Climate Risk, Insurance Premiums, and the Effects on Mortgages 

with Stephanie Johnson and Nitzan Tzur-Ilan (Link)

As climate change exacerbates natural disasters, homeowners' insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers' mortgage outcomes using a novel dataset on home insurance policies for 6.7 million borrowers. We find that higher premiums raise the probability of mortgage delinquency and prepayment. Results hold using a novel instrumental variable. The mortgage delinquency effect is greater for higher loan-to-value mortgages, while the prepayment effect is smaller for these loans. The effects are present in both GSE and non-GSE mortgages. We unveil a channel through which climate change threatens household financial health and potentially financial stability.  

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The Effect of Insurance Premiums on the Housing Market and Climate Risk Pricing

with Ammon Lam and Ryan Lewis (Link)

Climate change makes insurance more vital yet costly for households. We examine how insurance premiums affect the housing market using a 2013 flood insurance reform. With a triple-difference design, we find that homes losing insurance subsidies experience a 2% decline in transaction prices. Removing subsidies made home prices more sensitive to sea-level-rise risk, suggesting accelerated climate risk pricing. The price effect is not fully explained by the cash flows from subsidy reductions, indicating updated market perceptions of uninsured risks. Higher premiums reduce mortgage uptake due to costlier mandatory insurance and induce more rebuilding of treated homes, especially the riskier ones.

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Physical Climate Risk Factors and an Application to Measuring Insurers' Climate Risk Exposure

with Hyeyoon Jung, Robert Engle, and Xuran Zeng (Link)

We construct a novel physical risk factor by forming a portfolio of property and casualty (P&C) insurers' stocks, with each insurer's weight reflecting their operational exposure to states with high physical climate risk. Insurance companies can be exposed to climate-related physical risk through their operations and transition risk through their $12 trillion of financial asset holdings. We assess the climate risk exposure of P&C and life insurance companies in the U.S. We estimate insurers' dynamic physical climate beta, i.e. their stock return sensitivity to the physical risk factor. In addition, 
we calculate the expected capital shortfall of insurers under various climate stress scenarios. Validating our approach, we find that insurers with larger exposures to risky states have a higher sensitivity to physical risk, while insurers holding more brown assets have a higher sensitivity to transition risk.

 How Do Health Insurance Costs Affect Low- and High-Income Workers?

with Janet Gao, Lawrence Schmidt, Cristina Tello-Trillo (Link)

Employer-sponsored health insurance is a significant component of labor costs. We examine the causal effect of health insurance premiums on firms’ employment and employment outcomes of low- versus high-income workers. To address endogeneity concerns, we instrument for insurance premiums using idiosyncratic variation in insurers' recent losses, which is plausibly exogenous to their customers who are employers. Using Census microdata, we show that following an exogenous increase in premiums, firms reduce employment. Lower-income workers become more likely to be separated from their jobs, become unemployed, experience a large earning reduction upon job separation, and be part-time (ineligible for health insurance benefits). 

 Real Effects of Financial Conditions:  How Does Provider Financial Health Affect Opioid Prescription?

with Isil Erel and Pengfei Ma (draft available upon request)

We examine how healthcare providers' financial health affects their opioid prescription decisions, using changes in house prices in providers' residential neighborhoods as shocks to their wealth. We find that providers increase opioid prescriptions when experiencing adverse financial conditions: a one-standard-deviation decrease in house price growth leads to a 3\% increase in opioid prescriptions. The result is robust to including provider office--year fixed effect. Providers living in zip codes with bottom-half price changes during 2007--2009 increased their opioid prescriptions by approximately 16\% more in 2010--2012 than others. The effect is stronger among providers with greater home equity, those in competitive markets, and those serving vulnerable populations. Our findings reveal a previously undocumented channel through which providers' financial incentives affect opioid prescriptions.

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 Does Loan Securitization Expose Borrowers to Non-Bank Investor Shocks?

with Abhishek Bhardwaj and Saptarshi Mukherjee (Link)

65% of syndicated term loans are now securitized and ultimately funded by CLO investors.  Presumably, with loans securitized and distributed to a large number of investors, borrowing firms are not only insulated from shocks to banks but also from idiosyncratic shocks to nonbank investors in CLOs. We provide evidence that, due to concentrated capital and sticky relationships, the CLO market exposes firms to shocks that are idiosyncratic to insurance companies, which are the largest group of CLO investors. We present three main findings. First, when insurers experience favorable cash flows, they are more likely to invest in CLO deals, especially deals by CLO managers that they previously invested with. Second, when CLO managers are more exposed to insurers' favorable cash flows through past relationships, they are more likely to launch new CLO deals. Third, among private borrowing firms, those more affected (through sticky relationships with CLO managers) experience drops in spreads on new loans. Such firms are more likely to take new loans, as well as increase their employment and the number of establishments. Our results imply that substantial frictions exist in the loan securitization market that cause firms to be exposed to idiosyncratic investor shocks.

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