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Model Uncertainty and the Pricing of Hurricane Risk in Florida

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Abstract

This paper examines how model uncertainty affects the price of homeowners insurance in Florida. We use unique data on expected loss rate projections from seven hurricane risk models approved by regulators for use in Florida property insurance rate filings to quantify model uncertainty. By combining these data with newly published information on local property insurance markets, we are able to empirically test the relationship between model uncertainty and insurance premiums across Florida ZIP codes and over time. Controlling for confounding variables and time-invariant latent factors that may be correlated with observed variables, we find strong empirical support for the hypothesis that greater dispersion among model forecasts leads to higher homeowners insurance premiums. Our findings suggest that, had model dispersion been ten percent lower than that observed 2021, a typical Florida homeowner would have saved $50 to $90 on her annual homeowners insurance premium.

Suggested Citation

  • Erik Heitfield, 2026. "Model Uncertainty and the Pricing of Hurricane Risk in Florida," Finance and Economics Discussion Series 2026-016, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:102998
    DOI: 10.17016/FEDS.2026.016
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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