The Costs of Hedging Disaster Risk and Home Prices in the Face of Climate Change

with Ammon Lam and Ryan Lewis (Link)

Climate models predict that many natural hazards will become increasingly damaging and costly to insure as the effects of climate change manifest. We study how the cost of hedging disaster risk changes home prices by using a 2012 law that mandated flood insurance premium increases for properties discontinuously around flood zone boundaries and based on the timing of construction. With a triple-difference design, we estimate that a $1 increase in today's annual flood insurance premiums causes a reduction of $41 in home prices for homes not exposed to future flooding from sea level rise. The effect is five times larger for homes that are exposed to sea level rise, suggesting that insurance pricing can accelerate the incorporation of climate risk in asset markets. Our results contrast the prior literature, which finds little effect of flood insurance pricing on home values, and have important policy implications for flood insurance pricing and rate regulation in private insurance (e.g., fire).

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 How Do Health Insurance Costs Affect Firm Labor Composition and Technology Investment?

with Janet Gao, Lawrence Schmidt, Cristina Tello-Trillo 

draft available upon request, public posting pending Census approval (Link to slides)

Employer-sponsored healthcare insurance is a significant component of labor costs. We examine the causal effect of health insurance premiums on firms’ employment, both in terms of quantity and composition, and their technology investment decisions. To address endogeneity concerns, we instrument for insurance premiums using idiosyncratic variation in insurers' losses, which is plausibly exogenous to their customers who are employers. Using Census micro data, we show that following an increase in premiums, firms reduce employment. Relative to higher-skilled coworkers, lower-skilled workers are more likely to be laid off and remain unemployed for two years following the shock. Firms also invest more in information technology, potentially to substitute for labor.

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“How Does Investor Demand Affect CLO Creation, Firm Borrowing, and Investment?” 

with Abhishek Bhardwaj and Saptarshi Mukherjee (Link)

The collateralized loan obligation (CLO) market has grown drastically, with the amount outstanding rising from $100 Billion in 2005 to $650 Billion in 2020. We examine the effect of investors' demand on new CLO deal formation as well as on corporate borrowing and investment. We do so by using detailed data from insurance companies, which are the largest group of CLO investors. We present three main findings. First, when insurers experience favorable operating 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 borrowing firms, those more affected (through CLO managers) are more likely to receive new loans, as well as increase leverage and investment. Our results imply that investor demand affects CLO deal formation, as well as corporate borrowing and capital structure decisions. We also present evidence that insurers' aggregate demand for CLOs, proxied by their cash flows, is important for the growth of the CLO market segment that is exposed to insurers through past relationships.