Research

Under Review

"Pricing of Climate Risk Insurance: Regulatory Frictions and Cross-Subsidies"

Joint with Sangmin S. Oh (Chicago Booth) and Ishita Sen (Harvard Business School) 

Revise & Resubmit - Journal of Finance

Abstract:

Homeowners’ insurance provides households financial protection from climate losses. State regulators impose price controls to improve access to insurance and affordability. Using novel data, we construct a new measure of rate setting frictions for individual states and show that different states exercise varying degrees of price control, which positively correlates with how exposed a state is to climate events. Insurers in high friction states are restricted in their ability to set rates and respond less after experiencing climate losses. In part, insurers overcome pricing frictions by cross-subsidizing insurance across states. We show that in response to losses in high friction states, insurers increase rates in low friction states. Over time, rates get disjoint from underlying risk, and grow faster in states with low pricing frictions. Our findings have consequences for how climate risk is shared in the economy and for long-term access to insurance.


*  presentation by a coauthor

Link to current version on SSRN here 


Working Papers

"When Insurers Exit: Climate Losses, Fragile Insurers  and  Mortgage Markets" 

Joint with Pari (Parinitha) Sastry (Columbia GSB) and Ishita Sen (Harvard Business School)


Abstract:


This paper studies how homeowners insurance markets respond to growing climate losses and how this impacts mortgage market dynamics. Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment. Yet, despite their low quality, these insurers secure high financial stability ratings, not from traditional rating agencies, but from emerging rating agencies. Importantly, these ratings are high enough to meet the minimum rating requirements set by government-sponsored enterprises (GSEs). We find that these new insurers would not meet GSE eligibility thresholds if subjected to traditional rating agencies’ methodologies. We then examine the implications of these dynamics for mortgage markets. We show that lenders respond to the decline in insurance quality by selling a large portion of exposed loans to the GSEs. We quantify the counterparty risk by examining the surge in serious delinquencies and foreclosure around the landfall of Hurricane Irma.  Our results show that the GSEs bear a large share of insurance counterparty risk, which is driven by their mis-calibrated insurer eligibility requirements and lax insurance regulation.


Link to current version on SSRN here 


"Climate Risk and the U.S. Insurance Gap: Measurement, Drivers and Implications"

Joint with Tess Scharlemann, Pari (Parinitha) Sastry (Columbia GSB) and  Ishita Sen (Harvard Business School)


Abstract:


It is widely believed that U.S. households are under-insured, but limited granular data on insurance has made this difficult to measure. This project develops a new methodology to construct the first U.S.-wide, long term dataset on homeowners insurance premiums and coverage at the individual level. We combine mortgage servicing, deeds, and property tax data, and then employ a novel algorithm to back out insurance payments from recurring mortgage payments made through escrow accounts. We then estimate coverage amounts from payments using data on insurance pricing functions. We validate our estimates using newly available data on insurance information for a subset of mortgage borrowers. We find that under-insurance is a significant problem, particularly for vulnerable borrowers in high climate risk states and with the lowest FICO scores. We show under-insurance is driven both by elastic borrowers reacting to rising premiums, as well as by behavioral inertia that limits updating coverage as inflation and construction costs change. We finally study the broader implications of under-insurance for mortgage and real estate markets.


Link to current version on SSRN here.


"The Revolving Door and Insurance Solvency Regulation"

Abstract:

Solvency regulation of the U.S. insurance industry occurs at the state level and is led by insurance commissioners who wield significant discretion. I construct a novel dataset of the employment history of these commissioners and find 38% of them work in the insurance industry after their term (“revolvers”).  Revolvers are more lenient when regulating insurers' solvency along multiple dimensions. Consequently, insurers in revolver-led states over-reported their capitalization during the 2008 financial crisis by up to 10%.  Revolvers’ leniency can lead to inflated insurer credit ratings, and consumers can be overpaying up to $27 billion in insurance premiums a year.


Link to current version on SSRN here


"Impact of Money in Politics on Labor and Capital: Evidence from Citizens United v. FEC"

Joint with Pat Akey (University of Toronto), Tania Babina (Columbia GSB), Greg Buchak (Stanford GSB) 


Abstract:


The perceived increase in corporate political influence has raised concerns that corporations advance policies that benefit capital and harm labor. We examine whether money in politics harms labor using the surprise Supreme Court ruling Citizens United v. FEC (2010), which rendered bans on political spending unconstitutional, affecting roughly half of US states (treated states). In a difference-in-difference analysis, we find that treated states see increased political turnover and, surprisingly, increased labor income. We show evidence that these effects are driven by increased political competition whereby money allows for more political entry from firms that could not exert political influence in other ways. On net, the economic environment becomes more business-friendly and some of these gains are passed on to workers.


*  presentation by a coauthor

Link to current version on SSRN here 

"Is Corporate Charitable Giving a Form of Indirect Political Donation?"

Abstract:

I test the hypothesis that companies engage in charitable giving as a form of political donation. I focus on changes in charitable giving by S&P 500 companies' foundations around the 2010 US Supreme Court Decision of Citizens United v. FEC, which lifted the constraints on corporate political donations.  Using a difference-in-difference empirical strategy, I find that companies which were closer to the maximum political contribution decreased their charitable giving  after the constraint was lifted. There were no simultaneous changes in the trends of R&D investments, capital investments, firm profitability, or dividends. Furthermore, I compare state-level charitable giving patterns in states where the election laws were affected by Citizens United and in states with no election law change. I find that politically active firms in affected states decreased their charitable giving  more after Citizens United. These findings are consistent with politically active firms using charitable giving as a substitute for political donations.

Link to current version here


Selected Work in Progress

"The Role of Institutional Ownership in the Allocation of Climate Infrastructure" - Joint with Sijia Fan (Cornell) and Kelly Posenau (Cornell)

 "The Fragility of a Post-Insolvency Funded Guaranty System" - Joint with Ishita Sen (Harvard Business School) 

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