April 2022, Paper: "Homeowners’ insurance, a $15 trillion market by coverage, provides households financial protection from climate losses. Insurance premiums (rates) are subject to significant regulations at a state level in the U.S.. Using novel data, we construct a state-level measure of rate setting frictions. We provide evidence of a decoupling of insurance prices from their underlying risks and identify regulation as a driving force behind this pattern. Premiums are least reflective of risks in states we classify as “high friction”, i.e. states where regulations appear most restrictive. We identify two sources behind the decoupling. First, in high friction states, rates have not adequately adjusted in response to growth in losses. Second, insurers have cross-subsidized high friction states by raising rates in low friction states. Our results imply that low friction states are disproportionately bearing the risks of high friction states. More broadly, our findings question whether insurance prices can play a useful role in steering climate adaptation and whether households will have continued access to insurance."
Non-HKS Harvard Faculty Author Website - Ishita Sen