Insured, but Still on the Hook: Who Bears the Most Risk in Homeowner’s Insurance?

In an April post, using millions of homeowners’ insurance contracts matched with property-level exposure and disaster risk, we showed that although households are insured, they are still “on the hook” because deductibles and coverage limits leave homeowners responsible for part of a loss. Because insurers cannot perfectly observe how well homeowners maintain or protect their properties (a problem known as “moral hazard”), contract terms such as deductibles can play an important role in balancing risk sharing and incentives. By requiring homeowners to bear part of a loss, insurers can preserve incentives for policyholders to take actions that reduce damage risk. In this post, we quantify the cost of keeping homeowners on the hook. How costly is moral hazard in homeowner’s insurance? How much risk must households retain to preserve these incentives? And, importantly, who ultimately bears that residual risk? The short answer is that keeping homeowners on the hook costs insurers relatively little, but it leaves households with substantial risk, especially those least able to absorb a large loss.