Abstract: A rent guarantee insurance (RGI) policy makes a limited number of rent payments to the landlord on behalf of an insured tenant unable to pay rent due to a negative income or health expenditure shock. We introduce RGI in a rich quantitative equilibrium model of housing insecurity and show it increases welfare by improving risk sharing across idiosyncratic and aggregate states of the world, reducing the need for a large security deposits, and reducing homelessness which imposes large costs on society. While unrestricted access to RGI is not financially viable for either private or public insurance providers due to moral hazard and adverse selection, restricting access can restore viability. Private insurers must target better off renters to break even, while public insurers focus on households most at-risk of homelessness. Stronger tenant protections increase the effectiveness of RGI.
Discussant: Michael Boutros, University of Toronto
Tess Scharlemann, Federal Reserve Board of Governors
Ishita Sen, Harvard University
Ana-Maria Tenekedjieva, Federal Reserve Board of Governors
Abstract: In a world with rising risk, how much are U.S. households willing to pay for homeowners' insurance, and what does their demand imply for the future of insurance markets? We provide the first estimates of household willingness to pay for homeowners' insurance and the drivers of household insurance demand elasticities by exploiting quasi-exogenous regulatory shocks to insurance pricing. We utilize newly available individual-level data on homeowners insurance contracts covering the entire United States for over a decade, with rich information on mortgage contracts, property characteristics, and climate exposures. We document pervasive under-insurance, particularly among the most financially vulnerable households. We find that even at actuarially fair premiums, households’ willingness to pay is below expected losses, and demand remains elastic---results that are inconsistent with the textbook models of insurance demand. Financial constraints are a key force: constrained households reduce coverage as premiums rise, while unconstrained households borrow more to maintain insurance coverage. Exogenous increases in the cost of credit also reduce coverage demand. These results raise the concern that financial constraints reduce willingness to pay for insurance even below the actuarially fair price required for insurers to remain solvent, suggesting that the market may disappear for the most constrained, financially vulnerable households. If prices were to continue growing at historical rates moving forward, our estimates imply that between 17% to 31% of households would hit binding LTV constraints and be forced to reduce coverage substantially, meaning insurance markets may shrink even as losses from natural disasters rise.
Abstract: We provide survey evidence that individuals believe there is substantial nonpayment risk in annuity, life insurance, and long-term care insurance (LTCI) products. Using simple statistical analysis we show that nonpayment beliefs predict insurance ownership and that the insurance ownership rate would be much larger if people believed there was zero nonpayment risk. To better quantify how nonpayment risk affects insurance ownership and how different features of insurance products affect consumer welfare, we develop an incomplete-markets life-cycle model of the demand for life insurance, annuities, LTCI, and a risk free bond. We incorporate features of real-world insurance products such as perceived nonpayment risk, high loads above actuarial fair prices, and quantity restrictions (e.g., age restrictions on purchases, short-selling constraints). Both high prices and nonpayment risk substantially decrease insurance ownership. Compared to our rational expectations baseline, the welfare loss from sub- optimally owning zero insurance is 0.4 percent in consumption equivalent units. If the products had no risk and were sold at actuarially fair prices, the welfare cost of zero insurance ownership is much larger at 7.9 percent. If subjective beliefs are wrong and payments are always made, correcting beliefs increases welfare by 4 percent.
Discussant: Sasha Indarte, University of Pennsylvania
