By: Alex Martin
Climate change is driving more severe and frequent disasters and higher recovery costs. Home insurers have responded by jacking up rates and retreating from markets rather than working with households and communities to bolster resilience and lower the risk. This tactic reduces the insurance industry’s exposure and protects its profits, but families nationwide are finding it much harder to find or afford home insurance.
Steeper insurance costs compound housing unaffordability and make it harder for families to make ends meet with the steadily rising cost of living. Rising insurance premiums are responsible for higher credit card debt, higher credit card default rates, and higher mortgage delinquency rates.
Insurers claim that they need aggressive price hikes to cover increasing climate costs to continue offering policies. Some argue that these rapid increases will help reduce system-wide climate risk by sending needed price signals to encourage people to move out of harm’s way or invest in adaptation. They contend that efforts to promote home insurance affordability effectively subsidize people living in disaster areas and we should not dampen a price signal that could prompt people into action.
That’s a nice theory, but in real life, the neat market mechanism is likely to be ineffective and would impose an enormous financial strain on lower-income families.
Limited Effects of Insurance Price Signals
There is an extensive body of research demonstrating that price signals don’t work very well for shaping this type of behavior. People decide where to live for a host of reasons, and insurance premiums and projections are very low on that list. People build roots and social networks and want to stay in their homes and communities.
Additionally, the vast majority of families cannot afford to move. Buying or renting a new home and securing a new job is difficult and costly in the current economy. Even local moving expenses typically approach $2,000. These costs would be a heavy burden for most people, since 59 percent of households cannot cover an emergency $1,000 expense.
National Housing Affordability Crisis
Even for those who are motivated and can afford to move, finding long-term housing that is safe, resilient, and affordable is a challenge. It’s not just that we have a housing affordability crisis and a nationwide shortage of 4.7 million homes. The uncomfortable reality is that climate risk is now a nationwide phenomenon and homeowners can easily trade one peril for another or that their new location becomes overwhelmed by growing disaster risks over time.
The Insurance Price Signal Is Poisoned
Setting all that aside, price signal strategies can only work if prices accurately reflect climate risk. Unfortunately, homeowners’ premiums are not calculated wholly—or sometimes even primarily—based on property-level risk. Insurers substantially rely on policyholders’ credit scores to set premiums. Households with low credit scores in the safest areas are charged the same rates as households with higher credit scores living in areas with above-average disaster risk. On average, insurers apply a 99 percent penalty—equivalent to nearly $2,000 annually—for low credit score policyholders nationwide. Only California, Massachusetts, and Maryland prohibit the use of credit scores to determine home insurance premiums.
This substantial credit score dependence scrambles the purported climate risk-based price signals. In theory, credit scores only assess an applicant’s likelihood of repaying a loan, and it is inappropriate to use credit scores for things like housing and employment. There is absolutely no good reason to use credit scores for home insurance pricing since companies can simply cancel a policy if they don’t get paid.
Pricing Based on Credit Score Punishes Communities of Color
And the use of credit scores in insurance premiums effectively charges people of color higher prices since Black, Latine, Indigenous, and younger people have lower credit scores on average. The reality is that the credit scoring metric fundamentally reflects and perpetuates systemic racial economic gaps. This makes deploying credit scores in non-credit contexts like insurance especially egregious and locks out the next generation from accessing homeownership.
A perverse effect of rising insurance premiums is that households with lower credit scores get punished—even those living in the safest areas of the country—while wealthier households in high-risk areas receive an enormous relative subsidy based solely on their financial status. Using insurance premiums as a proxy for climate risk may inadvertently redirect resources away from lower-wealth communities and communities of color that need help to adapt.
A price hike-first strategy is a path to austerity, abandonment, and widening racial and economic inequity, not climate resilience. And it won’t work.