Homeowners insurance and the transmission of monetary policy

Dominik Damast, Christian Kubitza and Jakob Ahm Sørensen

No 55/25, ICIR Working Paper Series from Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)

Abstract: We document a novel transmission channel of monetary policy through the homeowners insurance market. On average, contractionary monetary policy shocks result in higher homeowners insurance prices. Using granular data on insurers' balance sheets, we show that this effect is driven by the interaction of financial frictions and the interest rate sensitivity of investment portfolios. Specifically, rate hikes reduce the market value of insurers' assets, tightening insurers' balance sheet constraints and increasing their shadow cost of capital. These frictions in insurance supply amplify the effects of monetary policy on real estate and mortgage markets by making housing less affordable. We find that monetary policy shocks have a stronger impact on home prices and mortgage applications when local insurers are more sensitive to interest rates. This channel is particularly pronounced in areas where households face high climate risk exposure. Our findings highlight the role of insurance markets in amplifying macroeconomic shocks and the interconnections between homeowners insurance, residential real estate, and mortgage lending

Keywords: Insurance Markets; Monetary Policy; Financial Frictions; Housing Markets (search for similar items in EconPapers)
JEL-codes: E44 E5 G21 G22 G5 R3 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-mon and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:icirwp:312410

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