The Costs of Hedging Disaster Risk and Home Prices: Evidence from Flood Insurance

Abstract

Climate models predict that many natural hazards will become increasingly damaging and costly to insure as the effects of climate change manifest. We study how the cost of hedging disaster risk changes home prices by utilizing a 2012 law that mandated flood insurance premium increases for properties discontinuously around flood zone boundaries and based on the timing of construction. With a triple-difference design, we estimate that a $1 increase in annual flood insurance premiums causes a reduction of $102 in home prices. The effect doubles for homes that are exposed to future flooding from sea level rise, suggesting that insurance pricing can accelerate the incorporation of climate risk in asset markets. Our results contrast the prior literature, which finds little effect of flood insurance pricing on home values, and have important implications for policymakers as they roll out new reforms to flood insurance pricing methodologies.

Keywords: Flood insurance, real estate, climate change

JEL Classification: G1, G14, Q54, G28, G22