Pricing Protection: Credit Scores, Disaster Risk, and Home Insurance Affordability.
Coauthors: Philip Mulder, Ben Keys
Abstract
We study how location and household characteristics determine homeowners insurance pricing. Using 70 million insurance policies linked to mortgages and a property-level disaster risk model, we show that credit scores have large effects on premiums, comparable in magnitude to disaster risk. In many cases, premiums depend more on who lives in the home than on the disaster risk the home faces. Leveraging a temporary ban on credit-based pricing in Washington State, we find that restricting credit information compresses the credit–premium gradient and reallocates costs. These results indicate that credit information not only gets transmitted to housing costs through mortgage borrowing, but also through insurance pricing. We discuss mechanisms behind the credit-premium gradient and their implications for housing affordability and the incidence of disaster costs.
Organized by: Katherine Wagner
