Working Paper: NBER ID: w4830
Authors: Robert J. Shiller; Allan N. Weiss
Abstract: Home equity insurance policies, policies insuring homeowners against declines in the price of their homes, would bear some resemblance both to ordinary insurance and to financial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in effect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular fixed insurance premia and is entitled to a claim if both there is a sufficient decline in the real estate price index and a specified life event (such as a move beyond a certain geographical distance) occurs. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices 1971- 91.
Keywords: home equity insurance; risk management; financial hedging
JEL Codes: G22; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| home equity insurance (G52) | reduce financial risk for homeowners (G52) |
| proper design of home equity insurance (G52) | mitigate moral hazard (G52) |
| poor design of home equity insurance (G52) | excessive claims (G52) |
| excessive claims (G52) | undermine insurance model (G52) |
| development of derivative markets for real estate (G19) | assist in implementation of home equity insurance policies (G52) |
| attractiveness of home equity insurance policies (G52) | ensure uptake by homeowners (R21) |