Experience Stern | Faculty & Research

Overview: In the paper titled, "Economics of Property Insurance", NYU Stern Professor Kyle (Jaehoon) Jung and co-author Hyeyoon Jung (Federal Reserve Bank of New York) analyze millions of insurance contracts to understand how deductibles and coverage limits are designed, specifically focusing on how risk is shared between insurers and households.

Why study this now: The study is particularly relevant given the increasing frequency and severity of natural disasters and the growing strain on property insurance markets. As climate-driven disasters become more frequent, they become more of a threat to national financial stability. In many regions, insurers are raising premiums, tightening coverage, or exiting markets altogether, bringing greater attention to how insurance contracts allocate risk between insurers and households. Understanding how deductibles, pricing, and risk exposure interact is therefore central to current discussions around insurance affordability, market stability, and the role of policy interventions.

What the authors found: Using a dataset of over 8.7 million insurance contracts combined with property-level disaster risk information, the researchers found that:

• The "moral hazard" (the cost of people being reckless because they have insurance) is actually very small (about 0.7% of the risk premium). However, the high deductibles used to prevent this tiny risk end up shifting a massive amount of financial burden back to the homeowner.
• Homeowners with lower credit scores and those living in high-risk areas pay higher premiums, but are often left with the most out-of-pocket exposure.
• Mandating that insurers offer full coverage to homeowners would lead to substantial market exit, further increasing household vulnerability.
• Commonly used measures of insurance pricing, such as dividing the premium by the coverage limit, overlook something important – the deductible, which really determines how much risk the policyholders actually bear.

What does this change: This research suggests that while the design of home owner insurance contracts effectively addresses moral hazard, it also shifts the risk back to households. More importantly, this residual risk is concentrated on the most vulnerable households. The researchers also warn that, counterintuitively, regulation that aims to extend insurance coverage by not allowing insurers to transfer risk back to households may lead to market failure and even higher risk exposure for policyholders.

Key insight: “Our findings show that insurance contracts leave households exposed to a meaningful share of disaster risk, largely because deductibles determine whether coverage actually pays out,” explains Jung. “In other words, these contracts don’t fully transfer risk – they allocate it between insurers and households. That has important implications for policymakers: efforts to expand coverage, such as mandating full insurance, may backfire by discouraging insurer participation and ultimately increasing household vulnerability.”