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

with Ammon Lam and Ryan Lewis (Link)

Climate change threatens to worsen natural disasters and increase the cost of insuring against them. We study how insurance costs affect the housing market using a 2013 reform that raised flood insurance premiums for properties discontinuously around flood zone boundaries and construction year cutoffs. Using a triple-difference design, we find that treated homes experience a 2% relative decline in transaction prices. This effect is partly driven by increased expected risks triggered by higher premiums, rather than a pure cash-flow channel. The price effect is three times as large for homes exposed to long-term sea level rise, suggesting that insurance pricing can accelerate the incorporation of climate risk into asset markets. Higher premiums induce more rebuilding of treated homes, as well as reduce mortgage uptake as the required insurance becomes more costly.  

 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). 

 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.

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.