Regulatory Capital and Catastrophe Risk

Abstract

Using nationally representative data on homeowners insurance prices, we examine whether insurers pass climate change costs to consumers. By exploiting a regulatory reform that imposes additional capital costs on US insurers exposed to catastrophe risks, we find evidence that the reform results in modest homeowners insurance price increases per household. While modest per household, our back-of-the-envelope calculation suggests total capital financed through homeowners insurance price increase is commensurate to 16-66% of the additional regulatory capital costs of catastrophe risks. We find that the increase is driven by insurers with greater regulatory capital constraints but not past catastrophic losses.

Keywords: Property/Casualty Insurance, Regulatory Capital Management, Climate Change, Homeowners Insurance Price

JEL Classification: G20, G22, G28