Monetary policy hikes increase homeowners insurance prices, amplifying housing market impacts

The paper documents a novel transmission channel where contractionary monetary policy shocks result in higher homeowners insurance prices.

Using granular data on the U.S. market, the authors show that rate hikes reduce the market value of insurers' assets, tightening their balance sheet constraints and increasing their shadow cost of capital.

This forces insurers to raise prices.

A 1 percentage point monetary policy surprise is associated with a 7 to 9.6 percentage point increase in insurance prices, a robust finding across various definitions and controls.

This mechanism is particularly pronounced for insurers with low capital ratios and portfolios highly sensitive to interest rate changes, such as those with larger mark-to-market shares or longer-duration assets.

These frictions in insurance supply amplify the effects of monetary policy on real estate and mortgage markets by making housing less affordable.

The impact on home prices and mortgage applications is stronger when local insurers are more sensitive to interest rates, especially in areas with high climate risk exposure.

The study proposes a stylized model: in a frictionless environment, higher rates would lower insurance prices by reducing the present value of future claims.

However, with financial frictions, increased rates constrain insurers' balance sheets, prompting price increases to bolster financial standing.

This highlights the interconnections between insurance, residential real estate, and mortgage lending.