How insurance pricing obscures the real cost of climate change

Credit scores, not disaster risk, play a major role in home insurance prices — muting what could be an important market signal of physical risk

Sep 05, 2025

Because property insurance is so liquid—subject to annual re-pricing or cancellation—it has the potential to serve as a market-based warning signal of accelerating physical climate risk, which could discourage development and encourage adaptation. But according to two recent studies (Blonz/Hossain/Weill and Birss/Cornelisson et al.) physical risk isn't a major factor when it comes to insurance prices.

It turns out that credit scores are a much larger determinant of price: people with good credit pay far less for the same insurance coverage than people with poor credit, wherever their houses are. Premiums decrease steadily as credit scores go up; having a top-tier credit score saves you so much that this discount is, on average, bigger than the part of your premium that reflects your expected disaster losses. Many Americans don't know this.

This pricing practice means signals of physical risk are being muted or lost. It also means we are seeing richer (mostly) people enjoying living in places prone to wildfire, floods, or hurricanes, because their financing costs and insurance premiums reflect mostly their creditworthiness, not their true physical risk. As of 2023, disaster risk accounted for (Blonz/Hossain/Weill, p.2) less than a quarter of premium pricing nationally, and only about a third of the price in risky places like Florida and Louisiana.

Here's a humdinger: researchers say the cost of natural disaster risk—the fastest growing component of insurance prices—is passed on disproportionately by insurance companies to people with lower credit scores. (Blonz/Hossain/Weill, p. 3.) As disasters become more frequent and costly, and insurers pass more of these expenses on to policyholders, people with lower incomes (generally more likely to have lower credit scores), will face both the higher costs of disaster risk and these credit-based penalties.

A better approach would be to require insurers to be transparent about the elements of their pricing so that both regulators and the public can grapple with all of this more thoughtfully. Policyholders need to know how much of their premium is due to the hazards of their location, so that they can make good decisions about where to live as climate risks increase. Similarly, consumers need to know how much of the premium is due to personal/behavioral factors—like credit scores—so they can address these issues. And so that all of us can address the fairness and morality of the outsize role that credit scores currently play in insurance prices.

Because whether credit scores should be used at all for pricing home insurance is fiercely contested—it's barred in California, Massachusetts, and Maryland. The insurance industry asserts that low credit scores are associated with a greater likelihood of policyholders filing claims.* From their perspective, using credit scores as part of their pricing calculation is actuarially necessary in order to construct pools of risk that end up costing policyholders less overall. Credit scores are easy, relatively objective shorthands—triggering sharply differential pricing—that the insurance industry wants to keep using. Credit bureaus also want this practice to continue, for obvious reasons.

Consumer advocates point out that homeowners with lower credit scores (FICO scores of around 630) pay from a third to 100 percent more for the same insurance than their otherwise identical high-scoring neighbors (FICO scores of around 820)—which has disproportionate effects on lower-income people, homeowners of color, younger homeowners, and people whose scores are low because of outstanding student loans or medical debt.

Many states are considering this issue—take a look at pending Senate Bill 5589 in the state of Washington, which calls for the insurance commissioner to report on possible disparate impacts created by the use of credit scores, and New York State's pending Assembly Bill 6053, looking at credit score use for auto insurance. Last month's Birss/Cornelisson report, carried out for the Consumer Federation of America and the Climate and Community Institute, calls for all states to prohibit insurers from using credit scores and credit history in pricing homeowners insurance.

There's a major kerfuffle going on in Illinois right now on this front, with Gov. JB Pritzker calling for change.

Illinois-based State Farm, the largest homeowners insurance company in the state (and in the US) by a wide margin, announced earlier this summer that it was raising rates in Illinois by an average of 27 percent, with some increases as high as 40 percent. Alone among the 50 states, Illinois relies on competitive forces to protect consumers when it comes to insurance rates—the state has no authority to approve, reject, or modify homeowners' insurance rate changes before they take effect, even if they're excessive or discriminatory. In late July, the Chicago Tribune published a letter from Gov. Pritzker complaining about this sudden price increase and calling for “[data] transparency in the interest of protecting homeowners and the ability to act on the data when companies are unfairly profiting."**

Part of this transparency should be clear disclosures about the roles of physical risk and credit as components of individual homeowners' premium rates. The opacity of premium pricing harms everyone: Consumers can't make informed choices or understand how they could lower their premiums. Risk signals are suppressed. Policymakers are making decisions based on intuitions rather than data. All of this is amplifying the likelihood of miserable outcomes for Americans as physical risks continue to accelerate across the country.

* The insurance industry argues that they use "credit-based insurance scores" that are not the same thing as a credit score, although they draw on the same data. Researchers have found that credit-based insurance scores are highly correlated with FICO credit scores. Blonz/Hossain/Weill n.1

** Gov. Pritzker doesn't want Illinois policyholders to be subsidizing Florida beachfront homeowners. In his July letter, he wrote "As states across the country face even more extreme weather than we do, we need to make sure Illinois homeowners are not paying for losses that companies experience in other states." Remember this moment. Much more of this is ahead.