How Climate Change is Making Insurance and Mortgages a Tougher Deal
Overview: In the paper titled, “Climate Risk, Insurance Premiums, and the Effects on Mortgages,” NYU Stern Professor Shan Ge and co-authors Stephanie Johnson (Rice University) and Nitzan Tzur-Ilan (Federal Reserve Bank of Dallas) explore how higher insurance costs due to climate change-induced natural disasters impact the ability for people to pay their mortgage.
Why study this now: Climate change is causing natural disasters like floods and hurricanes to become increasingly destructive. Because of this, home insurance premium costs are rising dramatically – in some cases, to more than $5,000 per year. The impact of these costs on overall household finances has been largely underexplored, until now.
What the authors found: Rising costs in one area (e.g., home insurance payments) mean that many households end up cutting back on other financial debts. Mortgages are usually a household’s biggest expense (nearly 72% of a household’s debt), and therefore offers a unique window into the financial impact of rising insurance costs. The average premium increase is associated with an 8% increase in delinquency rates, or an increase of around 207,000 mortgages being delinquent within 12 months. If a household can’t pay their mortgage costs, they may fall behind and even lose their homes. The researchers also found financially more vulnerable families struggle the most with rising costs of insurance.
What does this change: Mortgages are a large part of the U.S. economy. If a large number of people are unable to pay these loans, there are spillover effects. This study suggests that there are benefits of policy interventions to avoid these negative effects. For example, one solution may be to subsidize financial support to those unable to meet their insurance obligations in order to stop the problem from exacerbating.
Key insight: “Our findings unveil a channel through which climate change can threaten household financial health and potentially impact the stability of the financial system,” note the researchers. “Given the broader economic consequences of mortgage defaults, our research underscores the potential value of policy measures like insurance subsidies to mitigate these effects.”