Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies
92 Pages Posted: 2 Mar 2021 Last revised: 17 May 2023
Date Written: December 22, 2022
We study the consequences of state-level price (rate) regulation for U.S. homeowners’ insurance, a $15 trillion market that provides households protection against climate losses. Using two distinct identification strategies and novel data on regulatory filings and ZIP code level rates, we find that insurers in more regulated states adjust rates less frequently and by a lower magnitude after experiencing losses. Importantly, they overcome these rate-setting frictions by adjusting rates in less regulated states, consistent with insurers cross-subsidizing across states. In the long-run, these behaviors lead to a decoupling of rates from risks, implying distortions in risk sharing across states.
Keywords: Climate Risk; Homeowners' Insurance; Rate Regulation; Cross-subsidies; Insurance Availability.
JEL Classification: G22, G52, G28, G32, Q54
Suggested Citation: Suggested Citation