Escalating Home Insurance Costs Linked to Disaster Risk: Insights from Mortgage Escrow Data

The study "Property Insurance and Disaster Risk: New Evidence from Mortgage Escrow Data" by Benjamin J. Keys and Philip Mulder, presented as an NBER working paper in June 2024, offers a comprehensive analysis of the rising homeowners insurance premiums and their relationship with local disaster risks. Utilizing a novel dataset derived from mortgage escrow payments, the research examines over 47 million observations of property insurance expenditures from 2014 to 2023, revealing critical insights into the insurance market dynamics influenced by climate change and reinsurance costs.

Key findings from the study indicate a significant 33% increase in average insurance premiums from 2020 to 2023, equating to a 13% rise in real terms. This surge is not uniform across the United States; it is notably higher in regions with elevated disaster risks. The analysis identifies a strong correlation between disaster risk and insurance premiums, with a one standard-deviation increase in disaster risk resulting in $500 higher premiums in 2023, up from $300 in 2018. The rapid escalation in premiums is largely attributed to the pass-through of rising reinsurance costs, which have doubled for U.S. property catastrophe markets between 2018 and 2023.

The study employs a natural experiment approach, utilizing the sharp increase in reinsurance prices to demonstrate how these costs are transmitted to household insurance expenditures. The findings show that states with higher exposure to reinsurance markets, such as Florida, Louisiana, and Texas, experienced more substantial premium hikes compared to less exposed states. This relationship underscores the sensitivity of homeowners insurance premiums to global capital market dynamics, particularly in high-risk areas prone to natural disasters like hurricanes and wildfires.

Looking ahead, the research projects that if the reinsurance shock persists, households in climate-exposed regions could face $700 higher annual premiums by 2053. These projections are based on conservative climate change estimates and highlight the potential long-term financial burden on homeowners as disaster risks continue to rise. The study also notes significant variability in insurance premiums based on income and socioeconomic status, with lower-income and predominantly nonwhite areas bearing a disproportionate share of the premium increases.

By providing new estimates on the economic burden of climate risks through detailed insurance premium data, this study contributes to the broader climate finance literature, emphasizing the need for effective risk management and mitigation strategies. The insights are crucial for policymakers, financial institutions, and researchers aiming to address the challenges posed by escalating disaster risks and their impact on the affordability and availability of homeowners insurance. The study calls for a well-capitalized and competitive insurance market to set accurate price signals, encouraging adaptation and resilience in the face of climate change.