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What's at Stake? Understanding the Role of Home Equity in Flood Insurance Demand

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  • Liao, Yanjun (Penny)

    (Resources for the Future)

  • Mulder, Philip

Abstract

Millions of properties are exposed to increasing threats from natural disasters. Yet, many at-risk homes are uninsured against the costliest disaster: flooding. We show that low home equity is an important driver of low flood insurance take-up. To isolate the causal effect of home equity on flood insurance demand, we exploit price changes over the housing boom and bust. Insurance take-up follows house price dynamics closely, with a home price elasticity around 0.3. Multiple mechanism tests suggest that mortgage default acts as implicit disaster insurance. As a result, households do not fully internalize their disaster risk.Click "Download" above to read the full paper.

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  • Liao, Yanjun (Penny) & Mulder, Philip, 2021. "What's at Stake? Understanding the Role of Home Equity in Flood Insurance Demand," RFF Working Paper Series 21-25, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-21-25
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