Individualizing Climate Risk: Credit Score Penalties in the Home Insurance Market
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 rely heavily on proxies of individual risk to set prices, it is assumed that proxies of asset risk (e.g., construction quality) and environmental risk (e.g., flooding, fire) dominate the risk-based pricing of home insurers. However, as risk estimation and management have become increasingly individualized across the insurance industry broadly, contemporary home insurers collect a vast amount 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 such as wildfires or hurricanes. 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. I find that the marginal effects of credit scores on prices are substantively large compared to the marginal effects of zip codes. A low credit individual living in a zip code at the 25th zip code risk percentile is quoted at the same price as a high credit individual living in a zip code at the 80th risk percentile. 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 redistribution of anticipated losses through private home insurance.
Bio: Nick Graetz is an Assistant Professor at the University of Minnesota in the Department of Sociology and the Institute for Social Research and Data Innovation. He is also a Fellow at the Climate and Community Institute, a progressive climate policy think tank developing research on the climate and inequality nexus. His work focuses on the intersection of housing, population health, and political economy in the United States. Learn more at ncgraetz.com.
