Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies

Sangmin Oh (), Ishita Sen and Ana-Maria Tenekedjieva
Additional contact information
Ishita Sen: https://www.hbs.edu/faculty/Pages/profile.aspx?facId=1204618
Ana-Maria Tenekedjieva: https://www.federalreserve.gov/econres/ana-maria-k-tenekedjieva.htm

No 2022-064, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Homeowners’ insurance, a $15 trillion market by coverage, provides households financial protection from climate losses. Insurance premiums (rates) are subject to significant regulations at a state level in the United States. Using novel data on filings made by insurers to regulators, we propose a metric to quantify the extent of regulation in individual states. We provide evidence of decoupling of insurance rates from their underlying risks and identify regulation as a driving force behind this pattern. Rates are least reflective of risk in states we classify as "high friction", i.e. states where regulations appear most restrictive. We identify two sources behind the decoupling. First, in high friction states, rates have not adequately adjusted in response to the growth in losses. Second, insurers have cross-subsidized high friction states by raising rates in low friction states. Our results imply that households in low friction states are disproportionately bearing the risks of households in high friction states. More broadly, our findings question whether insurance rates can play a useful role in steering climate adaptation and whether households will have continued access to insurance.

Keywords: Climate Risk; Cross-subsidies; Homeowners' Insurance; Insurance Availability; Rate Regulation (search for similar items in EconPapers)
JEL-codes: G22 G28 G32 G52 Q54 (search for similar items in EconPapers)
Pages: 93 p.
Date: 2022-10-03
New Economics Papers: this item is included in nep-env and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-64

DOI: 10.17016/FEDS.2022.064

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