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

with Ammon Lam and Ryan Lewis (Link) Revise & Resubmit at Journal of Finance

Property insurance provides an important hedge against disasters, but distorted premiums can mute the pricing of disaster risks. We document that removing flood insurance subsidies precipitates a 2% average price decline, primarily concentrated in properties exposed to sea level rise. Our findings demonstrate that reducing premium distortions accelerates the incorporation of climate change risk in house prices. The house price effect is not fully explained by the cash flows from subsidy reductions, and indicates markets' increased perceptions of uninsured risks. Higher premiums reduce mortgage take-up as mandatory insurance becomes costlier, and encourage the rebuilding of homes, especially in risky locations.

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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) Revise & Resubmit at Review of Financial Studies

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, 

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The Hidden Cost of Climate Risk:

How Rising Insurance Premiums Affect Mortgage, Relocation, and Credit

with Stephanie Johnson and Nitzan Tzur-Ilan (Link) (ABC News, WSJ, WSJ x2, National Observer)

As climate change exacerbates natural disasters, homeowners' insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers' mortgage, relocation, and credit outcomes using new data on home insurance policies for 6.7 million borrowers. We find that higher premiums increase the probability of mortgage delinquency, as well as prepayment. The prepayment effect is mainly driven by relocation. Movers with larger pre-moving premium increases achieve lager premium reductions. The results hold using a novel instrumental variable. The delinquency effect is greater for borrowers with higher debt-to-income ratios. Both delinquency and prepayment effects are present across GSE and non-GSE mortgages. Beyond mortgages,  higher premiums also increase credit card delinquency and deteriorate borrower creditworthiness. Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system. ​

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

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

Given that employer-sponsored health insurance constitutes a significant component of labor costs, we examine the causal effect of insurance premiums on worker outcomes across the income distribution. To address endogeneity concerns, we instrument premiums using idiosyncratic variation in insurers' recent losses, which is plausibly exogenous to worker outcomes. Analyzing US administrative data, we demonstrate that firms reduce employment following premium increases. Importantly, higher premiums adversely affect lower-income workers but not high-income workers. Following instrumented premium increases, low-income workers face higher risks of job separation, unemployment, large earnings losses, transitions to staffing arrangements, and reduced wage growth even when retained. In contrast, high-income workers experience minimal or opposite effects.

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

with Isil Erel and Pengfei Ma (Link)

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. Results are robust to including provider office--year fixed effect and using the subsample of providers who live far away from their offices, which largely rules out a patient--demand explanation.  Providers living in zip codes with price changes in the bottom half 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?---Evidence from Insurers

with Abhishek Bhardwaj and Saptarshi Mukherjee (Link)

CLOs fund 65% of syndicated loans, theoretically insulating borrowers from bank and idiosyncratic investor shocks. However, concentrated capital and sticky relationships expose firms to idiosyncratic shocks to insurers, the largest CLO investors.  We find that: 1) insurers experiencing favorable cash flows invest more in CLOs, especially with familiar managers; 2) CLO managers exposed to these cash flows launch more deals; 3) using an instrumentalvariable approach, affected firms take out more loans at lower spreads, increase employment, and expand operations; 4) effects are stronger for private than public firms. These findings reveal significant frictions in the loan securitization market.