How Are Insurance Markets Adapting to Climate Change? Risk Selection and Regulation in the Market for Homeowners Insurance
Presented by:
Meredith Fowlie
Agricultural & Resource Economics
University of California at Berkeley
Friday, December 1, 2023
12:00 pm-1:15 pm
Taylor-Hibbard Seminar Room (Rm103)
Online - Login with UW-Madison NetID to view link
If you do not have a UW-Madison NetID, you can contact the seminar organizer or consult the seminar email announcement.
In the face of escalating climate risk, property insurance markets have a critical role to play in helping households and firms reduce risk exposures and recover from natural disasters when they strike. Performing these functions efficiently requires a detailed understanding of disaster risk and pricing that accurately reflects the costs of insuring this risk. We use proprietary data on parcel-level wildfire risk, together with insurers’ regulatory rate filings, to investigate how insurance is being priced and provided in a large market for homeowners’ insurance. We document significant differences between the risk pricing functions we estimate empirically and benchmark measures of ‘fair’ pricing. A selection model of natural hazard insurance that incorporates both price regulation and asymmetries in information across insurers helps rationalize these findings. Our results highlight the underappreciated importance of the winner’s curse as a barrier to participation in insurance markets for large, hard-to-model risks.