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Discussion Paper
What Millions of Homeowner’s Insurance Contracts Reveal About Risk Sharing
Housing is the largest component of assets held by households in the United States, totaling $48 trillion in 2025. When natural disasters strike, the resulting damage to homes can be large relative to households’ liquid savings. Homeowner’s insurance is the primary financial tool households use to protect themselves against property risk. Despite the economic importance of homeowner’s insurance, we know surprisingly little about how insurance contracts are actually designed with respect to property risk. In this post, which is based on our new paper, “Economics of Property ...
Discussion Paper
Insured, but Still on the Hook: Who Bears the Most Risk in Homeowner’s Insurance?
In an April post, using millions of homeowners’ insurance contracts matched with property-level exposure and disaster risk, we showed that although households are insured, they are still “on the hook” because deductibles and coverage limits leave homeowners responsible for part of a loss. Because insurers cannot perfectly observe how well homeowners maintain or protect their properties (a problem known as “moral hazard”), contract terms such as deductibles can play an important role in balancing risk sharing and incentives. By requiring homeowners to bear part of a loss, insurers ...
Discussion Paper
Does Corporate Hedging of Foreign Exchange Risk Affect Real Economic Activity?
Foreign exchange derivatives (FXD) are a key tool for firms to hedge FX risk and are particularly important for exporting or importing firms in emerging markets. This is because FX volatility can be quite high—up to 120 percent per annum for some emerging market currencies during stress episodes—yet the vast majority of international trades, almost 90 percent, are invoiced in U.S. dollars (USD) or euros (EUR). When such hedging instruments are in short supply, what happens to firms’ real economic activities? In this post, based on my related Staff Report, I use hand-collected FXD ...
Discussion Paper
CRISK: Measuring the Climate Risk Exposure of the Financial System
A growing number of climate-related policies have been adopted globally in the past thirty years (see chart below). The risk to economic activity from changes in policies in response to climate risks, such as carbon taxes and green subsidies, is often referred to as transition risk. Transition risk can adversely affect the real economy through the banking sector. For example, a shock to borrowers’ transition risk can impair their ability to repay, which can then lead to an amplified effect on banks’ current and expected future profits, resulting in a systemic undercapitalization of banks. ...
Discussion Paper
How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks?
Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed ...
Discussion Paper
Flood Risk and Firm Location Decisions in the Fed’s Second District
The intensity, duration, and frequency of flooding have increased over the past few decades. According to the Federal Emergency Management Agency (FEMA), 99 percent of U.S. counties have been impacted by a flooding event since 1999. As the frequency of flood events continues to increase, the number of people, buildings, and agriculture exposed to flood risk is only likely to grow. As a previous post points out, measuring the geographical accuracy of such risk is important and may impact bank lending. In this post, we focus on the distribution of flood risk within the Federal Reserve’s ...
Discussion Paper
Physical Climate Risk and Insurers
As the frequency and severity of natural disasters increase with climate change, insurance—the main tool for households and businesses to hedge natural disaster risks—becomes increasingly important. Can the insurance sector withstand the stress of climate change? To answer this question, it is necessary to first understand insurers’ exposure to physical climate risk, that is, risks coming from physical manifestations of climate change, such as natural disasters. In this post, based on our recent staff report, we construct a novel factor to measure the aggregate physical climate risk in ...
Discussion Paper
What Do Climate Risk Indices Measure?
As interest in understanding the economic impacts of climate change grows, the climate economics and finance literature has developed a number of indices to quantify climate risks. Various approaches have been employed, utilizing firm-level emissions data, financial market data (from equity and derivatives markets), or textual data. Focusing on the latter approach, we conduct descriptive analyses of six text-based climate risk indices from published or well-cited papers. In this blog post, we highlight the differences and commonalities across these indices.
Discussion Paper
Why Are Credit Card Rates So High?
Credit cards play a crucial role in U.S. consumer finance, with 74 percent of adults having at least one. They serve as the main method of payment for most individuals, accounting for 70 percent of retail spending. They are also the primary source of unsecured borrowing, with 60 percent of accounts carrying a balance from one month to the next. Surprisingly, credit card interest rates are very high, averaging 23 percent annually in 2023. Indeed, their rates are far higher than the rates on any other major type of loan or bond. Why are credit card rates so high? In our recent research paper, ...
Report
Economics of Property Insurance
We study the economics of homeowners’ property insurance by examining how contract design balances the trade-off between incentive alignment and risk sharing. Using granular contract-level property insurance data merged with property-level disaster risk for millions of U.S. households, we develop and structurally estimate a model in which insurers optimally determine contract terms given property risk and household risk preferences. The estimates provide, to our knowledge, the first large-scale contract-level structural measures of risk aversion, risk premia, and the cost of moral hazard, ...