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Survey: Nearly 4 in 10 Don’t Know Credit Affects Premiums

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About 35% of U.S. homeowners don’t realize how their credit score affects home insurance premiums, according to a survey conducted by HomeInsurance.com. While credit is only one rating factor, about 85% of home insurance providers use it when setting premiums for coverage.

The results are surprising because the practice is so widespread – and controversial. Many feel it unfairly targets minorities and low-income policyholders. Some states don’t allow its use as an insurance rating factor – Maryland prohibits home insurance providers from using it, and California and Massachusetts don’t allow auto insurance carriers to do it. Hawaii is the only state that restrains both types of insurers from using credit scores.

The survey was part of an effort by HomeInsurance.com to determine whether policyholders are aware of the factors that go into setting premiums. Other findings:

  • 29.3% didn’t understand that living near a fire station can result in lower costs for home insurance.
  • 17.8% didn’t know that homes with more square footage can be more expensive to insure.

Credit scores and risk

Insurance companies are in the business of assessing the risk presented by potential policyholders. Homeowners who have a higher risk of filing claims pay higher premiums for home insurance.

Some key risk indicators include the following:

  • Location. This one makes sense. A home along the East Coast or in the Midwest’s Tornado Alley stands a much greater chance of being damaged by a natural disaster. Standard home insurance policies typically protect homes from wind, hail, and other natural disasters. Consequently, homeowners who live in areas more prone to natural disasters will pay more for coverage because they have a higher risk than other homeowners.
  • Size of the house: Larger houses, in general, will cost more to replace than smaller houses, because they take more labor and building materials. So, again, it makes sense that owners of larger homes could pay more for home insurance than owners of smaller homes.
  • Age of the house: Older homes usually have older roofs and electrical, heating and cooling systems (unless they’ve been updated/replaced since original construction). That means they’re more vulnerable to wind, fire, and other damage that could result in costly claims. A typical fire claim, for example, averages more than $33,000, according to the Insurance Information Institute (III).

So where does credit fit in? Insurance providers say that information in a credit report, when combined with your claims history and other factors, helps predict your risk of filing a claim, according to a report by the National Association of Insurance Commissioners. Among the factors considered is your payment history, your level of debt and what type of credit a consumer has, the NAIC says.

Keep this in mind, however. Each provider assesses the information differently. That accounts in part for the differences in premiums among providers.

Among the interesting survey results were the differences by income of the respondents. About 44% of respondents earning between $50,000-$74,000 think credit doesn’t affect premiums. About 31% of people who earned between $25,000-$49,000 think that’s the case.

The industry defends the practice and insists that the use of credit information actually results in lower premiums for most policyholders. It says lower-risk customers would pay higher premiums if regulators ban the use of credit information.

Takeaways from the survey

Consumers still don’t understand the factors insurers use to determine home insurance premiums. Providers must do a better job of educating the public so that consumer awareness of these factors grows – the end result could be lower premiums for consumers.

Methodology

Results are based on more than 600 responses to a nationwide online survey conducted on February 27, 2014. All respondents were screened to ensure they were homeowners. Respondents were asked these five questions:

  • How would you rate your current credit score?
  • Yes or No: Do you think the square footage of a home impacts a homeowner’s insurance premiums?
  • True or False: The closer your home is located to a fire station, the lower your home insurance premiums will be.
  • Yes or No: Do you believe that your credit score impacts what you pay for homeowners insurance?
  • True or False: If burglary rates are high in a specific neighborhood, homeowners likely pay more for insurance coverage.

Answer options were displayed in a random order. The survey itself was displayed on websites where respondents were asked questions in order to access premium content. Demographic information on the respondents including age, gender, income and region was gathered by Google-administered technology.

Authors

Samantha Alexander, who writes for HomeInsurance.com, and Carrie Van Brunt Wiley, Editor of HomeInsurance.com’s homeowners blog. For more information about this data or related media inquiries, please contact Carrie at cwiley@homeinsurance.com.

Sources

Credit scoring. (2012, August). Retrieved from http://www.iii.org/issues_updates/credit-scoring.html

National Association of Insurance Commissioners, (2010). A consumer’s guide to home insurance. Retrieved from website: http://www.naic.org/documents/consumer_guide_home.pdf

Federal Trade Commission, (2007). Credit-based insurance scores: Impacts on consumers of automobile insurance. Retrieved from website: http://www.ftc.gov/sites/default/files/documents/reports/credit-based-insurance-scores-impacts-consumers-automobile-insurance-report-congress-federal-trade/p044804facta_report_credit-based_insurance_scores.pdf

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