Beyond the Storm: Climate Risk and Homeowners' Insurance

Abstract

Using detailed policy-level data and natural disasters as our setting, we document that insurers pass on climate risk costs to policyholders through both premiums and claim rejection rates. Consistent with our theoretical model, premiums increase significantly in both disaster-affected and unaffected areas following disaster events, while rejection rates rise only in unaffected areas. Spillover effects are heterogeneous and depend on consumers' price sensitivity: in line with price shrouding, less price-sensitive consumers in unaffected areas face higher premiums, while more price-sensitive consumers bear the costs through increased rejection rates. These effects are further shaped by insurers' financial constraints. During constrained periods, insurers raise premiums in both affected and unaffected areas, whereas during unconstrained periods, they primarily increase rejection rates in unaffected areas. Our findings demonstrate that climate risk has contributed to rising premiums over the past two decades and reveal how insurers' responses redistribute costs and access, impacting homeowners in both high-risk and low-risk areas.

Keywords: Climate risk, Home insurance, Premiums, Spillovers, Cost Pass-through, Risk sharing