The Real Estate Capitalization of Natural Hazards: A comparison across insurance systems
Additional information
Authors
Type
Working paper
Year
2021
Language
English
Abstract
Economic Theory predicts that when actuarially fair insurances are not available, risk-averse utility-maximizing agents have to bear risk, which try to minimize by adjusting the prices of goods. In particular, increasing risk would reduce the good's price by an extent proportional with the degree of risk aversion. While actuarially fair insurances are not available, they are a useful benchmark when setting a premium. Yet, the premium rates may have small or big departures from the actuarially fair one accounting for the extent of profit seeking behavior of the incumbent insurers. In this paper, we want to test this theory on the housing prices, exploiting documented differences in premium rates between public and private insurance systems in Switzerland, and natural hazard data. First, we develop a simple theoretical model to explain the intuition behind fixed differences in premium rates, and the effects that these have on real estate prices. Second, we empirically test the model using a triple difference-in-differences approach. We find that being one kilometer closer to natural hazards, when in private cantons lead to 200 CHF reduction, while there is little or no effect in public cantons. Our results align with the theory on actuarially fair insurances and suggest that in private cantons there are large losses stemming from risk updates.
Keywords
actuarially fair insurance, housing prices, natural hazards, triple difference-in-differences
