Insurance Against Rent Increases

The purpose of this paper is to investigate how an insurance policy against major increases in rents on the housing market could be designed1. The insurance policy presented below can be an interesting alternative to tenancy rent control policies. The proposed insurance policy makes it possible for tenants to protect themselves against the risks of strong rent increases. The insurance policy can be viewed as a call option - the insurance gives the tenant the right to stay in his or her apartment, paying a rent that is the lower of the current market rent and the rent according to the terms of the insurance contract . The main points regarding the proposed insurance policy are: When leasing to a new tenant, rents are based on prevailing level of market rents. The landlord is the insurer and the landlord is obliged to offer his tenants insurance against major rent increases. Tenants who have not purchased any insurance contract, are supposed to pay rents equal to market rents whenever rents are being changed. The insurance gives the tenant the right to stay in his or her apartment, paying a rent that is the lower of the market rent and the rent according to the terms of the insurance contract (the strike rent), when the rent is reviewed. The insurance contract shall be indexed to the inflation rate or another official cost index. The maximum premium a tenant has to pay when buying an insurance policy shall not exceed a pre-specified and regulated level. The landlord is obliged to offer tenants a minimum amount of different alternatives of insurance periods, e.g. 5, 10 and 15 years.