower-credit-score and higher-credit-score homeowners was significantly higher, at $496 or about 35%.
Over the past two to three years, a perfect storm of challenges has made risk-based pricing untenable for homeowners insurance carriers throughout the country, says Matic’s Chief Product Officer Lee Maliniak, who oversees all research and development for the company.
Not only have repair costs escalated on account of pandemic-era inflation and supply chain issues, but insurers have concentrated too much of their risk in high-risk areas. Additionally, carriers have been underestimating the frequency and severity of extreme weather leading to catastrophic losses. Complicating carriers’ ability to right-side their losses are state insurance regulators restricting the amount that carriers can increase rates.
As a result, carriers have dramatically increased homeowners insurance premiums. Matic’s new study, which analyzes the impact of credit restriction laws on home insurance rates across the U.S., shows lower-credit-borrowers bear a greater burden of those increased costs.
“If you have bad credit, you are going to see larger rate increases,” Maliniak says. “In general, the lower the credit score, the higher your premium will be.” The study shows this finding is true regardless of state-by-state credit use restrictions.
The majority of U.S. states allow insurance carriers to utilize credit-based insurance scores to price insurance offers, including whether to offer a policy at all. Some states – including California, Hawaii, Maryland, Michigan, Massachusetts, Oregon, and Utah – restrict the use of credit-based insurance scores to enhance fair access to insurance independent of a person’s financial standing.
Whereas credit scores are used in mortgage lending to assess a borrower’s likelihood (risk) of default, offering higher prices for homeowners insurance to lower-credit-score borrowers suggests that people with lower scores pose a higher risk of actually filing a claim, says Maliniak.
Matic's findings indicate that homeowners with lower credit scores may find themselves at an advantage finding more affordable homeowners insurance in states with credit restriction laws. At the same time, the findings underscore how escalating insurance costs have a greater impact on lower-credit-score borrowers who already receive more expensive financing on account of their lower scores.
According to Maliniak, nearly 80% of lenders whom Matic surveyed recently reported “increased problems” with home insurance, including delays on closing and debt-to-income ratios being thrown out of whack.
Borrowers with lower credit scores already receive more expensive home financing than higher-credit-score borrowers to compensate lenders and investors for those borrowers' increased risk of default. Offering costlier homeowners insurance to lower-credit-score borrowers increases those borrowers' debt-to-income ratios (DTIs), thereby raising the cost of their home financing and increasing both the real and perceived risk of that borrower defaulting on their loan.
However, in addition to facing pricing disparities in states without credit restriction laws, Matic’s study shows people with lower FICO scores appear to be taking on more risk by lowering their premiums with higher deductibles.
“The significant increase in deductibles across all FICO categories,” the study’s authors wrote, “is largely a result of carriers enforcing or recommending higher deductibles to reduce their losses in a tough insurance market, while some homeowners are self-selecting this route to offset increased premiums.”
Maliniak says “it’s really not a good sign” that in 2023 the company saw a 44% increase in home insurance policies with deductibles greater than $2,000, while policies with deductibles less than $500 fell 16%.
Deductibles are one of the biggest levers to pull for adjusting premiums, he explains, but higher deductibles often translate to worse coverage. People pay less for their monthly premium, which may help them qualify for a mortgage today, but they end up paying a larger amount should they have to file a claim.
“I think for a lot of Americans, they don't have $2,000 just laying around to spend on the deductible before the insurance kicks in if there's a catastrophic loss. You have to remember,” he says, “they're already in a bad situation.”
