Coverage Neglect in Homeowner's Insurance

J Anthony Cookson, Emily Gallagher and Philip Mulder

No 25-09, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Most homeowners do not have enough insurance coverage to rebuild their house after a total loss. Using contract-level data from 24 homeowner's insurance companies in Colorado, we show wide differences in average underinsurance across insurers that persist conditional on policyholder characteristics. Underinsurance matters for disaster recovery. Across households that lost homes to a major wildfire, each 10 percentage point increase in underinsurance reduces the likelihood of filing a rebuilding permit within a year of the fire by 4 percentage points. To understand why consumers purchase underinsured policies, we build a discrete choice insurance demand model. The results suggest that policyholders treat insurers that write less coverage as if they set lower premiums, forgoing options to get more coverage at the same premium from other insurers — a pattern we call coverage neglect. Our findings suggest that coverage limits are either not salient to consumers or difficult to estimate without the input of insurance agents. Under a counterfactual without coverage neglect, consumer surplus increases by $290 per year, or 10 percent of annual premiums, on average

Keywords: Disaster Insurance; Disaster Recovery; Information Frictions and Limited Attention; Insurance Demand (search for similar items in EconPapers)
JEL-codes: G22 G41 G52 G53 Q54 R22 (search for similar items in EconPapers)
Pages: 60
Date: 2025-03-11
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2025/wp25-09.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:99690

Ordering information: This working paper can be ordered from

DOI: 10.21799/frbp.wp.2025.09

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().