What’s at Stake? Understanding the Role of Home Equity in Flood Insurance Demand

Liao, Yanjun (Penny) and Philip Mulder
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Liao, Yanjun (Penny): Resources for the Future

No 21-25, RFF Working Paper Series from Resources for the Future

Abstract: Changing flood insurance demand shifts climate risk across homeowners, lenders, and governments. We show that flood insurance take-up follows rising and falling home equity over the housing boom and bust across markets with different price dynamics. To isolate the causal effect of risk-shifting on insurance demand, we study flood insurance policy renewals over the housing bust, exploiting granular differences in purchase timing that led policyholders to experience differential changes in skin-in-the-game exposure to flood risk for the same change in home equity. When homeowners have less equity exposure to flood losses, they are less likely to renew their policies. Lenders, in turn, have little incentive to require flood insurance when they can sell their mortgages to federally backed mortgage purchasers. JEL: G52, G21, Q54Keywords: climate risk, disaster insurance, household finance, home equity, housing cycles, implicit insurance

Date: 2021-08-17
New Economics Papers: this item is included in nep-des, nep-rmg and nep-ure
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Citations: View citations in EconPapers (3)

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